Key Aspects of VAT Input Tax Credit Formation

Value Added Tax (VAT) is an indirect tax included in the price of goods and services. For a VAT payer, the taxation mechanism involves both the accrual of VAT liabilities when carrying out taxable transactions and the possibility of claiming an input VAT credit when purchasing goods, services and non-current assets, provided that the requirements established by law are met.

The input VAT credit allows a VAT payer to account for VAT amounts paid or accrued on purchases of goods and services and to reduce its VAT liabilities accordingly.

An input VAT credit is the amount by which a VAT payer is entitled to reduce its VAT liability for the relevant reporting (tax) period in accordance with the rules established by the Tax Code of Ukraine.

The procedure for claiming an input VAT credit is primarily governed by Articles 198 and 201 of the Tax Code of Ukraine.

How Does the VAT Input Tax Credit Work?

The mechanism of the input VAT credit is easiest to understand through a practical example.

Suppose a VAT-registered company purchases goods for UAH 120,000, including UAH 20,000 of VAT. Provided that the statutory requirements are met, the UAH 20,000 VAT amount may be included in the company’s input VAT credit.

The company subsequently sells those goods for UAH 180,000, including UAH 30,000 of VAT. The UAH 30,000 constitutes the company’s VAT liability arising from the sale.

When determining the amount of VAT payable to the state budget, the company takes its input VAT credit into account:

UAH 30,000 VAT liability – UAH 20,000 input VAT credit = UAH 10,000 VAT payable.

Thus, a VAT payer does not pay the entire amount of VAT accrued on the sale to the state budget. When calculating the VAT payable, the amount of the available input VAT credit is deducted from the VAT liability.

If the VAT liability exceeds the input VAT credit, the positive difference is generally payable to the state budget.

If, on the other hand, the input VAT credit exceeds the VAT liability, a negative VAT balance arises. The subsequent treatment of such negative balance depends on the conditions established by the Tax Code of Ukraine. In particular, it may be applied against outstanding VAT liabilities, claimed as a VAT refund, or carried forward as an input VAT credit to the following reporting period.

Therefore, an input VAT credit is neither a separate payment to the taxpayer nor a VAT exemption. It is an element of the VAT calculation mechanism that allows a taxpayer to account for VAT accrued or paid in connection with relevant purchases.

Which Transactions Give Rise to an Input VAT Credit?

The transactions in respect of which VAT amounts may be included in the input VAT credit are specified in paragraph 198.1 of the Tax Code of Ukraine.

They include transactions involving:

• the purchase or manufacture of goods and services;
• the acquisition, construction or creation of non-current assets;
• the receipt of services supplied by a non-resident within the customs territory of Ukraine, as well as services whose place of supply is located within the customs territory of Ukraine;
• the importation of non-current assets into the customs territory of Ukraine under operating or financial lease agreements;
• the importation of goods and/or non-current assets into the customs territory of Ukraine.

The input VAT credit for a reporting period is determined on the basis of the contractual value of goods and services and consists of VAT amounts accrued or paid by the taxpayer in connection with the relevant transactions.

The input VAT credit may be recognised regardless of whether the purchased goods, services or non-current assets have begun to be used in taxable transactions during the relevant reporting period and regardless of whether the VAT payer carried out any taxable transactions during that period.

However, the subsequent use of the purchased goods, services and assets remains relevant. If they are intended to be used or begin to be used, in particular, in transactions that are outside the scope of VAT, exempt from VAT, or unrelated to the taxpayer’s business activities, an obligation to accrue VAT liabilities may arise in the cases provided for by paragraph 198.5 of the Tax Code of Ukraine.

Documents Confirming the Right to an Input VAT Credit

The mere fact of purchasing goods or services and paying their price is not sufficient to include the relevant VAT amount in the input VAT credit. The right to the input VAT credit must be properly documented.

As a general rule, for purchases of goods and services within the customs territory of Ukraine, the primary supporting document is a VAT invoice issued by the supplier and registered in the Unified Register of VAT Invoices (URVI).

A VAT invoice registered in the URVI serves as the basis for the purchaser to include the respective VAT amount in its input VAT credit.

VAT amounts that are not supported by VAT invoices or adjustment calculations registered in the URVI, customs declarations, or other documents specified in paragraph 201.11 of the Tax Code of Ukraine may not be included in the input VAT credit.

When goods are imported into the customs territory of Ukraine, the document confirming the right to include the VAT paid in the input VAT credit is a duly completed customs declaration confirming payment of the tax.

When Can an Input VAT Credit Be Claimed Without a VAT Invoice?

A VAT invoice is the primary, but not the only, document on the basis of which Ukrainian law permits an input VAT credit to be claimed.

Under paragraph 201.11 of the Tax Code of Ukraine, the documents that may serve as a basis for recognising VAT amounts as an input VAT credit without obtaining a VAT invoice include, in particular:

• a transport ticket, hotel bill, or an invoice issued to the taxpayer for communication services or other services whose cost is determined based on meter readings, provided that the document contains the details required by law;
• cash register receipts specifying the value of the goods or services received, the total amount of VAT charged, the fiscal number and the supplier’s tax number. The total value of goods or services received under such receipts may not exceed UAH 200 per day, excluding VAT;
• an accounting statement prepared in accordance with paragraph 36 of Subsection 2 of Section XX of the Tax Code of Ukraine;
• a VAT invoice issued by the recipient of services in accordance with paragraph 208.2 of the Tax Code of Ukraine and registered in the URVI.

Thus, a VAT invoice issued by the supplier is the principal, but not the only, document recognised by law as supporting an input VAT credit.

When Does the Right to an Input VAT Credit Arise?

As a general rule established by paragraph 198.2 of the Tax Code of Ukraine, the date on which VAT amounts are attributed to the input VAT credit is the date of the earlier of the following events:

• the date on which funds are debited from the taxpayer’s bank account to pay for goods or services;
• the date on which the taxpayer receives the goods or services.

Therefore, the general “first event” rule applies.

For example, if a company makes an advance payment to a supplier, the right to an input VAT credit is generally linked to the date of such payment. However, the actual inclusion of the relevant VAT amount in the input VAT credit requires appropriate documentary evidence, including, in particular, a VAT invoice registered in the URVI.

The Tax Code of Ukraine establishes special rules for certain types of transactions.

For goods imported into the customs territory of Ukraine, the date on which VAT may be included in the input VAT credit is the date on which VAT is paid in respect of the tax liabilities arising upon importation.

For services supplied by a non-resident within the customs territory of Ukraine, the date on which VAT may be included in the input VAT credit is the date on which the recipient issues the relevant VAT invoice, provided that it is registered in the URVI.

Special rules for determining the date of the input VAT credit also apply to certain other transactions and to taxpayers using the cash accounting method for VAT purposes.

How Long Is the Period for Claiming an Input VAT Credit?

If a VAT payer does not include a VAT amount in its input VAT credit in the reporting period in which the relevant right arose on the basis of a registered VAT invoice or adjustment calculation, the right is not lost immediately.

Under paragraph 198.6 of the Tax Code of Ukraine, the taxpayer may exercise this right within 365 calendar days from the date on which the VAT invoice or adjustment calculation was issued.

Therefore, if a registered VAT invoice was not taken into account when the input VAT credit was initially calculated, the respective VAT amount may be included in the input VAT credit in one of the subsequent reporting periods, provided that the statutory 365-day period has not expired.

If a VAT invoice or adjustment calculation is registered in the URVI after the statutory registration deadline, the relevant VAT amounts are included in the input VAT credit for the reporting period in which such registration occurs, also subject to the 365-calendar-day period calculated from the date on which the respective document was issued.

If registration of a VAT invoice or adjustment calculation in the URVI is suspended, the running of the above period is suspended for the duration of such suspension.

At the same time, the 365-calendar-day rule applies to VAT invoices and adjustment calculations. It does not apply in the same manner to other documents that constitute an independent basis for claiming an input VAT credit under paragraph 201.11 of the Tax Code of Ukraine.

Special rules and time limits for claiming an input VAT credit are also established for taxpayers applying the cash accounting method.

What Happens if a VAT Invoice Is Not Registered?

It is important to distinguish between the moment when the right to an input VAT credit arises and the ability to actually include the relevant VAT amount in the input VAT credit.

If the supplier fails to register a VAT invoice in the URVI, the purchaser, as a general rule, cannot include the VAT amount stated in such invoice in its input VAT credit solely on the basis that payment for the goods or services has been made.

Late registration of a VAT invoice may also delay the purchaser’s ability to claim the input VAT credit.

If a VAT invoice is registered after the statutory registration deadline, the purchaser includes the relevant VAT amount in its input VAT credit for the reporting period in which the invoice is registered in the URVI, subject to the time limit established by paragraph 198.6 of the Tax Code of Ukraine.

It is therefore important for purchasers to monitor not only their own VAT reporting but also the timely registration of VAT invoices by their counterparties.

What Should Businesses Pay Attention To?

The input VAT credit directly affects the amount of VAT that a business is required to pay to the state budget. Errors in its formation may result in both overpayment of tax and additional tax assessments, penalties, and disputes with the tax authorities.

In practice, businesses should pay particular attention to:

• the availability and timely registration of VAT invoices and adjustment calculations in the URVI;
• the accuracy of the information contained in VAT invoices;
• consistency between primary accounting documents and the actual substance of business transactions;
• correct determination of the date on which the right to an input VAT credit arises;
• compliance with the 365-day period for claiming VAT amounts under VAT invoices and adjustment calculations;
• proper documentation of import transactions and transactions involving non-residents;
• the use of purchased goods, services and non-current assets in taxable and non-taxable transactions and in the taxpayer’s business activities.

Particular attention should be paid to cases where registration of a VAT invoice has been suspended, the supplier has failed to register the invoice, errors have been made in the VAT invoice, or the tax authorities challenge the taxpayer’s entitlement to the input VAT credit.

Conclusions

The input VAT credit is one of the key elements of the VAT mechanism. It allows a taxpayer to take into account VAT amounts accrued or paid when purchasing goods, services and assets when determining the amount of VAT payable to the state budget.

In simplified terms, the mechanism can be expressed as follows:

VAT liabilities – input VAT credit = VAT payable to the state budget.

However, merely paying VAT as part of the price of goods or services is not sufficient to claim an input VAT credit. The taxpayer must correctly determine when the right to the input VAT credit arises, possess the supporting documents required by law, and comply with the time limits established by the Tax Code of Ukraine.

These issues are particularly important in cases involving late or suspended registration of VAT invoices, transactions with non-residents, imports of goods, the use of purchases in non-taxable transactions, and disputes with the tax authorities.

Law Firm “Kavchuk & Partners” provides legal support to businesses on taxation matters, including VAT, input VAT credit formation, VAT invoices, interaction with tax authorities, and challenging decisions of tax authorities.