As of 1 January 2017 the act of 1 December 2016 on the amendment of the goods and services tax act and certain other laws, providing for, among others, the application of reverse charge mechanism to a significant part of construction works conducted by subcontractors, entered into force.
The Act amending the VAT Act has expanded the scope of the application of reverse charge mechanism in national transactions to the majority of construction works (works classified under the Polish Qualification of Goods and Services (PKWiU) applied for tax purposes, groupings 41-43).
Pursuant to the amendment, purchasers are also taxpayers on account of the provision of construction works, if the following four cumulative conditions are fulfilled, namely:
- a provided service is among the construction works specified in item 2-48 of the proposed appendix no. 14 to the VAT Act,
- a service provider is a taxpayer, who does not benefit from the so-called subjective exemption,
- a service recipient is a taxpayer registered as an active VAT taxpayer,
- a service provider provides a particular service as a subcontractor
The operation of the reverse charge mechanism
The reverse charge mechanism in the case of construction services specified in appendix no. 14 to the VAT Act is that a subcontractor, for a service being subject to reverse taxation, shall issue an invoice to the main contractor only in the net amount with a “reverse charge” annotation. An invoice for the delivery of goods, which are subject to the reverse charge system, does not include any data regarding the tax rate, total net value of sales, and tax amount.
Any subcontractor that delivers goods, to which the reverse charge mechanism has been applied, is obliged to submit aggregate summary information within domestic traffic (VAT-27). VAT-27 information is submitted for those settlement periods, in which the tax obligation arose, within deadlines provided for the submission of the goods and services tax return by a taxpayer. Should there be any changes in the value of good deliveries being subject to the reporting obligation (VAT-27), the adjustments of such values shall be made for the period, in which the seller makes the adjustment of the tax base in VAT return.
The main contractor shall, by way of an internal document, make a reverse charge by applying VAT tax at the rate of 8 or 23% to the net amount included in the subcontractor’s invoice. In the case of the reverse charge mechanism, the amount of output tax constitutes, at the same time, the amount of input tax and the right to deduct that tax is vested in the purchaser according to general principles (i.e. to the extent that goods are used to perform taxed activities), as part of the settlement for the period, in which the tax obligation arose, provided that the taxpayer (purchaser) includes the output tax on account of these transactions in the tax return, in which the taxpayer is obliged to settle that tax.
The investor, in turn, should receive an invoice from the general contractor according to general principles. If a service purchased by the investor is used for conducting business activities as defined in the VAT Act, the investor shall have the right to deduct the input VAT from the invoice received from the contractor.
Determining the entity being a subcontractor
The term “subcontractor” has not been defined in the amendment of the VAT Act. The Ministry of Finance, in the public consultation report, has ordered that the definition included in the online version of the dictionary of the Polish language should be used, according to which a subcontractor is an entity or a person performing work commissioned by the main contractor.
Thus, each contractor, which provides services not to the benefit of an investor but to the benefit of another contractor, shall be deemed to be a subcontractor. It may also happen that a taxpayer, during the execution of one investment, will provide some services as the main contractor and some as a subcontractor. It is therefore necessary to analyse from time to time whether or not a particular entity provides a particular service as a subcontractor.
Determining the services being subject to reverse charge
Reverse charge applies only to the services specified in appendix no. 14 to the VAT Act.
Please note that although the new provisions refer to the Polish Qualification of Goods and Services (PKWiU), situations, in which a taxpayer provides complex services, e.g. providing assembly services with prior project preparation, or measuring electrical quantities of elevators and a goods delivery, are problematic. It is extremely important to conduct an analysis of the services provided by such a taxpayer as well as to determine whether each of the provided services qualifies to be included in the catalogue of services subject to the reverse charge mechanism, specified in appendix no. 14 to the VAT Act.
Pursuant to the transitional provisions, new rules are applicable to constructions services specified in appendix no. 14 to the VAT Act, that have been performed since 1 January 2017. For the purpose of determining the time of service provision, the provisions of Article 19a section 2 and 3 shall apply, namely:
- with regard to services accepted in parts, a service shall be deemed performed when the part of the service, for which a payment has been determined, has been performed.
- A service, for which, in connection with its provisions, subsequent payment or settlement deadlines are determined, shall be deemed performed at the end of each period, to which these payments or settlements pertain, until the provision of that service is completed.
- A service provided continuously for a period of time exceeding one year, for which, in connection with the service provision, no payment or settlement deadlines expire in a given year, shall be deemed performed at the end of each tax year, until the provision of that service is completed.
Sanctions resulting from incorrect classification
Incorrect classification for the purpose of goods and services tax applicable to a construction service gives rise to risk for both seller and purchaser. The taxpayer’s risk occurs in two cases:
1. When the taxpayer as a seller incorrectly classifies performed service as a service subject to the reverse charge mechanism, issues an invoice without the VAT rate with a “reverse charge” annotation and, as a consequence, does not pay the output VAT tax;
2. When the taxpayer as a purchaser of a service, which should have been classified as a service subject to the reverse charge mechanism, receives and invoice including input VAT tax and deducts the VAT tax from that invoice on its basis.
As of 1 January 2017 any decrease in budgetary receivables such as non-payment of tax, e.g. by the ordering party, which erroneously concluded that they were not obliged to apply reverse charge, or a deduction of VAT tax by a subcontractor that is subject to reverse charge, results in, except interest, an obligation to pay an extra amount that equals 30% of the unpaid or unlawfully deducted VAT tax. In the case of self-adjustment of the return and payment of the tax, the sanction shall equal 20%. Nevertheless, under certain circumstances the sanction may also equal 100%.
As of 1 January 2017 also the Penal and Fiscal Code was changed to provide for stricter sanctions for incorrect tax settlements.
We recommend verifying both services provided in the capacity of subcontractor and services purchased by counterparties in terms of whether or not such services are included in the catalogue of services subject to reverse charge.
If you, as a purchaser of a service, which should have been classified as a service subject to reverse charge, receive an invoice with input VAT tax, we advise you not to deduct the input VAT tax and request your counterparty to issue a correct invoice.
You are more than welcome to contact us if you need any substantive support in terms of the analysis of provided and purchased services in relation to the new provisions.