Cancellation of mutual obligations between entrepreneurs and the right to deduct VAT
Settlement of payments between entrepreneurs may take various forms and not in every case it has to be a payment in the form of money. One possible solution is to write off mutual obligations, which leads to the expiry of the claims of both parties. In connection with the decision by taxpayers to set off their liabilities, it is worth considering what consequences this will have in terms of the right to deduct VAT.
Cancellation of mutual liabilities - compensation
The cancellation of mutual obligations between entities is otherwise known as compensation and is regulated by the provisions of civil law.
Pursuant to Art. 498 § 1 of the Civil Code, when two persons are both debtors and creditors to each other, each of them may set off their claim against the claims of the other party, if the subject of both claims is money or things of the same quality, marked only as to the species, and both claims are due and may be pursued before a court or other state authority.
As a result of the set-off, both claims redeem each other up to the amount of the lower claim. If the value of the claim is equal, mutual obligations are terminated.
Compensation allows for the settlement of obligations, but not by their actual fulfillment, but by mutual redemption of the parties' claims, as a result of which their obligations expire. The payment function is that as a result of offsetting, mutual obligations of the debtors are written off as if the debtors had fulfilled their obligations. Although by compensation the parties do not effectively receive the benefits due to them, but by counting the claims of one of them against the claims of the other, each party is released from its debt, which allows them to be considered paid. In the case of redemption of mutual obligations - compensation - the mutual obligation relationship is terminated. Such compensation is considered to be equivalent to a cash payment. Consequently, the cancellation of mutual obligations has the same effects as payment.
Cancellation of mutual obligations and the right to deduct VAT
Now it is necessary to consider how the mutual liability write-off event affects the issue of the right to deduct input tax on taxable mutual transactions. The question arises whether the taxpayer is entitled to deduct input tax from an invoice that has not been paid in the traditional form of money, but as a result of compensation.
Pursuant to Art. 86 sec. 1 of the VAT Act, to the extent that the goods and services are used to perform taxable activities, the taxpayer referred to in art. 15, has the right to reduce the amount of tax due by the amount of input tax.
The amount of the input tax is the sum of the tax amounts resulting from the invoices received by the taxpayer for the purchase of goods and services. Under Art. 86 sec. 10 of the Act, the right to reduce the amount of tax due by the amount of input tax 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.
In addition, the right to reduce the amount of tax due by the amount of input tax arises not earlier than in the settlement for the period in which the taxpayer received an invoice or a customs document.
In general, the right to deduct VAT is granted when certain conditions are met, i.e. the deduction is made by a registered active VAT taxpayer and when the goods and services on which the tax was charged are used to perform taxable activities.
The document entitling to deduction is the invoice received by the taxpayer for the purchase of goods and services. In addition, the seller must have a tax obligation regarding the taxable activity indicated therein.
The presented rule excludes the possibility of deducting input tax related to goods and services that are not used for taxable activities, i.e. in the case of their use for tax-exempt activities and not subject to taxation at all.
In the context of the above-mentioned of provisions, it should be clearly emphasized that the VAT Act does not specify as a condition for the deduction of VAT by the taxpayer to settle the amount due on the invoice.
Therefore, it should be noted that each payment of the invoice (including in the form of compensation of mutual liabilities) does not affect the moment of the right to deduct the tax, because it is not an element necessary for its implementation.
[alert-info] The cancellation (compensation) of mutual liabilities between entrepreneurs does not affect the right to deduct input tax. The taxpayer still retains this right, even when the liability expired as a result of compensation, and not the classic payment. [/ Alert-info]
Cancellation of mutual obligations and accelerated VAT refund
Another issue related to both the compensation and the deduction of input tax is the accelerated VAT refund.
The standard return period is 60 days from the date of submitting the tax return. However, assuming that certain statutory conditions are met, an accelerated refund is possible within 25 days.
According to Art. 87 sec. 6 of the VAT Act, the tax office is obliged to refund the tax difference within 25 days from the date of submission of the settlement, if the following conditions are jointly met:
the amount of the input tax shown in the tax declaration, with the exception of the amount of the input tax or the tax difference referred to in paragraph 1, unsettled in previous accounting periods and shown in the declaration, result from:
invoices documenting the amounts of receivables that have been fully paid via the taxpayer's bank account at a bank established in the country or the taxpayer's account at a cooperative savings and credit union of which he is a member, indicated in the identification application referred to in separate regulations,
invoices other than those mentioned in point a, documenting receivables, if the total amount of these receivables does not exceed PLN 15,000,
customs documents, import declaration and decisions referred to in art. 33 paragraph 2-3 and art. 34, and have been paid by the taxpayer,
import of goods accounted for in accordance with art. 33A, intra-Community acquisition of goods, the provision of services for which the taxpayer is their recipient, or the supply of goods for which the customer is the taxpayer, if the tax return shows the amount of tax due on these transactions;
the amount of input tax or tax difference not settled in previous accounting periods and shown in the declaration does not exceed PLN 3,000;
the taxpayer submits to the tax office, not later than on the day of submitting the declaration, a confirmation of payment of the amount due;
the taxpayer for the next 12 months directly preceding the period for which the taxpayer applies for a refund within 25 days:
was registered as an active VAT taxpayer,
submitted tax returns for each tax period.
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The compensation is not a form of payment via a bank account, therefore the value of liabilities settled in this way falls within the agreed limit of PLN 15,000 and affects the possibility of receiving a refund within an accelerated period. As a consequence, when the sum of receivables settled by mutual amortization:
does not exceed PLN 15,000, the taxpayer retains the right to refund VAT within 25 days;
exceeds PLN 15,000, the taxpayer is not entitled to benefit from this preference.