A change in how a passenger car is used during the statutory adjustment period is a significant challenge for a company’s accounting. The system of input VAT adjustments in the Polish VAT rules requires particular care in bookkeeping to ensure compliance with the regulations in force. Recognising the VAT adjustment correctly in the accounting books has a direct effect on the entity’s financial result and its tax liabilities.
An input VAT adjustment on a change in the use of a car can be either an increasing adjustment (in plus) or a decreasing adjustment (in minus). The obligation or right to adjust arises within 60 months of acquiring the vehicle, and for vehicles worth up to PLN 15,000 – within 12 months
The VAT adjustment mechanism for motor vehicles was introduced to ensure that tax is settled fairly when the way a vehicle is used changes. Business owners need to be aware of the accounting consequences of such changes and record them properly. A common case is moving the car to private use – we discuss it in our article on the consequences of withdrawing a company car.
Legal basis for adjusting input VAT on vehicles
A taxpayer is entitled to deduct input VAT when goods and services are used to carry out taxable transactions that give rise to output VAT. This fundamental rule rules out deducting VAT on goods and services used for transactions that are exempt from VAT or outside its scope.
For motor vehicles intended for mixed use, under Article 86a of the VAT Act, the right to deduct input VAT applies to 50% of the VAT amount. This means that when a car is bought for both business and private purposes, the taxpayer can deduct only half of the VAT shown on the purchase invoice.
Under Article 86a(1) of the VAT Act, for expenses related to motor vehicles, the input VAT amount is 50% of the VAT shown on the invoice received by the taxpayer for the purchase of the car. This applies to vehicles intended for mixed use
The adjustment system is regulated in Article 90b of the VAT Act and covers two basic scenarios. The first is where a vehicle originally used exclusively for business is reclassified to mixed use. The second concerns a change from mixed use to exclusively business use, or the sale of the vehicle.
The adjustment period is 60 months, counted from the month in which the motor vehicle was acquired, imported or put into use. For vehicles with an initial value not exceeding PLN 15,000, this period is shortened to 12 months. The difference stems from the assumption that lower-value vehicles have a shorter useful life and lose value faster. A separate issue is the tax treatment of replacement car costs.
How VAT adjustments work in practice
An input VAT adjustment can take two forms, depending on the direction of the change in the vehicle’s use. An increasing adjustment (in plus) is available to the taxpayer when a vehicle originally bought with a limited right to deduct is put to exclusively business use or is sold. Exclusively business use must be documented with rules for using the vehicle and a vehicle mileage log kept from the date of the change (Article 86a(4)(1) and (6)–(7) of the VAT Act), and reported in the VAT-26 notification (information to the tax office about vehicles used exclusively for business) by the 25th of the month following the month of the first expense; if VAT-26 is filed late, the vehicle is treated as used for business only from the month in which the notification is filed (Article 86a(12)–(13)). The other consequences of disposing of a car are covered in our article on taxes on selling a company car.
A decreasing adjustment (in minus) is the taxpayer’s obligation where a vehicle originally used exclusively for business purposes is reclassified to mixed use. In that case, the taxpayer must pay back part of the input VAT deducted earlier.
The adjustment is made in the return for the settlement period in which the use of the vehicle changed. The adjustment amount is proportional to the remaining adjustment period and is calculated as the ratio of the remaining months to the whole adjustment period
It is important to understand that only expenses for the acquisition, import or production of the vehicle are subject to adjustment. Other running expenses, such as fuel, repairs or insurance, are not covered by the adjustment system and are settled on an ongoing basis in line with the vehicle’s current use.
- Identifying the change in the vehicle’s use during the adjustment period
- Calculating the adjustment amount in proportion to the remaining period
- Reporting the adjustment in the VAT return for the relevant settlement period
- Recording the adjustment in the books in line with its economic substance
- Updating the VAT deduction rules for future running expenses
In a ruling of 24 May 2021 (no. 0114-KDIP4-2.4012.204.2021.1.MC), the Director of National Tax Information (KIS) confirmed that the adjustment system covers only expenses for acquiring a vehicle as owner. Expenses for using a vehicle under a rental, lease or operating lease agreement are not adjusted, because they are settled on an ongoing basis.
Detailed rules for recording VAT adjustments in the books
A VAT adjustment must be recorded in the accounting books in line with the economic substance of the transaction, as required by Article 4(2) of the Accounting Act. This means that the way it is booked should reflect the actual nature of the adjustment and its effect on the entity’s financial position.
For an adjustment increasing input VAT, where the taxpayer recovers part of the VAT not deducted earlier, the amount should be booked as other operating income. This approach follows from the fact that the adjustment is not directly related to current operating activity, but corrects earlier settlements.
Under Article 3(1)(32) of the Accounting Act, other operating expenses and income are expenses and income indirectly related to the entity’s operating activity, and letter (b) of that provision expressly lists the disposal of fixed assets. A VAT adjustment on the sale of a car falls into this category
When a passenger car used for mixed purposes is sold during the adjustment period, the taxpayer becomes entitled to an increasing VAT adjustment of the input VAT not deducted on purchase. This adjustment is proportional to the remaining adjustment period and represents additional income for the entity.
| Type of adjustment | Direction of change | Accounts | Effect on result |
|---|---|---|---|
| Adjustment in plus | Increased deduction | Dr 221 Cr 763 | Higher income |
| Adjustment in minus | Reduced deduction | Dr 764 Cr 221 | Higher expenses |
| Sale of the vehicle | VAT recovery | Dr 221 Cr 763 | Higher income |
In accounting practice, an increasing adjustment requires the following entries. Account 221 Input VAT and its settlement is debited, and account 763 Other operating income is credited. This entry reflects the increase in the amount receivable from the tax office (urząd skarbowy) for VAT and the recognition of operating income.
Practical examples of recording VAT adjustments
Consider a situation in which a taxpayer bought a passenger car for mixed purposes in January 2025 for a net price of PLN 100,000 plus PLN 23,000 VAT. On purchase, they deducted PLN 11,500 VAT (50% of the VAT shown on the invoice). In March 2025, they sold the car for a net price of PLN 90,000 plus PLN 20,700 VAT.
The taxpayer is entitled to an increasing adjustment of 58/60 of the non-deducted VAT, which comes to PLN 11,116.67 (58/60 × PLN 11,500; the vehicle is treated as used exclusively for business from the month of sale until the end of the adjustment period – Article 90b(2) and (4) of the VAT Act). This amount will be added to input VAT in the return for March 2025.
A business owner running a consultancy bought a passenger car in January for PLN 123,000 gross for mixed purposes. They deducted 50% of the input VAT, i.e. PLN 11,500. In March, i.e. in the third month of the adjustment period, they sold the vehicle because the business changed its profile. Thanks to the VAT adjustment, they recovered an additional PLN 11,116.67, which significantly improved the company’s cash flow during a difficult restructuring period.
Recording the sale of the car in the accounting books involves several elements. The net sale value is booked to account 760 Income from the disposal of non-financial fixed assets (other operating income; account numbering depends on the entity’s own chart of accounts), output VAT to account 222 Settlements with the tax office for output VAT, and the gross amount receivable from the buyer to account 24 Other settlements.
An input VAT adjustment requires a separate bookkeeping entry. Account 221 Input VAT and its settlement is debited, and account 763 Other operating income is credited. The adjustment amount is proportional to the remaining adjustment period
For a decreasing adjustment, where the taxpayer must pay back part of the VAT deducted earlier, the reverse entry is used. Account 764 Other operating expenses is debited, and account 221 Input VAT and its settlement is credited. This entry reflects the recognition of an operating expense and the reduction of the amount receivable from the tax office.
Effect of adjustments on financial reporting
VAT adjustments related to a change in the use of vehicles have a direct effect on the entity’s financial statements. Increasing adjustments are other operating income and improve the financial result of the period in which they are booked. Decreasing adjustments, in turn, generate other operating expenses and worsen the financial result.
For reporting purposes, remember that VAT adjustments do not affect the carrying amount of fixed assets if the vehicle remains among the entity’s assets. They do, however, affect settlements with the tax office and the financial result for the period.
Entities required to prepare a cash flow statement must include VAT adjustments in the appropriate categories. Increasing adjustments are inflows from operating activities, and decreasing adjustments are outflows from those activities
When a vehicle is sold during the adjustment period, in addition to the standard entries for the disposal of a fixed asset, the VAT adjustment must also be recognised as other operating income. This situation requires particular attention when preparing the notes to the financial statements.
- A VAT adjustment affects the financial result for the reporting period
- Adjustment amounts must be shown in the appropriate items of the profit and loss account
- Settlements with the tax office change by the amount of the adjustment
- Cash flows from operating activities include the effects of VAT adjustments
- The notes should contain information on significant adjustments
Control and documentation of VAT adjustments
Proper documentation of VAT adjustments is a key element of the entity’s internal control system. Each adjustment must be properly documented, clearly stating the reason for the change in the vehicle’s use and how the adjustment amount was calculated.
The documentation should include the date of the change in the vehicle’s use, the period remaining until the end of the adjustment period, the calculation of the adjustment amount and the accounting justification. When a vehicle is sold, a copy of the sale agreement and the VAT invoice are also needed.
Tax inspection authorities pay particular attention to whether VAT adjustments are calculated correctly and reported on time in tax returns. Errors in this area may result in additional tax liabilities and late-payment interest
The internal control system should ensure regular monitoring of vehicles that are in the adjustment period and timely detection of changes in their use. It is particularly important to keep a register of vehicles with information on the date of acquisition, the original use and the adjustment period.
In practice, many entities keep special auxiliary records for vehicles subject to the adjustment system. Such records make it easier to monitor deadlines and to calculate adjustment amounts correctly when the use of a vehicle changes.
