Although the big amendment to the VAT Act has been postponed, 2022 brought some interesting innovations in the field of VAT. Below I would like to summarise the most important ones in my opinion.
Amendments in 2023
Let's start from the end. In December, an amendment to the VAT Act was added to the Collection of Laws, which regulates the following areas with effect from 1 January 2023:
- increase in turnover for the purposes of compulsory VAT registration from CZK 1 million to CZK 2 million;
- reduction of fines for individuals, limited liability companies with a sole shareholder, and quarterly VAT payers for late submission or failure to submit a control report;
- extension of the deadline for the payer's response to a request to amend, supplement or confirm the data originally claimed in the control report to 17 days from the date of delivery of the request from the tax office to the payer's data box;
- VAT payers must now also submit a control report at the request of the tax administrator even if they are not obliged to submit a control report under the VAT Act; in these cases, payers will use the quick response "I am not obliged to submit a control report".
With effect from 1 July 2023, a new definition of buildings for the purposes of applying the reduced VAT rate for the construction of single-family homes or apartment buildings will be introduced. In the case of single-family homes and apartment buildings, the definition will refer to the amended Building Act, not to the regulations governing the Land Register, as is the case now.
Leaseback
Leaseback agreements concluded from 1 April 2022 are subject to a new VAT regime. This is due to the conclusions of the Coordination Committee with the Chamber of Tax Advisors of the Czech Republic (KOOV). It should be noted that the KOOV responded to the CJEU's case law C-201/18 Mydibel. Thanks to it, we have clarity on how the domestic tax authorities are approaching the whole matter.
Simply put, from a VAT point of view, it is no longer (i) the delivery of the item to the leasing company and (ii) the subsequent leasing of the item to the user (the original owner), as we were accustomed to in VAT, but a form of financing. It follows that the leasing company is merely carrying out an exempt financing activity.
Leasing companies are unlikely to have a problem applying this change, but it can be a major stumbling block in group transactions. If an item with output VAT is delivered incorrectly, the purchaser will not be entitled to a deduction. The same applies to the user of the item for incorrectly charged VAT on lease payments.
The KOOV also dealt with the sale of the subject property in the event of default by the lessee. It has been concluded that this is a supply of goods subject to the reverse charge.
Donations for Ukraine
In March, the tax administration published the information Tax relief in the field of value added tax in connection with the situation in Ukraine.
However, it was only in the following months that the tax advisors clarified with the tax administration important related issues, specifically concerning the VAT exemption within the meaning of Section 68(15) of the VAT Act (see further conclusions of the KOOV).
This exemption applies where the taxpayer has purchased goods for the purposes of their economic activity and only subsequently decides to donate the goods so purchased to a humanitarian and charitable organisation based in the EU, which transports or sends the donation to a third country (outside the EU).
The KOOV confirmed to us that "shipment" can be understood to include situations where humanitarian or charitable organisations arrange for the transport of goods to Ukraine through an agreed transporter or through a third party (possibly including donors).
The goods in question must be used in the territory of the third country for humanitarian, charitable or educational activities. The KOOV specifies various situations in which this condition is deemed to be met.
The KOOV also gives examples of goods to which this exemption may apply and to which it may not.
However, there is no doubt that the taxpayer must always increase its vigilance when applying this exemption.
Proper keeping of the logbook for the purpose of applying VAT deductions on cars
At the beginning of August, the Supreme Administrative Court's ruling that rejected a claim for a VAT deduction on a purchased vehicle due to an incorrectly kept logbook resonated in the media. Since July of this year, the tax authorities have been entitled to request camera records of vehicle movements from the Police of the Czech Republic for tax administration purposes.
However, the question is how the cooperation between the Police of the Czech Republic and the financial administration will actually take place in practice. In the judgment in question, the police had the data at their disposal because of the ongoing criminal proceedings. But the VAT Act states that in the case of so-called mixed use of property, the taxpayer may only claim a VAT deduction in the proportion that is used for the outputs that give rise to the deduction. Although the law does not provide a specific procedure for determining this ratio, according to administrative practice, a properly kept logbook is a recognised means of proof.
It is also worth pointing out that the tax administrator has long had software that can determine whether the entries in the submitted logbook make sense or whether there is something wrong with them. The possibility of requesting CCTV footage from the police is therefore just one of the other means of support that the tax administrator can use when in doubt about the credibility of the logbook. In addition, it can also cooperate with the technical inspection stations (STK) to verify the current condition of the speedometer. Of course, the tax authorities can also verify individual business meetings with business partners quite easily.
For more on the issue of the logbook in taxes, see here.
Declared supplier and VAT fraud
2022 was the year of the tax administration's fight against VAT fraud. The same campaign is expected to continue in 2023.
Before the tax authorities start to deal with VAT fraud, they often try to question the supplier that is listed on the invoice (i.e. the declared supplier). One of the reasons is certainly the fact that the burden of proof in this case falls entirely on the taxpayer. The burden of proof for tax fraud is somewhat more fairly distributed.
In its judgment C-154/20 (Kemwater ProChemie), the Court of Justice of the European Union stated that the right to deduct VAT must be granted whenever the substantive conditions are met, regardless of any failure to meet the formal conditions. If the actual supplier is not indicated on the tax document, the taxable person must prove that the supply was made by a VAT payer. The VAT status of the supplier may be determined by the circumstances of the case, in particular the volume and price of the supply. If the taxable person bears this burden of proof, it is not necessary for the actual supplier to be identified in order to qualify for the deduction.
In the most recent judgment of the Supreme Administrative Court, 4 Afs 317/2021-43 (Jan Surý), the complainant did not provide or propose any convincing evidence during the tax proceedings to prove that the goods in question were supplied to the complainant by one or more actual suppliers in a VAT-paying capacity. Nor did such information emerge from the circumstances established in the case under review. Thus, the complainant has not discharged its burden of proof and, despite its explanations, it has not been established whether the disputed supply was actually provided by the supplier named in the invoices submitted or by another taxable person in a VAT-taxable status. That means that the material condition that it must still be proved with certainty that the actual supplier is in a VAT-taxable status has not been met. The Supreme Administrative Court (SAC) pointed out that it is for the taxable person to prove this fact.
Based on my practical experience, I recommend eliminating all doubts from the minds of the tax authorities concerning the declared supplier on the invoice from the very beginning.
It is important to note that if the taxpayer settles the matter with the declared supplier, it is very likely that there will be a second round - a defence that the taxpayer is not part of the tax fraud.
Given the tax authorities' zeal in these areas, I also recommend that you always thoroughly vet your supplier, especially a new one, before you start working with them.
VAT in the digital age: what's in store
In December, the EU Commission published a proposal to modernise VAT rules within the EU for the 2024-2028 period, in particular:
- real-time VAT reporting and e-invoicing;
- the application of VAT in terms of the economics of platforms; and
- uniform VAT registration in the EU.
Real-time VAT reporting and e-invoicing
- Reporting each cross-border transaction separately in real time (virtually within four days of the transaction).
- Expected implementation: 2028.
Applying VAT from the perspective of platform economics
- Application of the so-called assumed supplier in the case of short-term rentals or passenger transport via platforms (e.g. Airbnb, Uber).
- The platform will pay VAT in certain cases.
- Expected implementation: 2024.
Uniform VAT registration in the EU
- One Stop Shop (OSS) mode extension.
- The rules on distance selling will also apply to second-hand goods, works of art, collectibles and antiques.
- Extension of the possibility of applying the OSS also for other supplies to non-taxable persons (mostly non-business owners) with the place of supply in another EU Member State.
- It will also be possible to report in the OSS the transfer of own goods between warehouses located in different EU countries.
- Expected implementation: 2024.