For entities performing mixed activities, meaning both taxable and VAT-exempt transactions, the annual VAT adjustment is a crucial element of tax compliance. Although the mechanism has been in place for years, it is often underestimated in practice, which may lead to errors affecting both tax settlements and financial reporting.

Why is the annual VAT adjustment required?

During the year, input VAT is deducted using a provisional pro-rata ratio based on data from the previous year. After year-end, this ratio must be recalculated using actual data and compared with the provisional one. The purpose of the adjustment is to ensure that VAT deduction reflects the actual use of purchases for taxable activities.

Pro-rata ratio – how is it calculated?

The pro-rata ratio reflects the share of taxable turnover in total turnover. It is calculated on an annual basis and rounded up. Certain transactions are excluded from the calculation, including disposals of fixed assets, auxiliary financial and real estate transactions, and the VAT amount itself.

The regulations also provide simplifications. If the ratio exceeds 98% and the non-deductible VAT does not exceed PLN 10,000 per year, the taxpayer may apply a 100% deduction. If the ratio does not exceed 2%, a 0% deduction may be applied. In some cases, an estimated ratio may also be used, for example when prior-year data is not representative.

How does the annual VAT adjustment work?

The annual adjustment compares the provisional ratio with the actual one and corrects the deducted VAT accordingly. Depending on the type of expenditure, the adjustment may be one-off or spread over several years.

One-off adjustments apply to current expenses and low-value assets (up to PLN 15,000). For fixed assets and intangible assets, the adjustment is made over a period of 5 or 10 years.

The adjustment for 2025 should be reported in the VAT return for January 2026 or for Q1 2026, depending on the VAT settlement model.

Impact on CIT and PIT

The VAT adjustment also affects income tax. A downward adjustment (reducing deductible VAT) is treated as a tax-deductible cost, while an upward adjustment is recognized as taxable income. It should be recorded in the period when the VAT return including the adjustment is filed.

Accounting treatment

From an accounting perspective, the VAT adjustment should be recognized in the books for 2025, provided they have not yet been closed. It is typically presented as other operating income or expenses. For immaterial amounts, simplifications may be applied in line with the entity’s accounting policy.

Conclusion

The annual VAT adjustment ensures that VAT deductions accurately reflect the actual use of purchases in taxable activities. Proper calculation of the pro-rata ratio, correct application of simplifications and appropriate tax and accounting treatment are essential for tax compliance and reliable financial reporting.