Cessation of business activity after the lapse of statutory correction period may not mean exemption from VAT
The European Court of Justice will soon respond to the inquiry made by the Polish tax authority, whether cessation of business activity will mean that a taxpayer has to tax fixed assets regardless of the fact when such assets were acquired (case C-229/15).
If ECJ considers the interpretation proposed by the Advocate General Julianne Kokott, the taxpayers will have certain reasons to be worried: in the opinion of the Advocate General, the lapse of period for making a correction does not have an impact on taxation of assets after the taxpayer ceases its business activity. In practice, this means that retaining of goods by the taxpayer who ceased its business activity may be considered also as the supply of goods for consideration regardless of the moment of acquiring (therefore, as a rule, deducting VAT on) such goods.
Jan Mateusiak, running a notarial office, requested an individual interpretation on whether during a liquidation inventory prepared due to liquidation of business activity run by a natural person who is an active VAT payer, the value of fixed assets being the property of such a person should be included as at the liquidation date. The fixed asset being the subject of the taxpayer’s inquiry was a real property which partly served him for the purposes of his business activity since 1999, when the building was entered in the record of fixed assets. The taxpayer used the right to which he was entitled and deducted part of VAT covering the commercial part of the building. In the opinion of the taxpayer, he should not include the value of fixed assets owned by him in the liquidation inventory. Due to the lapse of statutory period for making a VAT correction for the real property, it also will not be necessary to make such a correction, therefore cessation of business will be de facto neutral for him in the part concerning the real property at issue.
Provisions of the Polish VAT Act impose that a physical inventory must include goods which pursuant to the definition stated in art. 2 par. 6 of the VAT Act, also include fixed assets. At the same time, fixed assets are subject to the provision of art. 91 of the VAT Act, which obliges the taxpayer to make a correction of the VAT deducted before, if as at the liquidation date, the fixed asset is in the so-called ‘correction period’ (lasting 10 years for real properties). If the dispute had been about a real property purchased 7, and not 17 years ago, the taxpayer would not only have been obliged to make such a correction, but also – if it was considered that the real property was to be presented as goods in the inventory, then the taxpayer would have had to pay VAT on this account.
In the opinion of the taxpayer, inclusion of the real property in the stock-taking is against the principle of VAT neutrality, imposing each and every time the necessity of ‘returning’ the VAT which had been deducted before.
The Advocate General pointed that the problem refers to whether art. 18 c) of VAT Directive is applicable also to goods which are investment goods within the meaning of art. 187 and for which, the period pursuant to sec. 1 of the quoted provision lapsed, therefore it was not possible to correct the deduction. Let us remind that art. 18 c) of VAT Act stipulates that the member states may deem retaining goods by a taxpayer as supply of goods for consideration if the taxpayer ceases to conduct business activity subject to taxation, if VAT on such goods was deducted in part or as a whole at the moment of acquiring or using them. At the same time, art. 187 stipulates that in the case of investment goods, the correction covers the period of five years including the year when the goods were acquired or manufactured (or possibly – used for the first time). With reference to real properties, the period forming grounds for calculating the correction may be extended to 20 years. These provisions have been reflected in the Polish VAT Act, in art. 14 and 91 respectively, while the correction period for the real property was determined for 10 years.
In the opinion of Julianne Kokott, the principle of tax neutrality does not require admission of taxation pursuant to art. 18 c) of the Directive only within the time framework outlined in art. 187 (in the case of real properties under the Polish law – the period of 10 years). Taxation also after the lapse of the period for correction results in the same tax treatment as in the case of selling a building at the same moment, guaranteeing the neutrality of VAT system. A different interpretation of regulations could affect the taxpayer’s business decisions (selling the building would have been unfavourable).
Accepting the stand proposed by the Advocate General by ECJ would mean for taxpayers that regardless of the lapse of VAT correction period in the event of cessation of business activity, retaining goods for their own use will be treated as supply of goods for consideration.