Conditions for the application of individual pre-deduction factors for VAT deduction
The WSA in Rzeszów, in a judgement of 28 May 2024, ref. I SA/Rz 77/24, dismissed the foundation’s complaint against the individual interpretation regarding the refusal to apply individual VAT pre-coefficients. The court agreed with the head of the KIS that the pre-factors proposed by the foundation for VAT deduction are imprecise and do not reflect the specific nature of the foundation’s activity.
The foundation, registered as a VAT payer, conducts statutory activity (which it deemed not subject to VAT) and business activity (subject to VAT). It sought an interpretation as to whether it could apply different VAT deduction pre-factors depending on the type of activity and the costs incurred.
The foundation asked whether it was entitled to apply two different ways of determining the proportion of input VAT to be deducted, i.e. an individual pre-factor for the actual participation of events promoting organic products and a revenue pre-factor for the costs of other statutory activities. In addition, the foundation wanted to know whether it could apply the hourly pre-factors to the costs of business activities and mixed costs.
The director of the KIS considered that the individual event share pre-factor was not reliable and did not correspond to the specifics of the foundation’s activities. The court agreed with the authority that the foundation did not provide a credible rationale, indicating that the calculated method would reflect the extent to which goods and services purchased are used for business activities in an objective and complete manner.
The court also shared the authority’s view that the hourly prevalence does not reflect the specific nature of the foundation’s activities, as it is based only on the number of working hours, which may lead to an inadequate deduction of input tax.The authority held that the foundation is not entitled to use this method as it does not provide an objective and complete reflection of the use of the purchased goods and services for business activities.
The WSA further pointed out that the multiplicity of ways of determining the pre-factor could lead to illegibility and errors in the deduction of input tax.
This judgment shows that it is not easy to convince both the interpreting authority and the administrative court to confirm the possibility of applying an individual pre-factor. The matter is further complicated if the taxpayer intends to apply more than one pre-factor.According to the WSA ruling, this requires additional justification, formulated, based on the subject of the taxpayer’s activity.
In general, however, it should be remembered that the provisions on the pre-factor, are not a separate regulation in themselves, but are part of the provisions on the right to deduct VAT.If the taxpayer is able to demonstrate that the applied method of proportional deduction (even using several pre-factors), corresponds to the relation of the expenses to economic activity, the authorities and courts, should accept the proposed and rational approach of the taxpayer.