Information from the General Financial Directorate on changes to VAT rates from 1 January 2024
Information from the General Financial Directorate on changes to VAT rates from 1 January 2024
On 12 January 2024, the General Financial Directorate issued information on VAT rates. The information focuses on VAT rates for land public transport, the supply of beverages as part of a catering service, construction and installation work and the supply of buildings for social housing, medical devices, drinking water and the supply of food and beverages. The information also contains some interesting facts on VAT exemption for books, settlement of advances and reporting.
Of course, the reduced rate still applies to goods and services that correspond to the CZ-CPA production classification code or the nomenclature code of the customs tariff, and at the same time to the explicitly stated verbal description of this code in the text part of the Annex to the VAT Act.
Following this change, the application of the reduced tax rate for special regular transport has been added. Special regular services encompass, for example, services provided by a carrier to a defined set of recipients (e.g. transport intended for employees of a specific company or companies) to the exclusion of other persons.
The provision of taxi services and other similar alternative transport will no longer be subject to the reduced tax rate if it is provided in vehicles designed to carry no more than nine persons, including the driver.
Selected beverages that are subject to a reduced tax rate include:
A necessary condition for the application of the reduced tax rate in the case of selected beverages is that these beverages are not alcoholic beverages and at the same time retain the essential character of milk, liquid dairy product or vegetable milk alternative even after the addition of flavourings, food or other beverages.
Point 3 can be more simply described as follows:
non-alcoholic coffee-flavoured milkshakes will be taxed at the reduced rate, but coffee with any amount of milk will be taxed at the standard rate.
Drinking water to which the reduced tax rate applies is only drinking water supplied by tap water without any further treatment ("tap drinking water"). Drinking water supplied by other means (e.g. bottled, from barrel-filled vending machines, ice chips, etc.) is not included in Annexes 2 and 3 and is subject to the 21% rate. Drinking water (i.e. without flavouring or further treatment) from a beverage dispenser connected to an internal water supply is subject to a reduced tax rate.
Drinking water supplied by so-called small water supply systems that are permanently used by less than 50 individuals, or if the average daily production from the annual average of drinking water per day is less than 10 m3, is also subject to the new reduced tax rate.
The information confirms that in the event of a water supply emergency, where drinking water cannot be distributed in the standard way via the water supply system and the operator is also obliged to provide an alternative drinking water supply, a reduced tax rate also applies.
In the case of tap drinking water, the reduced tax rate applies only if it is not flavoured (e.g. with juice, syrup, sweetener, other beverages or added fruit) or treated (e.g. with soda or ice chips) in any way. For example, ice chips made from tap drinking water and flavoured with syrup are subject to the standard tax rate. Conversely, the application of the reduced tax rate is not prevented by the addition of a decoration to or on a glass of tap water that is not an actual flavouring, like a mint or fruit, or the addition of ice.
The information confirms that a reduced rate is also applied to all non-alcoholic drinks served during breakfast for breakfast accommodation.
However, in the case of a separately purchased breakfast, lunch/evening meal or a buffet, the supply must be split, and the drinks served (excluding tap water and selected drinks) in the package must be charged at the basic tax rate. If splitting is not possible, the basic tax rate is also applied to the supply of the food.
For the sake of completeness, the information includes that the catering services in Annex 2 continue to exclude catering services exempt from tax under Sections 57 to 59 (educational, health and social services). Nevertheless, the amended text of the Act does not explicitly include this exclusion. It follows that the exemption for these services remains the same for the supply of all types of non-alcoholic beverages.
The following paragraph from the information is crucial, but unfortunately, it is also the least successful.
It can be inferred from the language of the legislative amendment and its meaning and purpose as expressed in the explanatory memorandum that (non-alcoholic) soft drinks are liquids prepared for consumption by drinking (i.e. not for the purpose of providing food). The nomenclature code (CN) is not specified for the definition of beverages, as beverages are included in a number of different CNs, generally goods classified in CN 2009 (fruit and vegetable juices), 2201 and 2202, still subject to the first reduced VAT rate of 15%. The purpose of the consumption of the beverage is not reasonably assessable.
It is already apparent that, for the sake of legal certainty, taxpayers will have to pay for a binding assessment of a liquid for which they are unsure what tax rate to apply. The fee for the binding assessment is CZK 10,000 per item.
At least the information states that syrups and follow-on formula can be taxed at a reduced rate.
Products of plant origin and other dry foodstuffs (e.g. coffee, tea, powdered drinks, instant mixes) will be subject to a reduced tax rate.
Conspicuously absent from the information is how to treat items like liquid food supplements and various liquid concentrates, for example. The General Financial Directorate completely ignored the comments of tax advisors in this respect.
The reduced tax rate can now be applied to single-use medical devices and to single-use in vitro diagnostic medical devices. Furthermore, this is an extension to small apparatus, equipment and other products of CN Chapter 90, which are defined in detail in Annex 3 within the narrative description.
The only clarification in the information can be found for pressure measuring instruments. Medical devices listed in Annex 3 under CN 9026 are generally classified under another CN (e.g. blood pressure measuring devices classified under CN 9018 9010) and hence remain subject to the basic tax rate.
Section 48 of the VAT Act states that the reduced tax rate applies to the provision of construction or assembly work carried out on a completed building if it is a building for housing or a building for social housing.
Section 49 of the VAT Act states that the reduced tax rate is also applied to the construction of a building that is intended for social housing. Furthermore, the reduced rate is also applied to the supply of a building, building right or unit for social housing.
The tax exemption on the supply of books is also applied to incidental expenses, in particular the costs of packaging and transporting the books.
The supply of books under the special scheme for second-hand dealers is also exempt from tax.
The information points out that other types of exemptions take precedence over this exemption. For example, the supply of a book to another Member State will be exempt from VAT with a right to deduct under another provision of the VAT Act. In this respect, it is still not possible to claim a deduction in the case of the purchase of a book for exempt transactions without a right to deduct (see in particular for public benefit taxpayers under Section 61 of the VAT Act).
The tax base for additional payments will be subject to the tax rate that applies in 2024.
If there was an overpayment in 2024 (the deposit paid was higher than the final price), the tax will be calculated at the rate at which the advance payment was taxed in 2023.
When the tax due date for reduced-rate supplies falls as early as 2024, the values in the "Tax Base 1" and "Tax 1" boxes of the control statement will be shown. The "Tax Base 2" and "Tax 2" boxes of the control statement remain for the second reduced-rate transactions with a tax due date of 31 December 2023 and for any corrections to the taxable amount of these transactions.
Of course, the reduced rate still applies to goods and services that correspond to the CZ-CPA production classification code or the nomenclature code of the customs tariff, and at the same time to the explicitly stated verbal description of this code in the text part of the Annex to the VAT Act.
Land public transport
A substantive change in passenger transport is the extension of the reduced tax rate to occasional passenger road transport (e.g. bus transport of pupils from school to a theatre).Following this change, the application of the reduced tax rate for special regular transport has been added. Special regular services encompass, for example, services provided by a carrier to a defined set of recipients (e.g. transport intended for employees of a specific company or companies) to the exclusion of other persons.
The provision of taxi services and other similar alternative transport will no longer be subject to the reduced tax rate if it is provided in vehicles designed to carry no more than nine persons, including the driver.
Beverages within a catering service
First, it is necessary to clarify which beverages remain at the reduced tax rate. The reduced tax rate can be applied to so-called selected beverages and drinking water.Selected beverages that are subject to a reduced tax rate include:
- milk (cow's, goat's, etc.) and liquid dairy products as defined in CN 04; these include, for example, buttermilk, yoghurt milk, kefir or other fermented (sour) or acidophilic milks;
- all plant-based alternatives to milk, such as soya-based drinks, nut-based drinks (e.g. almond or coconut), cereal-based drinks (e.g. rice or oat) and seed-based drinks (poppy, hemp or sesame);
- all milks, dairy liquids and their plant-based alternatives that contain added sugar or other sweeteners (e.g. milk with honey, sugar, etc.), fruit (e.g. milkshake with strawberries), nuts, cocoa, chocolate, spices, plants or parts of plants, cereals or other foods (e.g. milkshake with sprinkles).
A necessary condition for the application of the reduced tax rate in the case of selected beverages is that these beverages are not alcoholic beverages and at the same time retain the essential character of milk, liquid dairy product or vegetable milk alternative even after the addition of flavourings, food or other beverages.
Point 3 can be more simply described as follows:
non-alcoholic coffee-flavoured milkshakes will be taxed at the reduced rate, but coffee with any amount of milk will be taxed at the standard rate.
Drinking water to which the reduced tax rate applies is only drinking water supplied by tap water without any further treatment ("tap drinking water"). Drinking water supplied by other means (e.g. bottled, from barrel-filled vending machines, ice chips, etc.) is not included in Annexes 2 and 3 and is subject to the 21% rate. Drinking water (i.e. without flavouring or further treatment) from a beverage dispenser connected to an internal water supply is subject to a reduced tax rate.
Drinking water supplied by so-called small water supply systems that are permanently used by less than 50 individuals, or if the average daily production from the annual average of drinking water per day is less than 10 m3, is also subject to the new reduced tax rate.
The information confirms that in the event of a water supply emergency, where drinking water cannot be distributed in the standard way via the water supply system and the operator is also obliged to provide an alternative drinking water supply, a reduced tax rate also applies.
In the case of tap drinking water, the reduced tax rate applies only if it is not flavoured (e.g. with juice, syrup, sweetener, other beverages or added fruit) or treated (e.g. with soda or ice chips) in any way. For example, ice chips made from tap drinking water and flavoured with syrup are subject to the standard tax rate. Conversely, the application of the reduced tax rate is not prevented by the addition of a decoration to or on a glass of tap water that is not an actual flavouring, like a mint or fruit, or the addition of ice.
The information confirms that a reduced rate is also applied to all non-alcoholic drinks served during breakfast for breakfast accommodation.
However, in the case of a separately purchased breakfast, lunch/evening meal or a buffet, the supply must be split, and the drinks served (excluding tap water and selected drinks) in the package must be charged at the basic tax rate. If splitting is not possible, the basic tax rate is also applied to the supply of the food.
For the sake of completeness, the information includes that the catering services in Annex 2 continue to exclude catering services exempt from tax under Sections 57 to 59 (educational, health and social services). Nevertheless, the amended text of the Act does not explicitly include this exclusion. It follows that the exemption for these services remains the same for the supply of all types of non-alcoholic beverages.
Food and beverage delivery
Tap drinking water and selected beverages, as described above, are subject to a reduced tax rate. Other non-food beverages are subject to the standard tax rate.The following paragraph from the information is crucial, but unfortunately, it is also the least successful.
It can be inferred from the language of the legislative amendment and its meaning and purpose as expressed in the explanatory memorandum that (non-alcoholic) soft drinks are liquids prepared for consumption by drinking (i.e. not for the purpose of providing food). The nomenclature code (CN) is not specified for the definition of beverages, as beverages are included in a number of different CNs, generally goods classified in CN 2009 (fruit and vegetable juices), 2201 and 2202, still subject to the first reduced VAT rate of 15%. The purpose of the consumption of the beverage is not reasonably assessable.
It is already apparent that, for the sake of legal certainty, taxpayers will have to pay for a binding assessment of a liquid for which they are unsure what tax rate to apply. The fee for the binding assessment is CZK 10,000 per item.
At least the information states that syrups and follow-on formula can be taxed at a reduced rate.
Products of plant origin and other dry foodstuffs (e.g. coffee, tea, powdered drinks, instant mixes) will be subject to a reduced tax rate.
Conspicuously absent from the information is how to treat items like liquid food supplements and various liquid concentrates, for example. The General Financial Directorate completely ignored the comments of tax advisors in this respect.
Medical devices
Unfortunately, information is scarce in this area. Even an appeal to tax advisors has not worked. Since this is a legislative change that was added during the legislative process, it would deserve more attention and more examples.The reduced tax rate can now be applied to single-use medical devices and to single-use in vitro diagnostic medical devices. Furthermore, this is an extension to small apparatus, equipment and other products of CN Chapter 90, which are defined in detail in Annex 3 within the narrative description.
The only clarification in the information can be found for pressure measuring instruments. Medical devices listed in Annex 3 under CN 9026 are generally classified under another CN (e.g. blood pressure measuring devices classified under CN 9018 9010) and hence remain subject to the basic tax rate.
Construction or assembly work and buildings for social housing
The information merely confirms the legislator's intention to apply a reduced VAT rate of 12% to the transactions contained in Sections 48 and 49 of the VAT Act from 1 January 2024.Section 48 of the VAT Act states that the reduced tax rate applies to the provision of construction or assembly work carried out on a completed building if it is a building for housing or a building for social housing.
Section 49 of the VAT Act states that the reduced tax rate is also applied to the construction of a building that is intended for social housing. Furthermore, the reduced rate is also applied to the supply of a building, building right or unit for social housing.
Delivery of a book and provision of a similar service
The supply of books and the provision of similar services (typically versions of books intended for download or sent by e-mail or made available for reading online, including lending and renting) is now exempt from tax with a right to deduct.The tax exemption on the supply of books is also applied to incidental expenses, in particular the costs of packaging and transporting the books.
The supply of books under the special scheme for second-hand dealers is also exempt from tax.
The information points out that other types of exemptions take precedence over this exemption. For example, the supply of a book to another Member State will be exempt from VAT with a right to deduct under another provision of the VAT Act. In this respect, it is still not possible to claim a deduction in the case of the purchase of a book for exempt transactions without a right to deduct (see in particular for public benefit taxpayers under Section 61 of the VAT Act).
Taxation and settlement of advances
In the case of an advance payment that was made in 2023, the tax rate that applied in 2023 will be utilised.The tax base for additional payments will be subject to the tax rate that applies in 2024.
If there was an overpayment in 2024 (the deposit paid was higher than the final price), the tax will be calculated at the rate at which the advance payment was taxed in 2023.
Reporting in tax returns and control statements
Information on the reporting of VAT rates in the tax return and control statement is provided in the instructions for completing them, which have been published in Decree No. 368/2023 Coll.When the tax due date for reduced-rate supplies falls as early as 2024, the values in the "Tax Base 1" and "Tax 1" boxes of the control statement will be shown. The "Tax Base 2" and "Tax 2" boxes of the control statement remain for the second reduced-rate transactions with a tax due date of 31 December 2023 and for any corrections to the taxable amount of these transactions.