Do you use a coefficient to reduce VAT deduction entitlement? Watch out for correction pitfalls!
A contribution submitted at the January meeting of the Coordination Committee of the Chamber of Tax Advisors and the General Financial Directorate was meant to harmonise the practical approach to tax amount corrections by payers who apply entitlement to VAT deduction in a reduced amount. However, the most logical approach to make tax amount corrections in December VAT returns did not win the GFD’s support.
The crucial question to which taxable period a correction of a taxable supply effected by the payer using a coefficient should relate typically concerns financial institutions or business entities operating in the real estate sector. The correction results in the change of the settlement coefficient, e.g., the reporting of additional VAT-exempt supplies. At the meeting mentioned above, the contribution submitter inquired whether the entitlement to a deduction in the amount adjusted using a new settlement coefficient should be corrected in the taxable period in which the related taxable supplies should have been correctly reported, or instead in December (or the 4th quarter) of the appropriate year. For your information, during the year, taxpayers claim their entitlement to VAT deduction using the coefficient calculated from the data for the period of taxation of the preceding calendar year (“zálohový koeficient”). It is not until December that the settlement of VAT deductions is carried out based on the actual data (taxable supplies) for the given year.
The adjusted amount of the entitlement to a VAT deduction is identical when applying either of the two above-mentioned methods. But they may have dissimilar implications because of different periods of default as regards additionally assessed tax, i.e. the amount of default (late payment) interest will be entirely different, especially for corrections of taxable transactions effected at the beginning of the calendar year.
The following example may help illustrate the entire situation: a taxpayer forgot to report part of their VAT-exempt supplies in their February VAT return. As a result of this omission, in December, the payer carried out the settlement of VAT deductions using a settlement coefficient that was wrongly calculated and therefore higher. The current wording of the VAT Act does not explicitly regulate to which taxable period a subsequent correction of the entitlement to deduction using a new coefficient relates. It would therefore be quite logical and in line with legislation to perform a correction in the December taxable period, as it was in this month that the wrong amounts affected the assessed tax. Since during the year, a VAT deduction is determined using the coefficient calculated from the data for the period of taxation of the preceding calendar year (“zálohový koeficient”), the calculation of VAT in other periods is entirely independent of the declared taxable transactions. Consequently, the incorrectly reported (i.e. lower) amount of VAT-exempt supplies in the February VAT return did not result in tax being paid in a lower amount.
However, the GFD is of a different opinion: both the correction of effected supplies and the subsequent correction of the VAT deduction settlement should be carried out in only one taxable period, i.e. in the period in which related supplies are corrected, which in our illustrative example is February. Within an additional VAT return for February, the payer would declare both the omitted VAT-exempt supplies and make a correction of the VAT deduction. The resulting tax underpayment would then be subject to default interest as early as from the end of March.