The VAT man is back and looking at the bright side
This week's column returns to that perennial favorite, Value-Added-Tax (a.k.a., VAT), and some recent court case developments brought to my attention by my friend and VAT specialist, Mirek Barszcz. In particular, I was impressed by the commercial judgment shown by the court in this case, and how the "form rather than substance" debate of the taxing authority was overruled in favor of a sensible, logical approach.
The starting point for VAT is that it is supposed to have no effect at all for businesses that make taxable supplies. The tax is ultimately borne only by the end user of the good or service, but collected in stages along the production process, with a seller charging VAT on outputs, which is recoverable by the purchaser, against the VAT he charges to his customers, and so on down the line.
Various rules exist on the timing of the supply and the corresponding eligibility to qualify for recovery. Generally, VAT is chargeable when the supply is made, and recoverable for the purchaser on receipt of the supply.
However, in certain circumstances special rules apply to the timing of the supply, and this is what makes things more complicated.
Bear in mind also that if you do not charge the VAT that you should charge, there is an obligation to pay this to the tax office, plus a 30% penalty.
So here's what happened. A company supplying construction services was accounting for VAT in the month the supply was made, under the usual rules, and paying the VAT to the tax office accordingly. The tax office tried to argue that, as this industry qualifies for the concession of only having to charge VAT on the normal due date of the invoice rather than the issue date, looking at the month when the VAT should have been charged, then there was a significant undercharging of VAT. And for this, the tax office decided to penalize the vat payer.
Interestingly, the law provides no penalty or sanction for remitting VAT to the tax office earlier than required by law. Also, the VAT system works on a month-by-month basis and not a cumulative basis, as it does for other taxes. Thus, the fact that an amount equal to the "undercharged" VAT had already been given to the tax office in the previous month was of no relevance in looking at that particular month. Therefore, the tax office argued, the taxpayer needed to be penalized for giving the money to the tax office earlier than he needed to.
Let's consider what would happen if you did this in a normal business. If your customers came to you and offered to pay in advance, or before the normal pay terms, you would presumably accept. (I think I would, but this is only a theoretical situation for me.) You wouldn't then argue that as your normal payment terms were after 30 days, payment had not been made at the 30-day mark because it was made early.
I heartily understand that tax offices are not normal businesses and normal rules do not apply, but a certain amount of common sense and logic is in certain circumstances not a bad attribute, wherever you work.
Fortunately, the Supreme Administrative Court (NSA) judges agreed, and found the acceptable basis for making a judgment: The payment dates are specified in the law, whereas the concessionary dates are in an ordinance. On their understanding, the ordinance is a concession not an obligation, so if you choose not to take advantage of a concession offered to you, and are still operating in accordance with the law, then there is no basis to be penalized, which sounds perfectly sensible to me.
However, date of supply is becoming an increasingly complicated area as the opportunities for collection of penalties is higher when there is more scope for uncertainty. A good example of this is in something like consulting services where you are working on a long-term project such as a systems implementation. On the one hand, if you are performing a continuous service, where invoicing takes place regularly during the course of the contract, then the obligation to charge VAT arises on the issuance of any invoice. On the other hand, if you receive a pre-payment for a good or service that is less than 50% of the total contract price, then there is no obligation to charge VAT on the prepayment.
You can probably guess already where we are heading here. If your installment invoices do not yet total 50% of the total contract price, is it a prepayment (no VAT due) or a continuous service (VAT due)? Or is it more likely that the tax office will argue that whichever one you have treated it as, it should be the other one, so that they can penalize you whatever you have done? Despite the progress made in the court case, the complexities of VAT continue to delight and excite tax practitioners everywhere!
Peter Ferrigno and Miroslaw Barszcz are tax managers in the Warsaw office of Arthur Andersen.
