Changing the purpose of the real estate and the correction of VAT

The acquisition of an asset, which is real estate, gives the right to deduct input tax if it is used for the purposes of taxable business activity. It should not be forgotten that one of the elementary functions of real estate is its residential character. Bearing in mind these circumstances, we will consider how the change of use of the property affects the obligation to correct VAT.

Deduction of input tax in connection with the purchase of real estate

The taxpayer is entitled to deduct the input tax in connection with the expenses for the purchase of goods and services used for the purposes of the taxable business activity.

The above rule also applies to the purchase of real estate, however, it is necessary to pay attention to certain special regulations.

Well, according to Art. 86 sec. 7b of the VAT Act in the case of expenditure incurred on the acquisition, including the acquisition of perpetual usufruct rights to land, and the production of real estate constituting the property of the taxpayer's enterprise, used both for the purposes of the taxpayer's business activity and for personal purposes referred to in art. . 8 sec. 2, when the attribution of these inputs entirely to the taxpayer's business activity is not possible, the amount of input tax is calculated according to the percentage in which the real estate is used for business purposes.

As a result, when a taxpayer acquires a property that is used both for the taxpayer's personal needs and for the conduct of a business (i.e. mixed use), the deduction of VAT takes the form of a proportional entitlement. VAT may be deducted only in the amount corresponding to the real estate actually used for business purposes.

Example 1.

An active VAT taxpayer purchased a residential house, 60% of which will be used for business purposes, and the remaining 40% for residential purposes for him and his family. The amount of input tax resulting from the property purchase invoice is PLN 100,000. In this situation, the taxpayer may deduct the amount of PLN 60,000.

Incidentally, it is worth pointing out that Art. 90a of the VAT Act, referring to the content of Art. 8 sec. 2 of the VAT Act. It is necessary to recall this regulation because personal goals are of a broader importance here than in the common understanding. Include:

• the use of goods forming part of the taxpayer's enterprise for purposes other than the taxpayer's business activity, including, in particular, for the personal purposes of the taxpayer or its employees, including former employees, partners, shareholders, members of cooperatives and their household members, members of legal entities, members an association, if the taxpayer was entitled, in whole or in part, to reduce the amount of tax due by the amount of input tax on the acquisition, import or manufacture of these goods or their component parts;

• free provision of services for personal purposes of the taxpayer or its employees, including former employees, partners, stockholders, shareholders, members of cooperatives and their household members, members of governing bodies of legal persons, members of the association, and any other provision of services free of charge for purposes other than the taxpayer's business activity .

In a situation where a taxpayer purchases a mixed-use real estate, he is entitled to the deduction in the proportion that the real estate area used for business purposes is in relation to the total area. However, the part that is used for personal purposes does not give the right to deduct VAT.

Change in the purpose of the property on the basis of VAT

Due to various circumstances, the purpose of the real estate may change. Many different scenarios are possible in this respect. The taxpayer may use the entire private property for business purposes or vice versa. The originally set proportion may also be changed.

In this case, apply Art. 90a of the VAT Act, which states that in the case referred to in Art. 86 sec. 7B, when within 120 months from the month in which the property that is part of the taxpayer's enterprise was put into use, there will be a change in the degree of use of this property for business purposes, the input tax deducted on its acquisition or production shall be adjusted.

The above provision applies when, during the 120-month adjustment period, the property (to which the input tax relates) is not used solely for business purposes. It covers situations in which the property has mixed use, i.e. it is used for both business and other purposes, including the private use of the taxpayer or its employees.

It should be emphasized that the period indicated in the provision is calculated in months, not in years. Moreover, the counting starts from the month in which the real estate constituting part of the taxpayer's enterprise was commissioned by him. Therefore, it will not always be the date of purchase of the property. The re-purpose of the property requires an adjustment (both in plus and in minus) if the way in which the property is used changes during the 120-month period of the adjustment, either for private purposes or for business purposes.

Rules for making adjustments in the event of a change in the intended use of the property

Corrections, in the event of a change of destination, are made in the declaration for the accounting period in which the change took place, in an amount proportional to the remaining correction period. Its necessity will arise when, during the period of the correction, the way in which the property is used for private purposes changes.

The adjustment is of a one-off nature and takes place for its entire remaining period. We should remember that the correction made once again does not exclude the possibility of correcting the VAT again in the future, in a situation where a change in the intended use of the property occurs again.

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Example 2.

The property was put into use in March 2018. PLN 60,000 of tax was deducted. In May 2019 (after 15 months) it was allocated for private purposes. It should therefore be established what the remaining correction period is. It will be 105 months (120-15). As a result of the change in the purpose of the real estate, the taxpayer has to reduce the input tax once by the amount of PLN 52,500 (105/120 × PLN 60,000).

The presented regulations regarding the correction of input tax are not the only regulations determining the correction in the event of a change of destination. The provisions set out in Art. 90 of the VAT Act.

Art. 90a of the VAT Act is applicable when, during the 120-month correction period, the real estate is not used solely for business purposes. It applies to cases in which the real estate has a mixed use, i.e. it is used for both corporate and other purposes defined as personal purposes.

It does not apply to a situation where a given real estate is used for activities carried out by a taxpayer, and it is a taxable activity and an exempt activity. In the latter case, the provisions on partial deductions referred to in Art. 90 and art. 91 of the VAT Act.

It is worth noting that the above-mentioned the provisions regulating the correction may be combined.

In the case of a change in the intended use of the property, the input tax adjustment is made for the entire remaining adjustment period and once in the tax declaration submitted for the month in which the event causing the change of purpose took place.

Taking into account the provisions presented, it may indicate that the change of the intended use of the real estate is an event which necessitates the correction of the deducted VAT. Importantly, the correction may result in both the reduction of the tax deducted and its increase, which depends on the direction in which the change of destination takes place.