Consequences of issuing an invoice with a reverse charge for a non-vat

Service-Tax

In order to tighten the tax system in Poland, the legislator introduced a reverse charge mechanism, which occurs in the case of the provision of certain services and supplies of goods to VAT taxpayers. The reverse charge has been replaced from November 2019 by the split payment mechanism. The key aspect in the application of the previous mechanism was the status of the entrepreneur who had to be an active VAT payer. Let's check what are the consequences of issuing an invoice with a reverse charge for a non-VAT.

When do we deal with reverse charge?

The reverse charge mechanism consisted in transferring the VAT settlement obligation to the buyer. This means that the seller did not show on the invoices issued for transactions subject to a reverse charge of VAT.

Pursuant to Art. 17 sec. 1 point 8 of the VAT Act, in order for the provision of services to be subject to the reverse charge procedure, four conditions had to be met simultaneously:

  • the subject of the purchase were the services listed in Annex 14 to the Act,

  • the service provider is an active VAT payer, the sale of which is not exempt from tax pursuant to Art. 113 paragraph. 1 and 9,

  • the service recipient is a taxpayer with the status of an active VAT payer,

  • the service provider has the status of a subcontractor (in the case of services listed in items 2-48 of Annex 14 to the Act).

The reverse charge also covers the sale of goods. However, for the mechanism to apply, three cumulative conditions must be met:

  • the subject of purchase are goods listed in Annex 11 to the Act,

  • the seller is a taxpayer whose sale is not exempt from tax due to the turnover up to PLN 200,000,

  • the buyer is a taxpayer with the status of an active VAT payer,

  • the delivery is not covered by the exemption referred to in Art. 43 sec. 1 paragraph 2 or article. 122 of the VAT Act.

With the introduction of the split payment mechanism, Annexes 11 and 14 to the VAT Act were repealed and replaced with Annex 15.

Status of an active VAT payer and the reverse charge until the end of October 2019

Pursuant to Art. 17 sec. 1 point 7 and 8 of the VAT Act, both in the case of the sale of goods and the provision of services, one of the mandatory requirements for the application of the reverse charge mechanism is that the buyer and seller have the status of an active VAT payer. This means that when one of the parties to the transaction is an entrepreneur who benefits from VAT exemption or has been deleted from the VAT register, the consequences of issuing an invoice with a reverse charge do not apply and the sale should be settled on general terms.

In 2017, the provisions related to the deletion of entrepreneurs from the register of active VAT payers have been tightened. Moreover, business owners are often unaware that they have lost the status of an active VAT payer, and therefore do not inform the seller about it at the time of the transaction. If the entrepreneur does not have the status of an active VAT payer, the transaction should be settled on general terms (without exposure to the consequences of issuing an invoice with a reverse charge), i.e. the VAT due should be settled by the seller, not by the buyer.

Entrepreneurs can check the current status of the taxpayer (their own and the other party to the transaction). This verification is possible directly on the website of the Ministry of Finance, as well as in some accounting systems. It consists in checking the VAT status of the taxpayer based on his NIP. Thanks to the information obtained about the current taxpayer status, the seller will not be exposed to the possible consequences of issuing an invoice with a reverse charge for the non-VAT payer.

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Consequences of issuing an invoice with a reverse charge for a non-vat

Incorrect recognition of a transaction as a sale covered by the reverse charge mechanism has consequences in terms of VAT settlement. This is due to the fact that the VAT will be settled by the wrong party to the transaction (if the buyer is not aware that he has lost the status of an active VAT payer). Moreover, in a situation where the consequences of issuing an invoice with a reverse charge arise, and the other party to the transaction is a taxpayer benefiting from VAT exemption, VAT will not be settled by either party.

In practice, the consequences of issuing an invoice with a reverse charge are more severe for sellers than for buyers. Failure to show VAT on the invoice involves the need to issue a correcting invoice, and thus an additional tax liability will arise on the seller's side. In the case of transactions covered by the reverse charge mechanism, the tax obligation arises on general terms, i.e. at the time of delivery of goods or provision of a service. However, if all or part of the payment has been received before that date, the tax obligation arises upon its receipt in relation to the amount received.

Recognition of a credit note and a reverse charge instead of general rules

If the corrective invoice concerns a sale that took place in the current month, and the error related to issuing the invoice with a reverse charge for the non-VAT is detected before the submission of tax returns for this period, the only consequence of the seller will be the obligation to correct the entries in the records by issuing a correcting invoice.

In a situation where the correcting invoice concerns sales from previous months, the seller, in addition to correcting entries in the records, is also obliged to correct the sent tax declarations. As a consequence, it is exposed to the emergence of tax arrears, on which it is obliged to pay tax interest.

Additionally, pursuant to Art. 112b paragraph. 1 point 1 of the VAT Act, when the inspection authority determines that the taxpayer in the submitted tax declaration showed the amount of the tax liability lower than the amount due, he is exposed to additional tax sanctions in the amount of 30% of the amount of understating the tax liability. When making transactions subject to the reverse charge mechanism, taxpayers are required to send the VAT-27 summary information by the 25th day of the month following the month in which the delivery of goods or services took place. When a transaction has been incorrectly shown in the VAT-27 summary information, the taxpayer is obliged to correct the information sent immediately upon detection of the error.

The obligation to prepare an invoice correction is connected with showing VAT on it. This may result in a reduction in the seller's income, as the buyer may refuse to pay the difference resulting from the correction, and thus will not accept the correction, as the invoice value will be increased by the value of VAT as a consequence. Entrepreneurs may also issue a correcting invoice, as a result of which VAT will be calculated on the amount of the original invoice, so the gross value of sales will remain unchanged, but its net value will decrease. This solution will also affect the income tax liability as taxable income will be reduced.

Example 1.

Mr. Jan, who is an active VAT payer, provides as a subcontractor the construction services listed in Annex 14 of the VAT Act to the XYZ company. Due to the fact that XYZ is his regular contractor, he did not verify the VAT status of the buyer and issued a sales invoice with a reverse charge on April 10, 2018. It turned out, however, that XYZ was removed from the VAT register in the previous month, which it had not been informed about. What consequences for a non-VAT invoice may be imposed on Mr. Jan?

As a rule, the tax office is not required to inform taxpayers about their removal from the VAT register. Issuing an invoice with the reverse charge mechanism for a taxpayer who does not have the active VAT status is incorrect and is subject to correction. Therefore, Mr. Jan is obliged to issue a correcting invoice, where the VAT rate will change, because he is obliged to settle the VAT due. Due to the fact that the reason for issuing the correcting invoice is a billing error, the correction must be included in the period of issuing the original invoice, i.e. in April. This will result in the obligation to correct the VAT declaration and the VAT-27 summary information for April. As a result of the correction of the VAT declaration, it is possible to create a tax liability on the part of Mr. Jan, and thus the obligation to pay tax interest for underpayment of VAT.

As of November 1, 2019, the obligation to submit summary information in domestic trade, VAT-27, was abolished. If the taxpayer is required to correct the settlements "backwards" for the period before that date, he should submit a correction of the VAT-27 declaration.

To sum up, the verification of the buyer's VAT status should be performed periodically by the parties to the transaction so as not to be exposed to the consequences of issuing an invoice with a reverse charge for the non-VAT payer. Accounting systems with a mechanism for verifying the taxpayer's VAT status are helpful in this matter. It should be remembered that the mere fact that the buyer and seller are trusted parties and have cooperated for years cannot be a premise that prevents the obligation to settle possible VAT arrears. Both the seller and the buyer should verify that all conditions are met for the transaction to be reverse-charged. On the other hand, replacing the reverse charge mechanism with the split payment mechanism streamlined the process of issuing invoices because this mechanism applies to active VAT payers who issue invoices with the domestic VAT rate.