Value added tax (VAT) is a tax that applies to most products and services bought and sold in the European Union (EU). While standard rules are established by the EU, governments can apply these using their own VAT regulations and penalties.
VAT is a consumption tax; it is ultimately paid by the final customer, despite being collected through each step of production. At every stage, the buyer pays VAT to the seller as a percentage of the total price. The seller is then responsible for correctly reporting and paying the tax in their VAT return.
What are Hungary’s VAT Rates?
The general VAT rate in Hungary is 27%, but special rates of 18%, 5% and 0% apply for certain goods and services.
For Example:
- 18% VAT applies to milk and many dairy/bakery products. This rate also applies to entrance fees to open air music events (festivals).
- 5% VAT applies to some medical products and services, media services, certain utilities, and many types of meat and fish products.
- 0% VAT applies to daily newspapers.
When is VAT not Applicable in Hungary?
Like other EU countries, some products and services in Hungary are tax free. These include postal services, some medical and care products and services, sport related services, insurance, educational services, financial services (including bank charges), investment gold, certain real estate items, and gambling.
In general, all products previously excluded from VAT because the tax was not claimed back, such as used passenger cars, are also VAT exempt. Companies with an annual sales revenue of less than HUF 12 million can apply for tax exemption. This means that their invoices do not include VAT, and they cannot reclaim VAT on any purchases.
How Often Must VAT Returns be Filed in Hungary?
Generally, VAT reporting should be done monthly. However, some businesses that have very small amounts of payable or reclaimable tax are instead classified as quarterly taxpayers by the tax authority (NAV). A company’s classification is reviewed each year and is typically valid for the entire fiscal year. However, reporting frequency can immediately be changed to monthly if one return includes a very high amount of VAT.
What are the Most Common VAT Mistakes in Hungary?
Invoicing Errors
- Missing invoices. VAT returns in Hungary must be backed up with a VAT list, including all the invoices used for the tax return. If an invoice is not available, the accountant cannot include it in the VAT list. This means the tax is not reclaimable.
- Incorrect invoices. Because VAT returns in Hungary must be properly evidenced, invoicing errors can cause problems. For example, Word and Excel files are not accepted as invoices in Hungary. Invoices must also include two dates (invoice date and completion/delivery date). Since it is the completion date that determines which period VAT should be reported and paid in, it is vital that they contain both.
Reporting Period and Cash Flow Errors
- Reporting period for credit notes. In Hungary, payable VAT must be reported in the referring period, but reclaimable VAT can be reported later. If a credit note is issued after the end of a reporting period, it can only be reported and deducted in the month of issue to stay in line with the business partner’s report. This can have implications for a company’s cash flow.
- Late payments for large amounts. Because VAT charged on an invoice must be paid the following month, late payments from customers may be problematic. This can leave small businesses needing to pay a large amount of VAT before they have received payment from the customer. Companies must be prepared for this possibility.
VAT Rate and Exemption Errors
- Applying the wrong VAT rate. Luckily, modern invoicing software usually has a comprehensive list of tax rates along with clear explanations. However, choosing the wrong rate is still a commonly made mistake.
- Confusing 0% VAT with VAT exemption. 0% VAT and tax free are not the same. Products subject to the 0% VAT rate in Hungary are still considered taxable products, despite the rate being 0%.
Are There any Industry Specific VAT Rules in Hungary?
Special regulations in the construction industry are in place to prevent tax fraud and bankruptcy. If the customer is also a taxable person, construction works subject to a building permit must be invoiced with reverse charge VAT.
What Penalties can Businesses Face for VAT Mistakes in Hungary?
Businesses that file a VAT return late or incorrectly may be penalized. For late filings, a maximum penalty of HUF 500,000 can be issued (the penalty for a first-time offence is up to HUF 100,000). For late payments, interest based on the National Bank of Hungary prime rate is charged on the amount owed. For incorrect VAT reporting, penalties of up to 75% of the tax due can be issued.
Avoid VAT Mistakes in Hungary With Leinonen
Leinonen has been supporting foreign-owned businesses in Hungary for more than a decade. Managing 50 long term clients and 30+ financial statements per year at present, our accounting, tax and payroll specialists are experts in local and cross-border business.
Penalties for VAT mistakes in Hungary can be costly and time consuming to rectify. Therefore, finding financial experts you trust can be key to your company’s ongoing success and growth. Contact us today to find out how Leinonen can provide the tailored and competent accounting services your foreign-owned business in Hungary deserves.
