Practical information on changes to VAT rates
In mid-January, the General Financial Directorate (GFD) issued two pieces of information on the practical application of changes to VAT from 2024. In this article, we focus on the Information on VAT Rate Changes. Another piece, the GDF’s Information on the Determination of the Tax Base where an Advance Subject to a Different Reduced Rate Was Received in the Previous Year was published at the end of January.
VAT rate changes from 2024
From 1 January 2024, the Czech Republic has only two VAT rates: a reduced rate of 12% and a basic rate of 21%.
The information lists the items that have been reclassified from the reduced rate to the standard basic rate - bicycle repair services, household cleaning services, draft beer, hairdressing services, textile and shoe repair services, firewood, cut flowers, municipal waste collection and transportation and related services, services of authors and performers, and scheduled air mass transportation. In contrast, non-regular land mass transport is now subject to the reduced rate, which will be of interest to tour operators (including those organising school trips or cultural bus transport) and employers who provide transport services to their employees. The information explicitly points out that this transport does not include taxis or similar alternative transport services.
Another major change in VAT rates is the reclassification of soft drinks from the reduced to the basic rate. Exceptions are selected beverages and potable (tap) water, which remain at the reduced VAT rate. The selected beverages are milk and liquid dairy products further defined in the VAT Act (e.g., flavoured dairy products or their plant-based alternatives). The reduced rate can be applied to potable water supplied via taps or tanks. The information specifies that, e.g., the addition of mint as decoration does not preclude the application of the reduced VAT rate. Conversely, mint lemonade would be considered a drink subject to the basic rate since here, the water is flavoured. Coffee, irrespective of the amount of milk added, is a basic VAT rate beverage. However, the line between coffee-flavoured milk drinks and coffee with milk may in practice not be entirely clear.
Ready-to-feed follow-on baby food, despite its substantial water content, is subject to a reduced VAT rate. Similarly, plant products in their dry state (coffee, tea, etc.) and syrups or powdered beverages constitute foodstuffs subject to the reduced rate.
As the reduced VAT rate will continue to apply to food services, when serving beverages in a restaurant, it will be necessary to separate drinks from the food service. If, e.g., the menu does not allow this, the basic tax rate shall apply to the whole supply. A similar procedure should be applied to the provision of accommodation services, with the exception of accommodation with breakfast included in the price (here it will be an ancillary supply subject to the same VAT treatment as the main supply). The GFD also draws attention to its separate Information on the Application of VAT to Activities Provided in Hotel Establishments, the principles of which remain in application.
The application of the reduced rate to single-use medical devices, where the assessment may be problematic in practice, is only very marginally addressed in the information and provides no guidance on the meaning of a single use.
The VAT exemption for the delivery of books shall also apply to incidental expenses such as those incurred for books packaging and transportation. It is possible to request a binding assessment of the correct VAT rate and exemption for books. However, the time limit for processing the request is 90 days. As many such requests are to be expected, the GFD will most likely use the full length of the time limit to respond.
Determination of the tax base when VAT rates change
Uncertainties have in particular arisen concerning advances for supplies where the rate changed on 1 January 2024, i.e., the transfer of supplies between rates or supplies subject to a reduced rate.
The information confirms the application of the relevant provisions of the VAT Act concerning the rules for settlement of advances, which vary depending on its result.
Generally, on the date of taxable supply, the difference between the total consideration for the supply excluding tax and the sum of the advances received (less tax) is taxed. The result (tax base = taxable amount) may be either positive (underpayment) or negative (overpayment).
In summary, if there is an underpayment, the remainder of the tax base shall be taxed using the new tax rates; if there is an overpayment, the original tax rates shall be used for the settlement. In the case of multiple advances, it is necessary to proceed from the last advance paid. The information also gives some practical examples of how to proceed with settlements (including the supply of books).