You have probably already noticed the draft amendment to the VAT Act, which is set to increase the limit for compulsory VAT registration from CZK 1 million to CZK 2 million. Many small VAT payers were surely delighted by the publication of this proposal, because those with turnover in the range of CZK 1-2 million for the last 12 months will also be able to deregister and cancel their VAT registration.
Cancellation of VAT registration is also a condition if you wish to enter the flat-rate tax regime for personal income tax and insurance.
However, the temptation to do away with VAT obligations and save on related administrative costs should not overshadow awareness of the obligations associated with cancellation registration, in particular the possible obligation to reimburse previously claimed deductions. It is also advisable to consider whether being a non-taxpayer is actually advantageous for a given type of business or for a given position in the business chain.
In the following article, we summarise the questions you need to think about before you decide to cancel your VAT registration.
A taxpayer with their registered office or residence in the Czech Republic will be able to cancel their registration if they are not a VAT group and their turnover for 12 consecutive months did not exceed CZK 2 million.
The draft amendment also contains a transitional provision that allows taxpayers with turnover between CZK 1 and 2 million to apply for cancellation of registration. However, this depends on the publication of the amendment in the Collection of Laws. As the legislative process has slowed considerably, it seems that this possibility will only occur in December. If the amendment is published in the Collection of Acts on, for example, 14 December 2022, the taxpayer may submit an application for cancellation of VAT registration by 20 December 2022 (i.e. within 5 days of its entry into force).
We recommend that you consider the following circumstances before applying for cancellation:
- Will I have to reduce the deduction claimed?
- Am I at risk of being registered as an "identified person"?
- Is deregistration really advantageous for me given my position in the chain?
Will I have to reduce the deduction claimed?
If the taxpayer has acquired property on which they have applied input tax in full or in part and which they still have in their business assets, they will probably have to reduce the VAT deduction claimed. The period for adjusting the deduction is 10 years for immovable property and its technical improvement and five years for other fixed assets. The adjustment of the deduction also applies to inventories, own work-in-progress and other assets acquired in the 11 months preceding the month of deregistration for which a deduction of at least CZK 2,100 has been claimed. The obligation to reimburse the deduction also arises in respect of consideration received for a taxable supply which has not taken place by the day preceding the date of cancellation of registration.
If the VAT payer records any of the above in their business assets when applying for deregistration, they should pay attention. The cancellation of VAT registration can become very costly. However, the law sets a time limit for the adjustment of the deduction, which is intended to represent a kind of "lifetime" during which the assets should be used to create added value. If the taxpayer does not use the property for taxable activities for the whole of this specified period, or if the taxpayer cancels their VAT registration (and therefore does not create value added through the property subject to VAT), they must repay part of the deduction pro rata according to the number of years or months to the tax office, to avoid inequalities between VAT non-payers and "former VAT payers". Below is a short example of a reduction in the VAT deduction for a fixed asset, namely a car.
Example
A sole trader and VAT payer purchased a car in August 2020 for CZK 605,000 and claimed a full deduction of CZK 105,000. The individual's tax status was revoked on 15 December 2022. As the sole trader will file their last VAT return for December 2022, they must adjust the deduction claim in this tax return and reduce the deduction claimed on the car. Not even three years of the five-year reference period have elapsed since the purchase of the car. Thus, in the December 2022 return, the sole trader will have to reduce the deduction on the car by three-fifths of the claimed VAT deduction and refund three-fifths of the CZK 105,000, i.e. CZK 63,000.
Am I at risk of being registered as an "identified person"?
Before you decide to deregister from VAT, we also recommend that you consider the question of the obligation to register as an identified person. An identified person for VAT purposes is a kind of limited VAT registration, where despite the obligation to declare the tax or to declare the supply, it is not possible to claim the deduction. An identified person is a domestic taxable person (usually a business or a commercial corporation) who, for example, purchases goods from another Member State with an aggregate value exceeding CZK 326,000, receives a service with a place of performance in the Czech Republic from a person not established in the Czech Republic, or provides a service under the so-called basic rule to a taxable person established in another Member State. Like a taxpayer, the identified person is obliged to submit a VAT return and, where applicable, a control and summary report. For the reasons mentioned above, it is worth considering whether it is more advantageous for me to remain registered as a VAT taxable person who is entitled to a deduction on inputs used for economic purposes.
Although there is no risk of the non-taxpayer becoming an identified person when importing goods from third countries, it is important to note that if customs officials do not receive a valid VAT number, they will add VAT to the goods that the non-taxpayer cannot reclaim.
Is deregistration really advantageous for me given my position in the chain?
Probably the most important fact for the decision whether or not to be a VAT payer is what entities the business will be trading with, i.e. who will be their customers and clients, payers or non-payers. Generally, if your customers are taxpayers, it is better to be a taxpayer. If they are non-payers, it is better to be a non-payer. Although the business's profit per product is not affected by registration, the final price of the product, which determines demand and total sales, is already affected by (de)registration.
The following table shows the difference in final prices for customers, assuming that the business is a VAT payer/non-payer and the customer is a VAT payer/non-payer, using the example of a business buying inputs for CZK 1,000 to which it creates value added in the same amount:
|
Business |
Payer |
Non-payer |
||
|
Customer |
Payer |
Non-payer |
Payer |
Non-payer |
|
Purchase of tickets |
1,210 |
1,210 |
1,210 |
1,210 |
|
Cost for the business |
1,000 |
1,000 |
1,210 |
1,210 |
|
Input VAT |
210 |
210 |
0 |
0 |
|
Added value |
1,000 |
1,000 |
1,000 |
1,000 |
|
Selling price incl. VAT |
2,420 |
2,420 |
2,210 |
2,210 |
|
Cost to the customer |
2,000 |
2,420 |
2,210 |
2,210 |
As can be seen from the example, the business's profit is always CZK 1,000, but the final price is different. If the business is a taxpayer, it is more profitable to sell the goods to taxpayers, since, assuming the same profit for the business, the price for taxpayer customers is lower (2,000 < 2,420). If the business is a non-payer, it is more likely to sell its goods to non-payers as it has a competitive advantage as a non-payer vis-à-vis payers (the price of payers to non-payers is CZK 2,420 and the price of non-payers to non-payers is CZK 2,210).
Finally, we would like to add that the draft amendment is currently in its third reading in the Chamber of Deputies. For the time being, the amendment is expected to take effect on 1 January 2023, but we will keep you informed of the latest developments.