How to settle VAT in local government units?

Is it possible for local government units to deduct VAT?

Possibility of VAT deduction by local government units allows these entities to make significant financial savings. The applicable tax law allows for the deduction of input VAT based on Article 86 Section 1 of the Act on the Tax on Goods and Services (VAT Act). According to these provisions, purchased goods and services used for activities subject to VAT allow for its deduction by local government units, and thus entitle them to reduction of VAT payable. It is calculated on the basis of sales. The reduction includes the amount of input VAT, i.e. the one that is paid in the price of purchased goods and services. In this sense a local government unit may exercise the right to deduct VAT. For this to happen, the following conditions must be met:

•  the local government unit must be recognised as a VAT payer;
• the goods and services in connection with the acquisition of which the tax is charged must be used by the local government unit, at least in part or in whole, for taxable activities.

The VAT Act and the right to deduct input tax on investments made by local government units

Local government units functioning as VAT payers are subject to special regulations. The provisions of the VAT Act state that a local government unit acting as a public authority is not considered a VAT payer. However, taking into account Article 15, Section 6 of the VAT Act, if the unit concludes a civil law contract – for example, a lease, rental agreement, a contract for the supply of media, among others, it may act as a VAT payer. As a result, revenues obtained by local governments from concluded civil law contracts should, in principle, be subject to the VAT Act regimeIn such cases, they may be taxed at the appropriate VAT rates or be exempt from VAT.

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Local governments that are VAT payers have the right to deduct this input tax on investments made, including construction of facilities, as well as on expenses incurred for current operations. The only condition that must be met in this case for the right to deduct to exist is the partial or total connection of expenses with the taxable activities performed. The connection of expenses with taxable activities is determined based on the so-called direct and indirect allocation, established, among others, on the basis of sales ratio.

Within what time frame should local government units deduct VAT?

Deduction of VAT charged by local government units should be done on an ongoing basis. This means that local government units are obliged to show VAT charged in the present tenseIt is also possible to report VAT charged at a later date by submitting a correction to the VAT return, within a maximum of 5 years from the beginning of the year in which it arose. the right to reduce the amount of tax due by local government units.

There is also possibility of partial deduction of VAT by local government units. Such a possibility may occur, among others, in the case of a change in the intended use of a fixed asset. This may be, among others, a sewage system given for free use, which is then leased for a fee. Deduction of VAT by local government units in this case is spread over time.

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It is important for local government units to independently determine whether they have the right to deduct input VAT, mainly taking into account the currently applicable tax regulations and practice, as well as the business activity conducted.

Possibility of VAT deduction by local government units is beneficial and affects the financial savings of this type of establishments. Therefore, it is worth using the tax regulations in this area to be able to obtain the right to a full or partial deduction of VAT.

https://www.nik.gov.pl/aktualnosci/centralizacja-podatku-vat-w-jst.html