VAT Amendment - Construction Services | SSW Tax Alert 16-2016
As of 1 January 2017 the so-called big amendment of the VAT Act, just signed by the President, is to enter into force. The act introduces, among other things, revolutionary changes as regards the taxation of construction industry entrepreneurs, which are relevant both to subcontractors of such services and to general contractors.
According to the amendment, as of 1 January 2017 the bulk of construction services will be settled based on the VAT reverse charge mechanism. This means that the tax obligation in respect of the performance of such services will accrue on the part of the service user rather than, as it has been to date, on the part of the service provider. In case when this settlement method is used, the service provider issues an invoice net of the VAT, and the tax is accounted for by the service user who is obliged to disclose the tax amount in their VAT return (both on the output and input side, provided that they are eligible to deduction).
This method of settlement has been envisaged for numerous construction services listed in the new annex to the VAT Act, which includes as much as 48 items. According to the annex, the taxation on the reverse charge VAT basis will be applicable to, e.g., construction works related of the erection of housing and non-housing buildings, construction of motorways, roads, bridges and tunnels, as well as various kinds of installation and finishing works. In practice, this means that the reverse charge mechanism will cover the majority of typical construction services. Importantly, this method of settlement will apply only when both the service provider and service user are VAT-payers, and the service provider provides the services listed in the annex as a subcontractor.
The application of the new regulations in practice may raise numerous doubts. In order to ensure correct taxation of a construction service (i.e. determine whether the service is to be taxed on a generally applicable basis or based on the reverse charge method), the service provider and service users will have to determine whether, in the context of a given transaction, the service provider acts as a subcontractor. Since the amendment does not introduce a definition of this term, there may be divergent interpretations when it comes to the assessment of a particular situation. Consequently, the service provider and the service users may have different views on the tax implications of the delivered construction services as regards the VAT.
Specifically, doubts may arise in case of the implementation of large construction projects by multiple entities acting as consortium where in principle one of the entrepreneurs (consortium leader) settles the accounts with the contracting entity and subsequently settles the accounts within the group. It is not clear, whether the settlements within a consortium should be considered as a form of subcontracting, or rather internal settlements among the entities which jointly implement the project but their relationship is not of a subcontracting nature.
Similar issues may arise when it comes to accounting for comprehensive services where the construction service is just one of the services provided by a given entity as part of the project, and the fees are set jointly for all the services to be delivered. In case of such comprehensive performances, the separation and valuation of construction services for the purposes of their different taxation may present major difficulties. What is more, any incorrect definition of the scope of application of the reverse charge mechanism may entail risks for both parties to the transaction – charging the tax in case when it should not have been charged in certain circumstances creates a risk for the buyer, while the failure to account for the VAT in case when such obligation arises on the part of the supplier creates a risk on their side. Considering the reinstatement of the so-called VAT sanction as of 2017, such risks may have particularly significant consequences.
The new act will also affect the financial liquidity of the entities involved in the provision of construction services as they will not be able to gain from the output tax included in the price as the source of financing. As a result, the refunds of the excess input tax over output tax (which are already common due to the difference of the VAT rate between materials and services) will become even more significant.
The transitory provisions stipulate that the above-described principles will apply to services which are performed starting from 1 January 2017.
We are looking forward to hearing from those of you who are interested in our support with regard to the above issues or would like to obtain more information on this subject.
Łukasz Karpiesiuk, Partner, Tax advisor