Reverse charge and advance invoice

Service-Tax

The reverse charge belongs to the type of transaction in which the entrepreneur, who is the buyer, is obliged to settle VAT on the side of output tax. How to proceed in a situation where the purchase of goods under the reverse charge was preceded by an advance payment? When should VAT be accounted for on the tax return? Read the article and find the answers.

Reverse Charge - Legal Basis

As a rule, VAT on sales is settled by the seller. However, the legislator has set out some exceptions to this rule. Such an exception is the sale of goods listed in Annex 11 to the VAT Act, and services listed in Annex 14. In the case of transactions listed in these Annexes, the buyer may be required to settle VAT. It is a reverse charge settlement. However, this scheme is used if the statutory conditions are met. With regard to the sale of goods, these conditions are set out in Art. 17 sec. 1 point 7, according to which:

  • the person delivering the goods is the taxpayer referred to in art. 15, where the sale is not exempt from tax pursuant to art. 113 paragraph. 1 and 9 (VAT exemption due to turnover up to PLN 200,000),
  • the buyer is the taxpayer referred to in art. 15,
  • the delivery is not covered by the exemption referred to in Art. 43 sec. 1 point 2 (the supply of goods used exclusively for the purposes of tax-exempt activities, if the supplier was not entitled to deduct VAT due to the acquisition, import or production of these goods).

In order to apply the reverse charge mechanism when selling the services listed in Annex 14 to the VAT Act, the conditions set out in Art. 17 sec. 1 point 7, according to which:

  • the service provider is the taxpayer referred to in art. 15, where the sale is not exempt from tax pursuant to art. 113 paragraph. 1 and 9, acting as a subcontractor, and
  • the service recipient is the taxpayer referred to in art. 15, registered as an active VAT taxpayer.

Reverse charge - the buyer is the taxpayer

The taxpayer, who is also the buyer due to the use of the reverse charge mechanism, accounts for the value of VAT on the purchased goods both on the side of output and input tax. This applies to a situation where the purchased goods will be used by him to perform taxable activities as part of his business. In this case, the value of the settled VAT is neutral.

Reverse charge - the moment when the tax obligation arises

The tax obligation on the side of the output tax occurs in accordance with the VAT regulations at the time of delivery of the goods and performance of the service, unless an earlier payment has been made for a given transaction. Then the tax obligation occurs on the date of payment.

As for the input tax, the right to reduce the tax base by the value of the tax resulting from the invoice is in accordance with Art. 86 sec. 10 of the VAT Act, i.e. in the settlement for the period in which the tax obligation arose. However, the deduction cannot be made earlier than in the settlement for the period in which the taxpayer received the invoice for a given transaction.

An exception to this rule is Art. 86 sec. 10b point 3 of the said Act, according to which the right to reduce the amount of tax due by the value of the input tax is in accordance with paragraph 10, provided that the taxpayer includes the amount of tax due on the reverse charge transaction in the tax return in which he is obliged to settle this tax.

Reverse Charge - Settlement of the down payment invoice

In a situation where the taxpayer has paid an advance on account of a reverse charge transaction, the moment of payment of the advance payment for a given transaction should be considered as the moment when the tax obligation arises, as well as the obligation to settle the tax in the VAT-7 / VAT-7K declaration.

In the advance invoice issued under the reverse charge transaction, the seller should use an annotation in the VAT rate field that informs about the form of taxation of this transaction: "not podl", "OO", "VAT is settled by the buyer", and must also include next to the information that in the case of this of the sale, the taxpayer is the buyer (use the annotation "reverse charge"). The role of the buyer, who is also a taxpayer by law, is obliged to determine the correct VAT rate based on the PKWiU.

Example 1.

On July 30, 2016, the taxpayer made an advance payment for the purchase of goods listed in Annex 11 to the VAT Act, settled on the basis of reverse charge. He received the advance invoice on August 5, 2016. When should he account for the output tax and input tax in the VAT-7 return?

According to the regulations, the taxpayer is obliged to settle the tax due on the advance payment for the purchase of these goods in the settlement period in which he made the payment, i.e. in the VAT-7 declaration for July 2016. In the same declaration, he is entitled to deduct input tax.

In summary, the down payment invoice for the reverse charge must be settled by the buyer on the date the down payment is made. Therefore, the obligation to settle the tax due on this transaction should appear in the VAT declaration submitted for the settlement period in which the payment took place. The taxpayer also has the right to settle the value of input tax in connection with the purchase of goods in the same VAT declaration in which he made the settlement of the output tax.