VAT tax 2014 (part 3) - Changes in the provisions on the right to deduct input tax on purchases

The amendment to the Act of March 11, 2004 on tax on goods and services, effective from the beginning of January 2014, introduced revolutionary changes in the provisions on the right to deduct tax on purchases. Currently, not only the deadlines are different, but also the formal conditions for deductions.

Formal conditions of input tax deduction

It is well known that in the case of the acquisition of goods or services for the purpose of performing taxable activities as part of their business activity, taxpayers have the right to deduct input tax. The time limits for the reduction of the output tax by the input tax depend mainly on the moment when the tax obligation arises with the seller. This moment has changed from the new year.

The general rule of the emergence of a tax obligation, which has been in force since the beginning of January 2014, has made the issue of an invoice documenting the sale a secondary issue. According to the new art. 19a of the Value Added Tax Act, the tax obligation arises upon the delivery or performance of a service. On the other hand, the right to deduct input tax results directly from Art. 86 sec. 10, according to which it arises in the settlement for the period in which the tax obligation arose in relation to the goods and services purchased or imported by the taxpayer. This provision also applies in the case of part or all of the payment made prior to the delivery or performance of the service.

Receipt of an invoice and the right to deduct input tax

Importantly, the right to deduct arises not earlier than in the settlement for the period in which the taxpayer received the invoice. Therefore, in order for the taxpayer to be able to deduct input VAT on the purchase of goods or services, two conditions must be met:

• there must be a tax liability with the seller and

• the taxpayer must receive an invoice.

The date of receipt of the invoice is also relevant in the case of correction invoices. Pursuant to Art. 86 (19a), the taxpayer is obliged to reduce the amount of input tax in the settlement for the period in which the correcting invoice was received. If the taxpayer has not deducted the tax shown in the original invoice, and he is entitled to such a right, the reduction in the amount of the input tax shall be included in the settlement for the period in which the taxpayer makes the deduction.

Correct indication of periods giving the right to deduct VAT

Additionally, it is worth paying attention to situations where the taxpayer does not make the deduction in the tax period in which the tax obligation occurred. Then the deduction will be possible in two consecutive periods - months or quarters.

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Thus, an entrepreneur who obtained a purchase invoice with a delay (e.g. the tax obligation for the delivery of goods arose in January and the taxpayer received the invoice in July) will be entitled to deduct input tax only in the settlement period in which the invoice was received. As the seller's tax obligation occurred in January, the monthly buyer had the right to deduct the tax in January, and in February and March, respectively. However, when you receive an invoice only in July, your right is limited only to the period of receipt of the invoice.

Import of goods

The import of goods in the VAT Act was defined as the import of goods from the territory of a third country into the territory of the European Union. The tax obligation for the import of goods and the rules for deducting VAT from these transactions have not changed significantly since January 2014.

Taxpayers in the import of goods (Article 17 (1) (1) and (2)) are legal persons, organizational units without legal personality and natural persons who:

• have been burdened with the obligation to pay customs duty, also in the case when, on the basis of customs regulations, the imported goods are duty free or the duty on the goods has been suspended, in part or in full, or a preferential, reduced or zero duty rate has been applied,

• entitled to use the customs procedure including inward processing, temporary clearance, processing under customs control, including persons to whom, in accordance with separate provisions, the rights and obligations related to these procedures have been transferred.

As a rule, taxpayers who use the purchased goods for the purpose of carrying out taxable activities have the right under Art. 86 sec. 1 to deduct input tax on their acquisition. In this case, the taxpayer has the option to reduce the output tax by the amount of input tax applying general rules. Thus, in the settlement for the period in which the tax obligation arose in relation to the goods and services purchased or imported by the taxpayer (Article 86 (10)).

Tax obligation on import of goods in accordance with Art. 19a paragraph. 9 arises when the customs debt is incurred. Here, however, there is another fortification contained in paragraph 10B point 1 - not earlier than in the settlement for the period in which the taxpayer received an invoice or a customs document.

Tax deduction in reverse charge transactions

The VAT Act also specifies the rules for the settlement of transactions for which the taxpayer is the buyer of goods or services. They relate in particular to intra-Community purchases of goods, import of services and reverse charge in domestic trade.

1. Intra-Community acquisition of goods - a revolution in VAT deduction

The definition contained in the act defines the intra-Community acquisition of goods as the acquisition of the right to dispose of, as owner, goods that are shipped or transported to the territory of a Member State other than the country where the shipment or transport begins by the seller. According to Art. 86 sec. 2 point 4 letter c the amount of the input tax is the amount of the tax due for the intra-Community acquisition of goods referred to in article 1. 9.

Important! To recognize the transaction as an intra-Community acquisition of goods, the delivery should be made to a registered VAT-EU taxpayer.

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Pursuant to Art. 86 sec. 10b, in case of intra-Community acquisition of goods, the taxpayer will have the right to deduct the amount of input tax in the settlement period in which the tax obligation for the acquisition of goods arose. However, according to Art. 20 paragraph 5, the tax obligation in WNT arises upon the issuance of the invoice by the seller, but not later than on the 15th day of the month following the month in which the goods were delivered. However, the basic condition for the deduction of VAT is that the entrepreneur includes the amount of input tax in the same tax declaration in which he is obliged to settle the output tax.

Importantly, for the deduction to be justified, the taxpayer should receive an invoice for intra-Community acquisition of goods within three months from the end of the month in which the tax obligation arose (except for the movement of goods specified in Article 11 of the Act). Pursuant to Art. 86 sec. 10g, if the taxpayer does not receive the invoice within the above-mentioned period, he should reduce the amount of input tax shown earlier in the current settlement period. The re-deduction will be possible only when the taxpayer receives an invoice confirming the implementation of the intra-Community transaction (paragraph 10h).

Example 1.

The taxpayer purchased commercial goods from a contractor from the European Union on January 27. The seller, on the other hand, issued the invoice only on February 11, and then handed it over to the taxpayer. In this case, the tax obligation arose on the date of issuing the invoice, therefore the taxpayer in the settlement period for February should show both the due and the calculated VAT.

If it turns out that the same Taxpayer will not receive the invoice, as a rule, he should settle the VAT due and charged by the 15th day of the month following the delivery period. However, if the taxpayer does not receive the invoice within three months (from March to May), he will be required to correct the input tax in the May tax period.

2. Import of services

The import of services is clearly defined in Art. 2 point 9, according to which this concept should be understood as the provision of services for the performance of which the taxpayer is the recipient of services referred to in art. 17 sec. 1 point 4. Thus, the import of services will take place when the following conditions are met:

• the service provider is a taxpayer who has no registered office or a permanent place of business in the territory of the country, and in the case of real estate services (art. 28e), the taxpayer is not registered in accordance with art. 96 sec. 4;

• the service recipient is:

  • in the case of services to which Art. 28b - a taxpayer or a non-taxable legal person, registered or obliged to register for the purposes of VAT-EU information;

  • In other cases:

    • a taxpayer with a registered office or a permanent place of business in the territory of the country,

    • or a non-taxable legal person, established in the territory of the country and registered or obliged to register for the purposes of VAT-EU.

It is also worth noting that the general rule of the place of service provision pursuant to Art. 28b is the place where the taxable person who is the recipient of the service is established. The only exception are situations where:

• the services are provided for the taxpayer's permanent place of business, which is located in a place other than the place of business - then the place of supply of these services is the permanent place of business,

• the taxpayer who is the recipient of the service does not have a registered office or a permanent place of business - the place of supply of services is the place where he has his permanent address or usually resides,

• the services are intended solely for the personal purposes of the taxpayer or its employees - the provisions of Art. 28c.

It follows from the above considerations that despite the actual provision of the service abroad, the place of its provision is the country in which the recipient conducts business.

As you know, the changes to the VAT Act, in force since 2014, took place in many areas, but little has changed in terms of settling the import of services. The principle that the taxpayer has the right to deduct input tax in the tax period in which the tax obligation for the import of services arose continues to apply.

On the other hand, the tax obligation in the import of services arises on general principles, as in the case of domestic transactions, i.e. when the service is provided. However, if all or part of the payment has been received prior to the performance of the service, the tax liability arises upon its receipt for the amount received (Art. 19a (8)). As can be seen, also in this case the invoice documenting the transaction of importing services has lost its significance, thus the taxpayer does not have to apply for it. It is possible to issue an internal document issued as part of business activity, which will be supplemented with a proof of payment for the service provided.

Pursuant to Art. 86 sec. 2 point 4 letter and the amount of input tax is the amount of tax due for the provision of services, for which, in accordance with art. 17 sec. 1 point 4 or 8, the taxable person is their recipient. The taxpayer, using the purchased services for taxable activities, has the right to deduct the input tax in the period when the tax obligation arises, if he takes into account the amount of tax due in the tax return in which he is obliged to settle it.

If the taxpayer does not reduce the output tax by the amount of input tax on the import of services in the period when the tax obligation arises, then the taxpayer has the right to do so in two consecutive accounting periods. This is confirmed by the provisions of para. 13a, which says that a taxpayer who has not made a deduction on the date when the tax obligation arises or two subsequent ones, may reduce the amount of tax due by correcting the tax return for the period in which the right to deduct arose. However, it cannot do so later than 5 years from the end of the year in which the right to reduce the output tax arose.

3. Reverse charge in domestic transactions

Since October 2013, an extended list of products subject to reverse charge in domestic transactions has been in force. A taxpayer selling sensitive goods is obliged to issue an invoice without showing the VAT rate. Then the buyer should make VAT settlements, regardless of whether he benefits from the exemption or not.

A taxpayer using the purchased goods as part of taxable activities has the right to deduct the amount of input tax in the period in which the tax obligation arose in relation to them. At the same time, in order for the deduction to be possible, he should show the tax due on the reverse charge transaction in the tax return (VAT-7, VAT-7K, VAT-7D) in which he was obliged to settle it.

In the case of taxpayers benefiting from the exemption, they do not have the right to deduct input tax - therefore the amount of tax due will be tax deductible at the time of payment. In order to settle the transaction, they should prepare a VAT-9M declaration, and the tax amount should be paid to the account of the tax office.

4. Simplified import of goods

In the case of importing goods, it is possible to use a simplified procedure, which means tax settlement in the periodic VAT declaration. Importantly, the amount of input tax on imports subject to the simplified procedure is the amount of output tax. However, in Art. 33a of the VAT Act, it was specified that the taxpayer may settle the amount of tax due for the import of goods in the tax declaration submitted for the period in which the tax obligation for the import of these goods arose.

It is also worth paying attention to Art. 86 sec. 10d, which states that in the case of using the simplified procedure (consisting in entry in the register in accordance with customs regulations) in the import of goods - the right to deduct input tax arises for the accounting period in which the taxpayer made an entry in the register. Additionally, the condition of payment of the tax indicated in the customs document constituting the supplementary declaration should be met. In this case, the right to deduct VAT for one of the next two tax periods also applies, if the taxpayer has not reduced the tax due within the above-mentioned period.

5. Small taxpayer - cash method

Small taxpayers using the cash method also have the right to deduct VAT on goods and services purchased for the purposes of taxable activities. The only difference is when the settlement can be made.

According to Art. 86 sec. 10E, the right to reduce the amount of tax due by the amount of input tax in the period of its application of the cash method arises not earlier than in the settlement for the period in which the taxpayer has made payment for goods or services. The moment of receipt of the invoice is also important, as the deduction cannot be made before the moment of its receipt.