Spoilage, loss of consumer properties or other reasons for write-off of inventory (hereinafter - inventory) are common situations for many enterprises. However, such transactions have not only accounting, but also tax consequences. If during the purchase of such stocks the amounts of VAT were included in the tax credit, the taxpayer must take into account the requirements of the Tax Code of Ukraine regarding the accrual of compensatory tax liabilities. Let's consider when such an obligation arises and how to fulfill it correctly.
The tax credit is formed regardless of the use of assets
In accordance with item 198.3 of Article 198 of the Tax Code of Ukraine, the tax credit of the reporting period is determined on the basis of the contractual value of goods, services and non-current assets. It includes VAT amounts accrued or paid in connection with the purchase or manufacture of goods and services, acquisition, construction or construction of fixed assets and other non-current tangible assets, as well as when importing goods or non-current assets into the customs territory of Ukraine.
It is important that the right to a tax credit does not depend on whether such goods or assets have actually begun to be used in taxable transactions. It is also maintained even if during the reporting period the taxpayer did not carry out taxable transactions at all.
Why write-off of goods and materials leads to VAT accrual
A different approach is used when goods cease to be used in economic activities. Item 198.5 of Article 198 of the Tax Code of Ukraine obliges the VAT payer to accrue tax liabilities on goods, services and non-current assets, during the acquisition of which the tax amounts were included in the tax credit, if such assets begin to be used in transactions that are not economic activities of the payer.
This is exactly the situation that arises when writing off inventory, including damaged ones. After write-off, they are no longer used in the economic activities of the enterprise, and therefore, for VAT tax purposes, they are considered to be used in transactions that are not economic activities.
How tax liabilities are determined
For the application of the requirements of item 198.5 of the Tax Code, the moment when the goods begin to be used in non-taxable or non-economic transactions is important.
If goods or services were purchased from the very beginning for tax-free transactions, tax liabilities are determined on the date of their purchase. If they were purchased for use in taxable transactions, but subsequently begin to be used in transactions that are not economic activities, tax liabilities arise on the date of the actual start of such use. This date must be confirmed by primary documents drawn up in accordance with the requirements of the Law of Ukraine "On Accounting and Financial Reporting in Ukraine".
What actions should the VAT payer take
If, when purchasing inventory, the amounts of VAT were included in the tax credit, and subsequently such goods and materials are written off, the taxpayer is obliged to accrue VAT liabilities at the basic rate no later than the last day of the reporting period in which the write-off took place. In this case, the tax base is determined based on the cost of acquisition of written off inventory in accordance with item 189.1 of the Tax Code.
In addition, within the same period, it is necessary to draw up a consolidated tax invoice and register it in the Unified Register of Tax Invoices within the time limits established by the Tax Code of Ukraine.
Therefore, it is the fact of write-off of inventory for which the tax credit was formed that is the basis for calculating compensating tax liabilities with VAT. Timely fulfillment of these requirements will avoid tax risks and claims of regulatory authorities during inspections.
