In the modern world, more and more companies are making sure that the company can provide the employee with professional development, work motivation and good team relations. Additional benefits like fruit Fridays, medical packages, or sports cards are no longer something new. But even so, there may be doubts about the proper settlement of such transactions. What amount of VAT will apply to the provision of gratuitous benefits to employees? Are such benefits even taxable under VAT?
According to Article 7(2) of the Polish VAT Act, the gratuitous transfer of goods belonging to the taxpayer’s business is taxable, namely:
Importantly, if the taxpayer was entitled, in whole or in part, to reduce the amount of output tax by the amount of input tax on the purchase, import or manufacture of these goods or their components-then there is taxation of gratuitous releases.
In a situation where the employer provides the benefits gratuitously and the employee uses them exclusively for business purposes, such benefits are VAT-neutral. Examples of such benefits include:
An employer may opt to give employees T-shirts or sweatshirts with the company logo for promotional and advertising purposes. If it is directly related to the taxpayer’s business, the transfer of these clothes will not be subject to VAT.
Some companies choose to hire employees from a location other than their headquarters or place of work, with the employer agreeing to provide a free transportation to work.. Providing employees with free transportation to work will not be subject to VAT. On the other hand, only if the nature of the business or other excusable hardship forces the company to provide such transportation and does not constitute an expense for personal purposes of employees.
For example – commuting difficulties may affect construction workers or shift workers. During certain hours, it may not be possible to get to or from work using public transportation. Then the employer may decide to provide transportation in order for the company to function properly. In other unjustified cases, free transportation of employees to work is subject to VAT as a gratuitous supply of services for employees’ personal purposes.
In a situation where the employer is obliged to provide employees with supportive meals (e.g., based on health and safety regulations), the gratuitous transfer of meals is not subject to VAT. In this case, the provision of meals is aimed at providing employees with the right conditions and serves the proper functioning of the company.
If an employer chooses to provide benefits related to employees’ personal purposes, it is worth distinguishing whether it is gratuitous use or transfer of goods or gratuitous provision of services. In the case of goods, it is important to determine whether there was a right to deduct VAT when the goods were purchased. If so, the gratuitous provision involves output VAT; if not, the goods-related benefits are not taxable. Examples include providing an employee with ownership of a laptop or phone purchased for the company, or providing a company device for private use.
Giving occasional gifts to employees serves their personal needs, not business needs. Therefore, when purchasing goods for such gifts, the employer is not entitled to deduct input tax (due to the lack of connection with the performance of taxable activities). In such a situation, when we do not have the right to deduct VAT on the purchase, so the free gift itself should not be subject to value-added tax.
Most often, the employer does not have the right to deduct VAT on purchases of sweets, flowers, small gifts, given to employees on various occasions, due to the fact that there is no connection with the business.. These purchases are intended to satisfy the private needs of employees. So as above, in such a situation, the benefit in question should not be subject to value-added tax.
The employer cannot deduct VAT from the invoice for eyeglasses for employees, because after all, the purchaser of the goods is the employee. Thus, the basic condition for deduction – the actual acquisition of goods for taxable activities – is not met. In this case, there is no basis for settling output VAT.
The above situations were examples of accounting for the transfer of gratuitous goods. On the other hand, if the object of the provision is services, the gratuitous service should be taxed when it is provided for the employee’s personal purposes.
If an employer provides medical packages to its employees gratuitously, the benefit in question, under Article 8(2) point 2 of the VAT Act, should be considered a supply of services resulting, in principle, in the obligation to report output VAT.. Insurance services, on the other hand, are subject to VAT exemption, so there is no basis for output VAT.
For Multisport cards, the benefit in question should be taxed at the 8% VAT rate.
Author: Olga Antropovak, Accountant at MDDP Outsourcing.