The European Court of Justice has ruled that the tax point for VAT may be defined as the moment of formal acceptance of work performed under a construction contract. In its judgement of 2 May 2019 (C-224/18) the court stated that the tax point may arise at the time of formal acceptance of the work stipulated in the contract.
In a recent dispute, the Polish tax authorities maintained that, according to the VAT Act, the tax point for construction and installation services arises at the moment of issuing an invoice, no later than 30 days from the date of performing the service. The regulations, however, are not specific in defining the date of performing a service.
According to the taxpayer in this case the defining moment was the date of signing a handover protocol denoting the client’s acceptance of the work. The tax authorities, on the other hand, claimed that the date of the service should be understood as the moment in which the contractor announced to the buyer that the services were complete and ready for handover.
Such conflicting definitions arise regularly and cause a number of practical problems. Firstly, the moment of completing construction works is often difficult to determine precisely. Secondly, the time lapse between completing construction work and the client’s acceptance of the work may, in practice, take many days. As a result, contractors have often been forced to issue an invoice, declare and pay the tax long before receiving payment from the client.
The inconsistent determination of the tax point can also cause significant problems for buyers. If a buyer of construction works intends to reinvoice these costs to his tenant (for example, fit-out costs), it is mandatory for the construction company to apply the reverse charge VAT mechanism. As a rule, such a transaction should be VAT neutral for the buyer (meaning that output and input VAT is settled in the same period). However, if the tax point is incorrectly determined, and the buyer discovers it more than 3 months after the date of transaction, the buyer has to correct its output VAT going back to the time of the transaction, but its input VAT in the current period. This can lead to tax arrears and interest arising even in circumstances about which the buyer was completely unaware.
In its recent judgment the ECJ allows the tax point to be defined as the moment of signing the handover protocol, provided that the following three conditions are jointly met:
a) A formal acceptance protocol is stipulated by the parties under the contract,
b) Formal acceptance protocols are common commercial practice in the field in which the service is supplied,
c) It is not possible to establish the consideration due by the client before the client formally accepts the construction or installation work.
This ECJ judgement impacts both future and past transactions and may be also applied in other areas, such as the supply of medical devices and the provision of architectural, IT and advisory services.
How can ASB Tax support you?
We recommend that you confirm that VAT on construction works has been settled in the correct periods. In some cases, it may be prudent to conduct a tax review to identify and mitigate risks in this area. Although the above ECJ judgment concerns the construction industry the same principles may apply in other business fields where acceptance reports are commonly used as a way of determining that work is completed and that a client is obligated to pay the contractor.
If you have questions, please contact one of ASB Tax specialists.
Head of Tax
Senior Tax Consultant - Tax Adviser