Suspension of activity and VAT

Pursuant to the applicable regulations, a taxpayer may suspend his business activity for a period from 1 to 24 months. Only those entrepreneurs who do not employ employees in their company are entitled to suspend their business activity. Additionally, a partner in a civil law partnership may not suspend his activity, unless all other partners of the partnership suspend it at the same time.

It should not be forgotten that the suspension of business activity gives rise to certain tax consequences, including the tax on goods and services (VAT).

Suspension of activity and VAT-7

During the suspension, the entrepreneur cannot perform economic activity and generate current income from it. The rights and obligations of the taxpayer during this period include:

• the right to perform any activities necessary to maintain or secure the source of income,
• the right to accept receivables or the obligation to settle obligations arising before the date of suspension of business activity,
• the right to sell own fixed assets and equipment,
• the right or obligation to participate in court proceedings, tax and administrative proceedings related to business activities performed before the suspension of business activities,
• performing all obligations prescribed by law, e.g. tax obligations,
• the right to obtain financial revenues, also from activities carried out before the suspension of economic activity.

Importantly, the entrepreneur, despite being suspended, may be inspected in accordance with the rules provided for persons performing economic activity.

As a rule, the VAT payer is obliged to submit a VAT declaration every month (monthly or quarterly), by the 25th day of the month following the given settlement period.

However, according to Art. 99 sec. 7a of the VAT Act, in the event of suspension of economic activity pursuant to the provisions on freedom of economic activity, taxpayers are not required to submit the declarations referred to in para. 1 and 2, for the billing periods to which this suspension applies.

However, this exemption does not apply to all entrepreneurs who suspend their business activity. An exception to this rule applies to:

• taxpayers making intra-Community acquisitions of goods,
• taxpayers importing services or purchasing goods - for which they are a taxpayer,
• billing periods in which the suspension of business activity did not apply to the full billing period,
• accounting periods for which the taxpayer is obliged to settle the tax on the performance of taxable activities and for which it is obliged to correct the input tax.

Suspension of activity and the right to deduct VAT

VAT taxpayers often ask themselves whether they can deduct VAT from invoices received during the period of suspension of business activity?

The answer to this question is in the affirmative, but it must not be forgotten that the invoice must relate to a contract concluded before the suspension and serve taxable activities (in short - the activity will be suspended in the future).

The general rule is that the entrepreneur may deduct the tax in the period in which he received the invoice or in one of the two subsequent accounting periods. Either way, despite the suspension, the taxpayer must submit VAT returns on time. The entrepreneur will then report cumulatively the amount of input VAT to be transferred to the next settlement periods. It will also be able to claim a direct refund. However, due to the lack of sales, the maximum allowable period of time, i.e. 180 days from the date of submission of the declaration, will have to be expected for return.

There is one more possible solution, which is to deduct the tax after the suspension of business activity, by submitting a corrected VAT declaration for the entire period of suspension.