VAT reverse charge in construction services

fot Tomasz Wojdal, KRS Kancelaria-BW for web

THE NEW VAT REGULATIONS HAVE INTRODUCED IMPORTANT CHANGES TO HOW INVOICES ARE ISSUED AND WILL LIKELY HAVE SIGNIFICANT IMPACT ON THE FINANCIAL FLUENCY OF SUBCONTRACTORS

Tomasz Wojdal, Head Legal Advisor at KRS Kancelaria Legal Office

Starting from January 1, 2017, amendments were introduced to the Value Added Tax Act (VAT Act) concerning the taxation of goods and services, in particular the taxation of construction services in Poland. These services are covered by the so-called VAT reverse charge mechanism. This mechanism states that a service provider does not charge VAT because the settlement of the tax rests on the purchaser of the service. Pursuant to the introduced provisions in the VAT Act, the reverse charge mechanism must be applied under the following conditions:

• The purchased services are one of the construction services that are listed in Annex 14 of the VAT Act.
• The entity providing the services is registered as an active VAT taxpayer (which is not exempt from VAT) and has the status of the subcontractor for construction work.
• The purchaser (buyer of the services) is an entity registered as an active VAT taxpayer.

The effects of the changes

As of January 1, 2017, subcontractors are obliged to issue VAT invoices without charging VAT. The invoice must include a statement on the application of the VAT reverse charge mechanism. In practice, the contractors also require a statement in writing that the subcontractor is an active VAT taxpayer.
The new laws have affected the financial fluency of subcontractors, which are often obligated to purchase building materials and pay VAT. On the other hand, they receive payment without VAT (due to application of the VAT reverse charge mechanism). This results in a VAT excess for reimbursement to the subcontractor.

It should be taken into account that the standard time limit for a VAT refund is 60 days. Moreover, as a rule, such a VAT refund is preceded by a tax control or verifying actions that lead to the extension of the deadline for VAT refunds. In practice, this may mean trouble for the financial fluency of subcontractors.

Settlement of VAT for services at the turn of 2016/2017

It should be noted that the old law applies to the performance of construction services performed until December 31, 2016. This means that subcontractors for such services should issue an invoice with VAT, even if the invoice is issued in 2017. The key issue is to determine the actual date of performance of construction services. According to the interpretation provided by the Ministry of Finance, the performance of the service is recognized when the construction work is actually performed. The date of preparation of the acceptance protocol is not of importance.

In practice, to determine the date of performance of construction services, the recommended solution is to include a statement on the acceptance protocol of works (if it is made in 2017) saying that the works were performed by the end of December 2016. Then the subcontractor is entitled to issue an invoice for their services with VAT. In the case that the acceptance protocol indicates that the construction services were performed after January 1, 2017, then it is necessary to issue invoices without VAT, with information on the application of the reverse charge mechanism.

The above issue is rather important, because the legislator has not introduced any transitional provisions in this respect.

Forecasts

The new regulations are not precise. They do not contain a definition of a subcontractor and there is a lack of transitional provisions. It is not clear how the new law will affect the financial fluency of subcontractors in practice. Time will tell how the new rules affect the entire construction industry.

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