Proportion in VAT - mixed sales and calculation of the ratio

Every taxpayer with mixed sales should apply the so-called VAT proportion when reducing their VAT liability.

What is mixed sales and how do you distinguish the cost associated with it?   

Mixed sales is a situation in which a taxpayer makes sales subject to VAT, but also has transactions that are exempt or not subject to VAT at all.   

Art. 86(1) of the Polish VAT Act defines the principle of the possibility of deducting input tax, where the determinant of the possibility of tax deduction is the connection with the purchase of goods and services and their use in activities taxable by the taxpayer. To sum up, the relationship between the cost and the revenue generated on its basis must be maintained.   

A cost related to mixed sales is a cost that cannot be clearly attributed to either taxable or exempt sales.   

Examples of costs related to mixed sales may include:  

1. renting the premises where the business is carried out,   
2. telecommunications services related to ongoing business operations,   
3. purchase of office supplies used for current operations.   

How to calculate the value of the proportion in VAT? When to apply it?  

The proportion ratio is calculated by dividing the value of taxable sales for the previous year by the total value of sales to the taxpayer. This is precisely defined in Art. 90(3) of the Polish Goods and Services Tax Act.   

The result is the VAT proportion ratio that should be applied for costs related to mixed sales.   

It is worth mentioning here Art. 90(10) of the Polish VAT Act, which informs about the application of two solutions in the case of a very high and a very low value of the ratio. If the proportion:  

• exceeded 98% and the non-deductible amount of input tax resulting from the application of this proportion per year was less than PLN 10,000 – the taxpayer has the right to assume that this proportion is 100%;  

• did not exceed 2% – the taxpayer has the right to assume that this proportion is 0%.  

To sum up, we can distinguish three options for linking costs with revenues in order to classify the possibility of deducting VAT:  

1. Cost related to taxable sales – we can deduct VAT  
2. Cost related to exempt sales – VAT cannot be deducted  
3. Cost related to taxable and exempt sales – VAT proportion  

Putting theory in practice   

MDDP Outsourcing has experience in serving clients with mixed sales, and therefore, the entity settles the tax on goods and services using the VAT proportion. Let’s take an example of an entity from the telecommunications industry that develops telecommunications infrastructure by purchasing, building and modernising networks, but also grants loans to related entities or provides securities for the financing obtained.   

In this case we can demonstrate:  

• Costs related to the telecommunications network – e.g. maintenance costs including electricity fees, space rental for network elements, fees for supervision, management services or network modification services – which will be recognized as those strictly related to taxable sales and here input VAT may be deducted in full,   

• Costs related to loans, guarantees – these could be some advisory services in the field of settlements of guarantees between companies – then it would be impossible to deduct VAT, because the cost would be related to exempt sales,   

• Costs related to current administrative activities – e.g. rental of a seat/office branch, office supplies, purchase of office equipment, including laptops and telephones, office maintenance costs – coffee machine services, cleaning services. The above-mentioned costs cannot be clearly assigned whether they concern taxable or exempt sales, therefore an appropriate VAT proportion ratio must be applied in this respect.   

To facilitate the work of an accountant in calculating the appropriate amount of tax and, moreover, to minimise the risk of mistake – the best solution is to set the accounting system so that it automatically calculates the appropriate value of VAT to be deducted. In the SAP Business One system, we used a solution where various tax codes were defined – related to the proportion and those unrelated to it.  In the case of proportion ratio-related codes, the system automatically, in the background, calculates the appropriate amount to be deducted and the difference, which it assigns as defined to the appropriate cost account. This solution speeds up the accounting process, in which the accountant selects the right code at the right cost and does not have to worry about manually converting the VAT amount that is not deductible.    

Author: Michał Figat, Senior Accountant at an accounting office in Warsaw.