Shortages and losses – Impact on VAT
During inventory taking, many situations can arise. One of the less pleasant ones is the discovery of a shortage or loss when some assets or inventories are lost, stolen, or damaged. This situation needs to be taken into account not only in accounting but it also requires adjustments in VAT.
A VAT payer is obliged – in cases of undocumented damage, loss, or theft of business assets – to refund the originally claimed VAT deduction. To determine the amount that the payer must refund from the originally claimed deduction, it is crucial to decide whether it is an offset or adjustment method.
The offset method is used in the case of inventory for which a deduction has been claimed within the period of 3 years. Such deduction should be refunded by the payer in full. Since inventory is not further specified in the VAT Act, it remains relatively questionable whether to refund the claimed deduction for missing inventory, including secondary acquisition costs (such as transportation) or without them. The adjustment method is used in case of shortages in tangible assets for which a deduction has been claimed within a period of 5 years. The part of the deduction that remains until the end of entire five-year period should be refunded.
Representatives of the General Financial Directorate within the Coordination Committee of the Chamber of Tax Advisers of the Czech Republic have stated that only the adjustment or offset of VAT deductions related to tax-deductible expenses according to the Income Tax Act constitutes a tax-deductible expense. Conversely, the expense resulting from the adjustment or offset of VAT deductions for undocumented shortages and losses is a non-tax-deductible expense.
The issue of addressing shortages and losses is not entirely straightforward, and many companies lack practical experience in this area. Failure to comply with legal requirements can lead to sanctions imposed by the tax authorities. If you need any kind of advice on this issue, do not hesitate to contact us.