Property renting is, by default, exempt from VAT, but taxpayers can make a preliminary decision to opt for it being taxable. It is crucial to get the timing right when informing the tax authority, as failure to meet the registration obligation can result in taxpayers having to delve deep into their pockets, as demonstrated by the following court case which serves as a good case study.
It is a common error that tenant companies do not bother to find out whether the lessor has indeed opted for VAT with the tax authority on the renting activity. And it is in cases like these that the recipients of the invoices on the rental fee discover, during a tax inspection, that they illegally deducted the VAT. The unlawfully charged VAT can be claimed back from the issuer of the invoice, but the recipient of the invoices will be the one facing a tax penalty potentially running into several millions of forints.
According to the following ruling from the Curia summarised below, it is also clear that the issuer of the invoice can expect a hefty tax penalty if the notification was not made at the proper time.
First of all, let’s look at the facts:
• In the first quarter of 2010 the tax authority conducted a pre-remittance review at a taxpayer for VAT.
• The taxpayer began its activity on 26 May 2009, and its main profile was the renting and operating of own and leased property.
• After being registered, the taxpayer acquired business premises on 9 July 2009, which it then leased out based on a rental contract dated 28 September 2009.
• The inspectors found that the taxpayer only generated revenue from property renting, but the taxpayer did not notify the tax authority of the option to make this taxable, and so the taxpayer could not deduct any VAT on purchases. Following the tax inspection the amount of VAT reclaimable by the taxpayer was modified to HUF 0, and resulted in a tax penalty from the tax authority.
According to the taxpayer, it only became clear to them on 17 September 2009 that the business premises in question were to be rented out, and the notification was sent on the same day. However, the inspectors did not accept this argument, stating that the company designated the rental of owned and leased property as its main profile when founded, and so in their opinion the taxpayer should have made a statement on the option for taxation upon the registration of the company, regardless of whether the taxpayer had any property at that time or not.
The tax authority also found that on the form submitted on 17 September 2009 the taxpayer made a declaration with retroactive effect to 26 May 2009 that in the case of property renting it chose to make the activity subject to VAT, as opposed to being exempt. The declaration was previously rejected by the competent office of the tax authority, stating that it is not possible to make this taxation choice at a subsequent date. Consequently, in 2009 the taxpayer should only have invoiced the renting of the business premises without VAT. The tax authority also noted that in 2009 the taxpayer did not submit a declaration stating it wished to opt for VAT in 2010 with regard to its property renting activity. The taxpayer did submit a modification form on 14 June 2010, in which it opted for VAT with retroactive effect to 28 September 2009, but the tax authority rejected this declaration and so the taxpayer should have invoiced its renting activity without VAT in 2010 as well.
The case made it all the way to the Curia. In its ruling, the Curia emphasised that the Act on the Rules of Taxation does not make it possible to make up at a later date for failing to choose the proper method of taxation, and to make notifications with retroactive effect.
The tax authority won the case, while the taxpayer won some valuable (and expensive) experience, essentially, that the tax authority does not accept statements made in connection with property renting that are submitted with retroactive effect. If renting is included among the scope of activities when a company is established, it is advisable to submit notification of the taxation choice at this time, even if the company does not yet have any property.