Posted by In the previous case we discussed, you were a Vat and bought a computer (with VAT) and a work from Adam’s employee (based on a work contract, i.e. without VAT). The conclusion of our discussion was that, being a Vat, it is good to have suppliers who are also Vats.
Note: The following article is not legal, financial or tax advice.
Case 2 – What if you are not a Vat?
The following example is not legal or tax advice. For exact guidance, ask your accountant or tax office.
Let’s assume you’re in business and for some reason you’re a passive VAT payer – you can’t deduct it. Let’s continue with the example from last post.
You sell a product for 5,000 PLN, you don’t add any more VAT because you are not a Vat payer. You bought a computer for 2000 PLN net, or 2460 PLN gross. You hired Adam to do the necessary work for 2,000 PLN gross. So what were your total costs and what about VAT?
Your costs are 2460 PLN and 2000 PLN, or a total of 4460 PLN. Your client didn’t advance you the VAT, because you’re not a Vat taxpayer, meaning you just got a transfer of 5000 PLN from him. After paying your costs, you were left with 540 PLN of profit. When you bought the computer, you simultaneously transferred to the seller the VAT due for it 460 PLN, and you can’t do anything about it – there is nothing to deduct this amount from, as in case 1, because you are not a Vat. It is simply your cost. Hiring Adam’s employee is also your cost, whether on a contract for work or on the basis of a VAT invoice, if he has a business and is an active VAT payer.
As you can see, the profit is less than in case 1, because at least one of your suppliers is a Vat payer. Therefore, you operate with your suppliers on gross prices.
Conclusion: if you are not a Vat, it is often better to have costs that are not subject to VAT, but this very much depends on your cost structure in general and the type of supply item.