The deadlines for many decisions or entitlements in relation to value added tax (VAT) and environmental product charges are the end of December and January, which are worth considering and taking advantage of from a tax optimisation or even administrative reduction perspective, as those who decide and act in time can greatly facilitate their operations in the new year.

Year-end decisions related to VAT

 VAT-exempt status

Until the last day of the year, 31 December, eligible businesses can opt for an exemption from VAT and must notify the National Tax and Customs Administration (hereinafter: “NAV”) of their decision. Businesses must maintain their chosen status for two years and cannot voluntarily change it within that time period. (Of course, those businesses that start their activities during the year may also opt for the exemption during the year.)

The conditions for opting for the exemption are as follows: the amount of the consideration, expressed in Hungarian forints and aggregated on an annual basis, which the enterprise has received or is to receive in return for the supply of goods or services within Hungary may not exceed 12 million Hungarian forints either as actually paid in the preceding calendar year or reasonably expected to be paid in the current calendar year.

If a company opts for VAT exempt status, it will not be liable to pay VAT in this capacity and will only be able to issue invoices without VAT. However, as a matter of course, it will not be entitled to deduct VAT either. A taxable person who opts for a VAT exemption is also exempt from the obligation to declare VAT.

Making the sale or the leasing out of immovable property taxable

Under the VAT Act, the sale of immovable property with buildings erected more than two years before, as well as immovable properties (other than building plots) with no buildings on them, and also the leasing out of residential and other properties is exempt from VAT. Therefore, sellers and lessors are not liable to pay VAT on the sale or lease of such immovable properties, but due to their tax-exempt status, they are not entitled to deduct VAT on purchases made in connection with the sale or rental of immovable property either.

To avoid this problem, the legislation provides for the possibility of making the above sales and leasing activities subject to VAT (separately or even together), which also entitles taxable persons to deduct the related VAT. Taxable persons must notify NAV of their choice to become subject of VAT before the start of their activities, but those who have already carried out such activities but wish to become subject of the VAT from the following year must notify their choice by the last day of the year preceding the year in question, i.e. by 31 December.

Before the decision, it is worth considering whether or not potential customers are taxable persons eligible for VAT deduction, because for the latter the gross consideration is what matters and the VAT-added selling price may even put them at a competitive disadvantage, and it should also be borne in mind that the taxable status cannot be changed until the end of the fifth calendar year following the year of that choice.

Selecting cash accounting

Let us not forget about the option to opt for cash accounting, the deadline for which decision is also 31 December. Businesses using cash accounting incur the VAT liability when their customers have paid them the purchase price, and they can only exercise their right to deduct VAT on their purchases once they have paid the purchase price to their vendors. However, cash accounting does not only affect businesses that opt for it, but also the rights of their customers. Indeed, customers of such a taxable persons can only exercise the right to deduct VAT if the customer has already paid the purchase price on the invoice of the taxable person opting for cash accounting.

The following conditions must be met for businesses to be eligible for using cash accounting:

• the business must be established for business purposes in Hungary;
• on the first day of the calendar year in question, it must be a small enterprise within the meaning of the provisions of the SME Act (or it should qualify as one if it was subject to the Act);
• the business cannot be subject to bankruptcy or liquidation proceedings;
• the net amount of the consideration, aggregated on an annual basis, which the enterprise has received or is to receive in return for the supply of goods or services within Hungary may not exceed 125 million Hungarian forints either as actually paid in the preceding calendar year or reasonably expected to be paid in the current calendar year.

Choice of VAT conversion rate

Where the VAT tax base (as a main rule, the consideration) is denominated in a foreign currency, taxable persons must choose the exchange rate quoted in foreign currency as the selling rate in the domestic currency of a financial institution authorised to carry out currency exchange operations in the country of establishment for the conversion into Hungarian forints. They may also choose the official exchange rate of the Central Bank of Hungary (MNB) or the European Central Bank (ECB), but they must notify the NAV in advance. When making this choice, it should be noted that the MNB or ECB exchange rates cannot be deviated from until the end of the calendar year following the year of choice. When a company is set up, the MNB exchange rate is often chosen automatically, but it is not necessarily the exchange rate chosen for accounting purposes in the accounting policy at the start of the activity. In such a case, it may be advisable to change the previously chosen VAT conversion rate at the end of the two-year prohibition period in order to avoid the distortive effect of persistent exchange rate differences on the profits.

Overpayment and expiry of rolled-over VAT

At the end of the year, businesses should check both their overpayments in their NAV tax current accounts and the reductions carried over from the previous period in their last VAT returns (previously deducted but not yet reclaimed VAT –  rolled-over VAT), to see if they expire on 31 December. (The right to reclaim the overpayment and the right to reclaim the tax expires, unless otherwise provided by law, five years after the last day of the calendar year in which the right to reclaim the overpayment or the tax is triggered.)

NAV cancels the overpayment registered in the tax current account automatically and without prior notice, so it is worth checking these amounts and, if necessary, before the end of the year, arrange for such amounts to be transferred to another tax account to reduce arrears there or request these amounts to be refunded. Similarly, it is worth checking whether some or all of the VAT rolled over would expire on 31 December and whether it can still be used as a tax deduction in the last VAT return of the year or whether there are circumstances where its refunding could be requested by self-auditing a previous VAT return before the end of the year.

Time limit for the right to deduct VAT

In VAT returns it is possible to deduct input VAT on transactions for which the right of deduction has been opened in the period concerned or before, but not earlier than the first day of the preceding calendar year. In practical terms, this means that the last opportunity to deduct input VAT on purchases of goods and services made in 2023 without self-auditing is in the last VAT return period of 2024. Thereafter, the amount of deductible VAT can only be reclaimed through self-auditing the VAT return period in which the right to deduct was opened (in principle, this is when the transaction was completed). Of course, this is also only possible if the relevant return period has not yet been closed by an audit.

To avoid unnecessary administration, it is therefore advisable at the end of the year to review the 2023 invoices containing VAT deductible amounts not yet taken into account, so that they can still be included in the last VAT return of the year.

Decisions in connection with product charges

Taxable persons liable to pay product charges have two options to consider, although in this case the deadline to notify their choice is not the end of the year, but 31 January 2025.

Taking into inventory

The product charge liability can arise at different times:

• on the date of performance shown on the invoice issued for the first placement on the domestic market, or in the absence of an invoice issued, on the date shown on another document that certifies the performance of the transaction, or in the absence of such other document, on the date of the performance of the transaction;
• in the case of use for own purposes, on the date on which the use for own purposes is accounted for as a cost, or, if this date cannot be determined, on the date of performance of the transaction;
• in the case of use for own purpose related to the dismantling of packaging imported from abroad, if the date cannot be determined on the basis of the foregoing, the date of final dismantling of packaging;
• in the case of other petroleum products of domestic production, on the date of the invoice issued by the first buyer of the first distributor placing the product on the domestic market, or on the date of performance as shown on another document certifying the completion of the transaction, or on the date when the use for own purposes is accounted for as a cost;
• in the case of a shortage or destruction of products exceeding an accountable shortage, on the basis of the documentary evidence of the shortage or destruction of the products subject to the charge, on the date on which it is entered in the accounts.

For the sake of administrative simplification, the obligor may choose to incur the obligation to pay the product charge from the current year onwards on the date on which the goods subject to the product charge are taken into inventory. This must be notified to NAV by 31 January of the year in question at the latest, but the notification does not have to be repeated for each year in question, as it will be continuous.

In addition to the notification, the taking into inventory is dependent on the condition that an inventory of the goods subject to the product charge in stock on the first day of the year in question must be drawn up and the product charge must be declared and paid in the return for the first product charge assessment period of the year in question. The way in which the liability is incurred cannot be changed within the current year, but it is possible to revert to the general rules from the following calendar year. In order to do this, an inventory of the products subject to the product charge in stock at the turn of the year must be taken and the products in stock must be recorded separately in order to avoid having to pay the product charge again.

Choice of flat-rate product charge

The following types of operators may opt to pay a flat-rate product charge:

• low-volume issuers (those placing goods subject to the product charge on the market, using them for own purposes or taking them into inventory),
• agricultural producers, and
• distributors of motor vehicles.

Obligors must notify NAV of the activity carried out with the product subject to the product charge, as well the intention to pay the flat rate, within 15 days of the start of the activity. An obligor that is registered with NAV prior to the current year and has opted for a flat-rate payment of product charges for the current year must make the notification by 31 January of the current year.

The notification does not have to be repeated for each year if the conditions for the obligation to pay the product charge on which the declaration is based remain unchanged. The choice of flat-rate payment may not be changed within a given year, except in cases where the quantitative limits are exceeded.

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This newsletter is based on the information available at the date of its publication and is written for general information purposes only; therefore, it does not constitute or replace personalised tax advice in any respect.