Extensive amendment to the VAT Act 2019 and its transitional provisions
A significant part of the amended provision is effective from 1 April 2019. I have already outlined the most significant changes in my miniseries The 8 Most Significant Changes in VAT for 2019; but I would like to point out that several important provisions have a special efficiency adjustment.
In practice, this means that sometimes a provision is effective retroactively, e.g. on 1 January 2019, or a provision has a delayed effect in the future. Understanding the transitional provisions is also important for correctly applying the VAT Act amendment to those provisions, where events occurring before 31 March 2019 are considered, which have an impact on VAT after 1 April 2019.
Below I briefly summarise the substantial changes in the VAT Act and interpret the special transitional provisions.
- New understanding of financial leasing
The tax administrator is changing its administrative practice. From 1 January 2020, the lease of a movable asset with an option for a subsequent purchase for a minimum value will no longer occur. This arrangement will now be treated as a financial lease with the obligation to pay VAT on the issue to the user of the entire lease. You can read more about this topic in part 4 of the miniseries (The Czech tax administrator’s new approach to financial leasing).
To mitigate the effects and to strengthen the legal certainty of taxpayers, the former administrative practice will continue to apply to contracts for the surrender of goods for use (where the ownership of the goods in use will be transferred to its users) and for which the goods were also left for use until 31 December 2019.
- Calculation of VAT “from the top” and rounding
Taxpayers will still have six months to adjust their SWs for “from the top” calculations. Within this period, both the former method, i.e. calculation using coefficients, and the new one will be permitted.
Example: Receiving a deposit for goods at a basic rate of CZK 100,000. Calculation of VAT under the old method = CZK 100,000 x 0.1736. Calculation of VAT under the new method = CZK 100,000 – CZK 100,000 / 1.21.
However, the new provision on (non)rounding is already effective from 1 April 2019. The rounding of cash payments no longer affects VAT. For example, if I issue an invoice for CZK 99.90 + CZK 20.98 VAT and I want to display rounding on my invoice, I need to indicate the form of payment. If CZK 121 is accepted in cash, the recording obligation should be 99.90 + 20.98. If the same amount is paid by credit card or bank transfer, the amounts of 100 + 21 will appear in the recording obligation.
Since Council Directive (EU) No 2016/1065 was effective from 1 January 2019, it is determined that the taxpayer may proceed with the vouchers issued between 1 January 2019 and 31 March 2019 in accordance with the wording of this amendment on VAT.
In the foreseeable future, the General Financial Directorate will issue a guideline on the vouchers, including answers to frequently asked questions.
Since it is one of the biggest topics of this amendment, I focus on it in detail in part 2 of my miniseries (Single-purpose vs. multipurpose vouchers). This article is continually updated depending on the information provided by the tax administrator.
- Correction of tax base for irrecoverable claims
This is probably the most fundamental change in 2019. Unfortunately, the tax administrator tries to prevent the taxpayer from claiming a VAT refund on irrecoverable claims if the aforementioned proceedings started before 1 April 2019.
In practice, this means that claims recovered prior to the amendment are governed by the VAT Act in the wording until 31 March 2019. Unfortunately, according to the wording of the VAT Act before 31 March 2019, VAT may only be refunded for claims filed in insolvency proceedings where the court has declared bankruptcy. Even if the insolvency proceedings started before the amendment and bankruptcy was declared after the amendment, the wording of the VAT Act from 31 March 2019 will apply.
The transitional provisions also affect the construction of a three-year period for the possibility of making a correction to the tax base. The deadline does not run for the period of the aforementioned proceedings, but at the earliest from the effective date of this amendment.
Example: Receivable with date of chargeable event on 1 April 2017, initiation of judicial recovery on 1 April 2018, recovery terminated unsuccessfully on 1 April 2020. In this case, the three-year period was suspended only from 1 April 2019 to 1 April 2020.
The issue of correcting the tax base for irrecoverable claims is described in detail in part 1 of my miniseries (Correction of the tax base for irrecoverable claims).
- Fines for breach of obligations in connection with a control statement
The obligation to pay the fine expires if the payment assessment decided based on this obligation has not been issued within six months from the day on which the breach occurred. This provision also applies to breaches of duties prior to the effective date of this amendment.
Example: A breach of duty occurred in September 2018. As notice of payment was not issued by 31 March 2019, the fine expires.
In addition to this special, but generally positive, provision, the VAT Act also includes a provision allowing fines of up to CZK 500,000 to be imposed for serious hampering or obstruction of VAT administration. Administrative practice will show how this hard sanction will be applied.
For the sake of completeness, I add that high fines from the control statement (CZK 10,000, CZK 30,000 or CZK 50,000) can in certain cases be waived. In 2019, a request for remission of the following fines may be submitted in accordance with Guideline GFR D-29 in the version of Appendix 3:
- one arbitrary waiver of a fine of CZK 10,000, CZK 30,000 or CZK 50,000;
- late reaction within 5 business days following the expiry of the call for submission of a control statement, provided that the payer did not actually incur the obligation to submit a control statement;
- late reaction within 5 business days following the expiry of the call to change, supplement or confirm the data where the payer confirms the correctness of the last submitted control statement.
- Adjustment of the tax deduction for a major repair of a real property
In the event of a correction initiated before the amendment becomes effective, which has been completed after the amendment has come into effect, the payer may decide to proceed in accordance with the new provision of Section 78 da of the VAT Act.
I suppose that most taxpayers will not opt for this. If a taxpayer sells a property exempt from VAT, he certainly will not want to return part of the VAT claimed on a significant repair.
Otherwise, it would make sense. If the taxpayer is not entitled to deduct the VAT on the repair because the property is used for exempt transactions without the right to deduct and intends to sell the property as a taxable supply, the correction can give him a VAT deduction of several tenths of a percentage point.
I also look at the treatment of immovable property from the perspective of VAT in 2019 in part 3 of my miniseries (Supply and lease of immovable property in 2019).
- Other transitional provisions
- The possibility of not using the Mini One-Stop Shop for e-services in the EU up to the EUR 10,000 limit is already valid from 1 January 2019 due to the direct effect of Council Directive (EU) 2017/2455.Compulsory electronic submission of all types of VAT returns and control statements, including applications for registration and changes of registration data for taxpayers and newly for identified persons, will apply from 1 January 2021.
- In addition, the prohibition on taxing rentals of apartments and family houses should start to apply as of 1 January 2021. I also describe the negative effects of this provision in my part 3 of my miniseries (Supply and lease of immovable property in 2019).
- By 1 May 2019, the tax administrator will publish information in the Register of Payers that the entity is a taxpayer without a registered seat or establishment in the Czech Republic. This information will serve mainly for service providers according to the basic rule that if the service is provided to a foreign person’s facility located in the Czech Republic, the place of performance remains in the Czech Republic and the service provider is obliged (with exceptions, e.g. construction-assembly work) to pay VAT.
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