Service-Tax

Reverse charge in VAT and the provision of construction services

The reverse charge mechanism in VAT constitutes a derogation from the general rule, according to which the output tax is settled by the supplier of goods or services. The obligation to settle VAT is transferred to the buyer, for whom, like in the case of Intra-Community acquisition of goods, such an operation is tax-neutral, the tax due is also an input tax, provided that the statutory conditions are met. Does the reverse charge in VAT also apply to the construction industry? Read the article below and find out more!

Construction works and the reverse charge in VAT

Construction works subject to reverse loading include:

repair,
tidying up,
maintenance,
reconstruction,
real estate demolition,
acceptance of construction works deemed to be the delivery of goods.

To this day, many problems arise with the evaluation of a specific transaction, does the reverse charge procedure cover it or not? Unfortunately, the incorrect qualification may have severe consequences for both parties to the transaction. The change in the settlement of construction works was aimed at eliminating abuses by unfair taxpayers, but inevitably affected all entrepreneurs and is quite problematic for them.

Criteria for the reverse charge in VAT

The reverse charge on VAT in the construction industry has been in force since January 1, 2017. This mechanism is statutorily regulated in Article 17 para. 1 point 8, sec. 1h of the VAT Act. The taxpayer obliged to settle VAT on such transactions is the buyer of the service listed in Annex 14 to the Act, while meeting the following conditions:

The service provider and recipient must be active VAT payers;
The service provider provides services as a subcontractor;
Applies to construction services listed in Annex 14 to the VAT Act.

It is extremely important to properly classify the services in question, according to PKWiU from 2008, because in many cases it may be decisive for assessing whether we are dealing with a reverse charge. Construction services are listed in Annex 14 from items 2 to 48. A completely new form of taxation of construction works, prompted the Ministry of Finance to issue 2 information brochures at the very beginning, the first on March 17, 2017, and the second on July 3, 2017.

The term "subcontractor" in the brochures of the Ministry of Finance

The first brochure introduces taxpayers to the subject of the reverse charge. An important element in the entire procedure is the definition of the term "subcontractor", which has not been named in any provision, therefore it is recommended to use the linguistic interpretation: "subcontractor - is a company or person performing work on behalf of the main contractor". The construction industry is quite specific in terms of the possibility of placing orders in the "chain" of subcontractors. Hence, it is important to explain the Ministry of Finance that: Each subsequent taxpayer in this series of contracts becomes a subcontractor to the "general / prime contractor", regardless of the number of further subcontracts of the service.

Construction services performed by the main contractor for the investor are taxed on general principles, so there is no reverse charge mechanism. However, orders for services to subsequent subcontractors will be subject to settlement with the reverse charge. The status of a subcontractor results from concluded contracts, most often in writing. Recently, there are opinions that in the absence of a contract, subcontracting should result from the nature of the services provided in certain circumstances.

The emergence of a tax obligation for construction and construction-assembly services, the Ministry of Finance in the general interpretation of April 1, 2016, ref. No .: PT3.8101.41.2015.AEW.2016.AMT.141 explains in detail the situations for which a tax obligation arises for construction services. As we read in the interpretation: In the case of construction or construction and assembly services, the decisive factor for the correct determination of the moment when the tax obligation arises is the date of the service or the date / date of issuing the invoice, which, however, is determined by the date of the service.

The general interpretation was issued due to the compilation of the possibilities and situations that may occur when providing construction and construction-assembly services. Further, in the general interpretation, we read about the situations that give rise to the emergence of a VAT obligation:

First, the transfer of the service in whole or in part. The moment of performance of the service, in whole or in part, is the date on which the works or their parts are actually completed and the contractor reports them to the buyer for collection.

Secondly, the performance of a service of a continuous nature, with agreed consecutive payment terms. In such a situation, the service is deemed to have been performed upon the expiry of the payment deadlines. In the event that the payment terms exceed one year, the service is considered to have been performed at the end of each tax year until the end of its provision. The amount to be paid does not have to be determined in advance, before the service is performed, it is important to indicate the billing periods in the contract.

Thirdly, provision of services to the consumer, i.e. non-taxable persons of value added tax. In this situation, the tax obligation arises when the service is performed in full, in part, at the expiry of payment terms for continuous services, and in periods longer than the tax year at the end of each year, until the service is completed.

Fourth, receipt of all or part of the payment before the service is performed - upon receipt of part or all of the payment. For all the deadlines specified above, for construction and construction-assembly services, a 30-day invoice period runs. In a situation where it is not issued, the VAT on a given transaction should be settled anyway, during the period when the tax obligation arises.

Documentation and recording of construction services

Once we know when the tax obligation arises, the next step is for the service provider to issue an invoice. The subcontractor issues an invoice in net amounts, excluding VAT, and the buyer of the service will settle the tax. The invoice should contain the annotation "reverse charge", does not contain the tax rate and amount (Article 106e (1) (18) and (4) (1) of the VAT Act).After including such a document in the VAT register, a VAT declaration will be prepared on this basis, in which the sum of all invoices with reverse charge will appear in item 31. An additional obligation for the invoice issuer will be the preparation and submission of VAT-27 summary information in accordance with Art. 101a of the VAT Act. Taxpayers settling VAT quarterly must remember that they submit VAT-27 on a monthly basis by the 25th day of the month.

On the part of the recipient of such an invoice, there will be an obligation to calculate the VAT rate appropriate for a given service and to settle the due and input VAT, if it is deductible. The form of documentation can be any, the amount of VAT can be charged on the received source document or on an internal document. The amounts calculated in this way are included in the VAT sales and purchase records, which are then reflected in the VAT-7 declaration, in items 34/35 and 45/46, respectively. The basis for the entry in the VAT records is the invoice received from the service provider and his data should appear in JPK_VAT.

Summary

In practice, entrepreneurs who settle taxes according to the reverse charge procedure encounter a number of situations that are not as model in their construction as we described above. The most burdensome are:

correcting billing documents,
incorrect definition of the PKWiU code,
comprehensive services,
rental of machines and equipment with or without an operator,
maintenance services,
service with or without material.

Each of the above items can be the subject of another article. Participants in transactions in the construction works sector often look for answers to their problems on internet forums, as well as in specialist press, or ask for an individual tax ruling. More and more often you hear about the idea of "replacing" the reverse charge with the obligatory split payment - a split payment in VAT. Experts have different opinions on the effects of healing problems in the construction industry with split payment. They see many positives in this idea, but at this stage it is difficult for them to assess the risks. There is nothing left for us to do but wait for the next tax solutions, hopefully simplifying.

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