Input VAT adjustment

What it means

An input VAT adjustment corrects tax deducted on capital goods when the way they are used changes during the monitoring period.

For movable capital goods the period is five years; for real estate twenty. Each year in which use changes triggers an adjustment of a proportionate part of the original deduction.

An input VAT adjustment is not the same as partial deduction. Partial deduction deals with a purchase that serves taxable and exempt activity at the same time and is settled with a coefficient for the year. The adjustment follows capital goods for years after the purchase and kicks in when their use changes later on.

How it works in practice

The classic case is a building bought for taxable activity that later starts being let under an exemption. Part of the original deduction goes back to the state.

The adjustment is calculated in the last tax period of the year. It requires a capital goods register with acquisition dates and how each asset was used in each year.

An adjustment is not always to the payer’s disadvantage. A company that first used a machine partly for exempt activity and deducted only part of the tax under the coefficient can, on moving to fully taxable activity, deduct a proportionate part of the remainder in the following years of the monitoring period.

What to watch out for

It is forgotten on selling an asset, changing activity and on deregistration. That is exactly where a tax liability appears that nobody priced into the transaction.

Purchase documents for real estate and records of its use must be kept for the whole monitoring period, far longer than ordinary documents. When a question about the adjustment comes up years later and the original invoice is missing, the company cannot prove the amount deducted, and document retention becomes a tax problem.