Leasing and VAT Refunds: How to Offset the Tax Correctly

Why leasing creates an amount to be refunded

Leasing is a way to acquire an expensive asset without paying the full amount up front. From a VAT perspective, however, significant input tax appears in the period, while revenue from using the asset builds up gradually.

It is this timing gap that creates a situation where the VAT to be offset for the period exceeds the VAT charged. It is especially noticeable in the first periods after launching a new line of business or production.

What gives the right to offset in leasing

The right to offset arises when several conditions are met at once: the company is a VAT payer, the tax has been properly charged, and the leased asset is used in taxable activities.

The key point is actual use of the asset in the business. If the leased asset stands idle or is used in non-taxable transactions, the right to offset VAT on it may be called into question.

• VAT payer status
• properly issued documents from the lessor
• the leased asset has been accepted and put into operation
• the asset is used in taxable activities
• transactions are recorded in the accounts and supported by registers

How VAT recovery on leasing differs from a purchase

In an ordinary purchase, the tax is charged once, together with the asset. In leasing, the payment structure is more complex: a payment may contain different components, and not all of them affect the tax calculation in the same way.

That is why the first thing we review is the lease agreement itself and the payment schedule. How the transaction is structured and how documents are issued for each payment determine what amount is offset and in which period.

Documents supporting the right to a refund

The evidence base is built around three facts: the transaction is real, the tax was charged correctly, and the asset is used in taxable activities. A gap in any link weakens the company's position in a tax audit.

Particular attention goes to the documents on acceptance of the leased asset and putting it into operation. Their absence remains one of the most frequent reasons for disallowing amounts from offset.

• lease agreement and payment schedule
• invoices from the lessor
• acceptance certificates for the leased asset
• documents on putting the asset into operation
• payment documents and bank statements
• documents confirming use in taxable activities
• accounting registers from which the claimed amount was compiled

Typical mistakes in recovering VAT on leasing

The first is a mismatch between the payment schedule and the documents actually received. The company offsets the tax according to the schedule, while the document for the period is missing or defective.

The second is no link between the asset and taxable activities in the documents. The equipment is actually working, but there is nothing to prove it: no commissioning certificates, no utilisation data, no link to the production process.

The third is mixing up the components of the lease payment in the calculation. This is a technical error, but it distorts the amount claimed and raises questions during the audit.

• offset claimed without a supporting document for the period
• defects in the lessor's invoices
• no acceptance or commissioning certificate
• the leased asset is used in non-taxable transactions
• the structure of the lease payment is recorded incorrectly
• reported figures differ from the accounting registers

How we support VAT recovery on leasing

We start by reviewing the lease agreement and schedule: we look at the payment structure, how documents are issued and how the transaction is recorded in the accounts. Most future problems are identified at this stage.

Then we carry out an internal audit of the documents and a reconciliation with the lessor, calculate the amount to be refunded and assess the prospects. If the support for some items is weak, we say so immediately: a realistic assessment at the outset is worth more than optimistic promises.

After the claim is filed, we support the tax audit: we prepare explanations, respond to requests and take part in resolving disputed items until a decision is made.

Why Leader Audit

Leader Audit is an audit firm. Over 13 years of practice we have carried out more than 220 audits and helped clients recover more than 200 billion soums of VAT.

We work throughout Uzbekistan. For leasing refunds our approach is simple: review the document package the way an inspector would and close the weak spots before filing.