A significant modification entered into force on 1 January 2016 relating to the deduction of input VAT in Hungary, which so far has not resulted in much change to companies’ tax return filing practices. Yet as the end of the year draws near, it is worth revisiting the modified rules since these will first have an impact on VAT returns in 2018. Starting from next year, the VAT of certain incoming invoices will now only be deductible as part of a self-revision.
What will change from 2018 regarding the deduction of input VAT?
Although the new rule entered into force in 2016, taxpayers only have to apply the modified rules in practice from 2018. Prior to the 2016 tax amendments, with regard to exercising VAT deduction rights the VAT Act stated that payable tax established in the tax assessment period can be reduced with the deductible input VAT generated within the same period, or in former periods but before the limitation period expires.
In 2016, the relevant provision was supplemented as follows: in any current VAT return only the deductible input VAT generated in the same period, or prior to that, but within the calendar year preceding the calendar year that includes said tax assessment period, can be taken into account.
In practice, this means that taxpayers can exercise their tax deduction right in respect of a 2016 incoming invoice until the end of 2017. In the case of input VAT subject to the reverse charge mechanism or related to import transactions filed according to self-assessment rules, the tax has to be assessed in the period when the tax payable is determined, in line with the governing rule.
If taxpayers do not exercise their tax deduction right until the year following the date of performance, they may take the deductible VAT into account (within the limitation period) in the tax assessment period when the tax deduction right arose. Accordingly, for certain incoming invoices, the period that includes the date of performance has to be modified with a self-revision. Based on the provisions of the VAT Act in Hungary, this rule first has to be applied for transactions where the deduction right is generated on 1 January 2016 or afterwards.
In the case of correction invoices where the amount of input VAT increases as a result of the correction, the tax deduction right still starts upon receipt of the modifying invoice, so here the tax deduction deadline does not have to be calculated based on the date of performance but rather based on the date of receipt.
What does this mean for taxpayers?
Self-revisions mean extra administration for taxpayers since in addition to filing the self-revision, the reason and the impact of the self-revision also have to be documented in detail.
With a self-revision, taxpayers inevitably use up the more favourable conditions related to the first self-revision since when submitting the second and subsequent self-revisions the self-revision interest is higher if the self-revision comprises a tax payment liability.
For self-revisions that benefit the taxpayer (i.e. if we are claiming tax back as a result), it is important to mention that filing the self-revision resets the limitation period. This means that according to the general rules, the tax authority has another 5 years to possibly subject the period modified with a self-revision to an inspection.
How to avoid detrimental consequences?
The regulation in Hungary does not distinguish between invoices received or issued late, so to eliminate administrative burdens, those receiving the invoices will definitely be interested in having the invoices available within the maximum two-year period, meeting the requirements in terms of form and content.
To avoid the negative consequences derived from self-revisions, regular year-end reviews of invoices not yet subject to deductions is definitely recommended.
