DGP: Non-deducted VAT and costs. Better to make a mistake than to take a wrong turn

Michał Thedy, tax advisor and partner at Thedy & Partners, commenting on the ruling in the newspaper, pointed out that as a rule, input VAT is not a cost on the grounds of income taxes. Systemically, VAT is supposed to be neutral for the taxpayer and burden only the final consumer. To this end, the VAT mechanism provides that input tax paid by the taxpayer to the supplier is deductible from the output tax paid to the taxpayer by the recipient of the goods or services. This means that effectively the input tax burden does not fall on the taxpayer. As a consequence, input tax can only be charged as a cost in a situation in which the taxpayer is objectively not entitled to a deduction (in which case the entire gross amount is effectively borne by the taxpayer). The taxpayer may not “choose” the manner of accounting for VAT and decide whether to deduct it from output VAT or to recognize it as a cost. The same applies if the taxpayer forgets or makes a mistake with regard to the deduction. In such a situation, the taxpayer must correct his VAT settlements, and thus “recover” the non-deducted tax (however, he cannot recognize the cost in income taxes). Of course, it should be remembered that recognition of input VAT in costs is possible under the condition that, in general, the cost of a given transaction may be recognised as a tax cost (whether in net or gross amount).

In the case at hand, the authorities took the position that the taxpayer did not have the right to deduct the input VAT on the purchase of the real estate (which was not in dispute). However, they held that the taxpayer could not recognise this tax as a cost (through depreciation) because it had “lost this right as a result of abuse”. (which position was shared by the Court of First Instance). However, the NSA assumed that in the situation in question the taxpayer did not have the right to deduct the tax from the very beginning (already at the time of purchase) and consequently, from this perspective, there is no obstacle to recognising the input tax as costs. It seems that the NSA’s position is correct, assuming that no changes took place after the purchase of the real estate (e.g. change of its purpose). Of course, a separate question is – if in fact the situation in question was connected with some abuse – whether the taxpayer is entitled to depreciate the purchase price of the real estate together with the undeducted VAT at all.

The entire article can be read in Dziennik Gazeta Prawna dated 10 November 2021.