Are You Obliged to Adjust VAT Deductions for Overdue Liabilities?

VAT payers are obliged to adjust their originally claimed VAT deduction if the related liability has not been paid by the end of the sixth calendar month following the month in which it was due. The adjustment of the VAT deduction is based on the amount of outstanding liability and shall be made in the taxable period in which the last day of the sixth calendar month falls within.

After paying the outstanding liability, the VAT payer is entitled to 'reclaim' the VAT deduction. The re-increase of the VAT deduction may be included in the taxable period in which the liability is paid at the earliest. If only part of the liability is paid, the re-increase of the VAT deduction should be applied proportionally to the payment.

The GFD Information provides several practical situations and describes the application of VAT deduction adjustments in practice. Below is an overview of the most interesting ones.

• Definition of supply

The obligation to adjust VAT deduction applies only to received taxable supplies where the supplier is obliged to declare the output VAT, i.e., the obligation does not apply to supplies under the reverse charge mechanism.

• Split maturity

For supplies with so-called split maturity, where multiple due dates are set for a single liability, the obligation to adjust the VAT deduction is monitored separately for each part of the liability. This is a typical example of a retention fee.

• Existence of mutual liabilities and receivables

The existence of mutual liabilities and receivables between business partners does not exclude the obligation to adjust the VAT deduction for the debtor. The decisive factor is the due date of the specific liability, regardless of the existence of receivables, as the liability ceases only upon offset (to the extent of the offset). This can cause practical problems, e.g., invoicing between related parties, where the parties believe that a mutual offset will occur, but according to the contractual documentation, the liabilities are already overdue.

• Supply subject to different VAT rates

If a supply is subject to different VAT rates, the obligation to adjust the VAT deduction applies to each unpaid supply individually. If the unpaid part does not relate to a specific item, the VAT deduction must be adjusted proportionally for all VAT rates.

The GFD Information also provides practical examples of VAT deduction adjustments depending on whether a proportional or pro rata coefficient is applied, or for supplies received before VAT registration.

Authors:

Eliška Šťastná, Senior Consultant, Tax Department

Radka Dubnová, Tax Department Manager