Deputies approve amendment to VAT Act

Unsupported shortages and damage

The existing VAT Act neither defines shortages and damage nor provides guidance on how these should be treated with respect to VAT. Case law repeatedly confirmed that unsupported shortages, destructions, losses or thefts of business assets are considered utilisation for other than a taxpayer’s business purposes and, consequently, VAT on output should be paid (where VAT deduction has been claimed upon purchase).

The amendment to the VAT Act directly defines how to apply VAT on unsupported business asset shortages, damage, destructions or thefts. It introduces the duty to settle the entitlement to input VAT deduction originally claimed, all this within three years with respect to inventories and low-value assets and five (or ten) years with respect to fixed assets. In such cases, taxpayers will have to prove the age of the relevant business assets. Some questions, however, remain unanswered, for example, it could be quite problematic to clearly allocate the originally claimed entitlement to VAT deduction to replaceable inventories. The question is whether it is possible to adjust the deduction based on, for example, the cost at which inventories are kept in the stock records at the time. If shortages and damage are supported with proper documentation, the procedure that has been applied before the amendment remains the same: it is not necessary to adjust the original deduction in any way.

Duty to pay VAT on received advances

With reference to the Court of Justice of the European Union’s decisions, the amendment specifies what information about a taxable supply must be known as at the date an advance was received to give rise to the duty to declare VAT before the supply is effected. The supply will be sufficiently specified if (i) the goods or services constituting the supply, (ii) the applicable VAT rate, and (iii) the place of supply are known. The requirement to include information about a person effecting the supply has been omitted from the amendment’s original wording. This new taxable supply definition seems to comply with a new directive regulating vouchers, adopted by the Council of the EU in June 2016. These changes should be integrated into the VAT Directive from 2019.

For single-purpose vouchers where all the above specifics are known (e.g. a voucher for accommodation in one specific hotel), the duty to pay VAT originates already at the moment of receiving consideration. The subsequent use of the voucher is irrelevant for VAT purposes. However, the question remains what specific information must be known about a supply for its accurate definition. Is it necessary to match the consideration with specific goods or services or is it sufficient just to know the appropriate VAT rate?

For multi-purpose vouchers (e.g. a gift voucher to a department store for the purchase of various goods with various VAT rates), the moment that a voucher is used (i.e. the moment certain goods or services are delivered) is decisive for VAT purposes.

Other changes

• To fight tax fraud, the amendment extends the application of a local reverse-charge mechanism to include the provision of personnel for construction and assembly work and to various forms of forced delivery of property.
• The amendment introduces the unreliable person concept and expands the concept of liability for unpaid VAT to include instances in which consideration for taxable supplies is provided in a virtual currency.
• The new legislation also amends the definition of fixed assets and the same rules will now apply to both fixed assets acquired via finance leases and fixed assets acquired in a standard manner.
• The amendment repeals special rules on societies (formerly associations without legal personality). Under the new regulations, unit funds and investment fund sub-funds will be regarded entities liable to VAT.
• Taxable supplies provided over a period longer than twelve months during which no consideration liable to the duty to declare VAT has been received should be regarded as effected no later than on the last day of each calendar year.

Interest on long-retained excess deductions

An amendment to the Tax Procedure Rules, approved within this tax package, includes, among other things, a provision increasing interest paid to taxpayers by the tax authority in cases of long-retained excess VAT deductions.

Under the new amendment, interest will apply to the retention of excess deductions not only resulting from the procedure to remove doubt but also from tax inspections. The amendment also reduces the period for which the tax administrator may retain – without punishment - excess deductions within the procedure to remove doubt from five to four months from the end of the deadline for filing a VAT return. Interest will be paid equal to the Czech National Bank’s annual repo rate increased by two percentage points, compared with one percentage point currently in effect.

Although we may find the adequacy of the interest rate questionable (especially when considering the default interest rate charged to taxpayers when they misstep), it is definitely a step forward.