VAT deduction: what year-end obligations to watch out for
The end of the calendar year is associated with several obligations related to the right to deduct VAT. If a VAT payer claims a proportional or reduced deduction, it is good to know what needs to be done in the December VAT return. This article gives an overview of the basic steps that should be taken as well as some tips on when you do not need to do anything at all.
Correction of proportional VAT deductions
For received taxable supplies used for both economic and non-economic activities, taxpayers are entitled to claim only a proportional VAT deduction. Typical uses for non-economic activities are supplies provided free of charge or for private consumption by the taxpayer and their employees. A proportional VAT deduction should also be applied where a company provides company vehicles to employees for both business and private purposes.
The proportional right to deduct is calculated using a coefficient that depends on a specific measurable criterion, such as floor area or mileage. At the time of claiming the right to deduct, it is also possible to estimate this coefficient.
Where an estimate was used, the taxpayer must recalculate the coefficient at the end of the year based on actual facts and correct the VAT deduction in the VAT return for December, specifically on line 45. However, the VAT Act allows the estimated coefficient to differ from the actual coefficient by up to 10 percentage points without the need for correction. Moreover, if after the recalculation it turns out that you were entitled to a higher deduction, you do not need to make this correction but can do so voluntarily.
Settlement of reduced VAT deductions
The settlement of VAT deductions also includes the correction of deductions claimed in a given year. The term 'settlement' applies to received taxable supplies where the taxpayer is entitled to a reduced deduction - i.e., taxpayers who carry out both taxable and exempt supplies without the right of deduction. These are mostly banks and insurance companies, but the obligation to reduce the right to deduct may also apply to you if, e.g., you rent property to both VAT payers and non-payers, and the rent to non-payers must be exempt from VAT.
The right to deduct at a reduced rate corresponds to the extent of the use of taxable supplies expressed as a proportion of the value of taxable supplies with the right to deduct and all the taxable supplies carried out. However, the calculation need not include one-off events representing supplies exempt from VAT whose value is generally high and which would thus bias the coefficient away from reality (e.g. the provision of financial services or the supply or rental of immovable property where it is an ancillary activity).
If you are reducing your VAT deduction in 2024 for the first time, you can use a qualified estimate. If you already have experience with reducing your VAT deduction, during 2024, you have already used the coefficient calculated as part of last year's settlement.
In the December return, line 53 is then used to make an accurate calculation based on the supplies made and to adjust the claimed right to deduct. Here, the VAT Act no longer provides for any "headroom" and the settlement must always be performed even if the coefficient changes only by one percentage point, in any direction.
The coefficient shall always be rounded up to whole percentages. If it is greater than or equal to 95%, the coefficient shall be rounded to 100%. Hence, if the coefficient is even a fraction higher than 94%, you can claim the full deduction.
VAT deduction adjustment
Another statutory obligation in the December VAT return is the obligation to make a VAT deduction adjustment on line 60, which relates to the deduction of VAT on fixed assets if there is a change in the scope of its use within 5 years (or 10 years for real property) from its acquisition.
Changes in the scope of use can be summarised as any use that results in a difference between the possible claimed VAT deduction, and the facts upon the acquisition of the fixed assets. This may involve situations where, e.g., real property was rented out on a taxable basis, but the lease changed to an exempt one in 2024 (or vice versa). Or where an employee used a company vehicle in 20% for private purposes in the year of acquisition and in 45% in 2024.
These changes are assessed separately for each calendar year of the 5-year/10-year period, always compared to the originally claimed deduction. Thus, for 2024, there is an obligation to monitor the scope of use for fixed assets acquired since 2020 or 2015 for real property.
The adjustment amount is always set as one-fifth, or one-tenth, of the product of VAT on received taxable supplies and the difference in the indicators of the right to deduct VAT. The indicator of the right to deduct is either 0%, 100%, or the coefficient amount.
However, if the difference between the indicators of the right to deduct is no more than 10 percentage points, no VAT deduction adjustment shall be made. Should the adjustment lead to an increase in the right to deduct, it is voluntary.