The split payment mechanism in practice - worth knowing (part 1)

Service-Tax

The split payment mechanism replaced the reverse charge mechanism as of 1 November 2019. From that day, many doubts arose, problems with the correct identification of the goods sold in relation to the obligatory mechanism, but also the problem of when to pay using the split payment mechanism. It is therefore worth getting to know the split payment mechanism in practice, i.e. how to solve many problems related to its use.

A word about reverse charge

The legislator repealed the provisions on the reverse charge in domestic sales transactions with effect from November 1, 2019.
Until the end of October 2019, this mechanism was applicable when:

  1. the supplier and buyer of the goods was an active VAT payer,
  2. the subject of delivery are goods that already appear in the former Annex 11 to the VAT Act,
  3. the delivery of goods does not benefit from the objective exemption referred to in Art. 43 sec. 1 of the VAT Act,
  4. the value of goods sold in one transaction exceeds the sum of PLN 20,000. net, if the subject of delivery is electronic equipment.

However, it should be remembered that even now it may happen that in some exceptional situations some taxpayers will still have to recognize the sale (and purchase) transaction using the reverse charge mechanism.

Basic issues about the split payment mechanism

The split payment mechanism, hereinafter referred to as the split payment mechanism, replaced the previously used mechanism for settling VAT on the sale of certain goods and services, i.e. the reverse charge.

In the case of split payment, the principle of operation is to settle the received invoice for the purchase of goods or services by the buyer through a payment message, which will be distributed by:

  1. all or part of the net value from this invoice to the seller's business account and
  2. all or part of the VAT value from this invoice to the seller's special VAT account.

The split payment mechanism is mandatory from November 1, 2019, but only in relation to goods and services listed in Annex 15 to the VAT Act. What exactly does it entail? About it later in the publication.

When the seller is obliged to issue an invoice using split payment

The seller is obliged to issue an invoice with the annotation split payment mechanism, if the following conditions are jointly met:

  1. the total value of the invoice is at least PLN 15,000. gross,
  2. the supplier of goods or services is an active VAT payer,
  3. the buyer of the goods is a taxpayer conducting business activity, a partnership or a capital company,
  4. the subject of the sale indicated on the invoice is at least one product or one service contained in Annex 15 to the VAT Act (annex containing goods and services covered by the split payment mechanism).

Therefore, the seller, in the above-mentioned conditions, issues a sales invoice using (annotation) the split payment mechanism with the VAT rate added on the invoice, as in a domestic sales transaction, while the buyer receiving such an invoice is obliged to pay it also through the split payment mechanism.

Everything would be simple and understandable, but there are still many problems that prevent taxpayers from correctly settling sales and purchase transactions in terms of VAT.

Split payment and reverse charge at the border of periods

In some cases, it may happen that some taxpayers will still apply the reverse charge mechanism after its duration (after October 31, 2019).

Example 1.

An active VAT taxpayer issued on October 31, 2019r. an invoice for the installation of the plumbing system. The service was performed on November 25, 2019.

In this situation, the taxpayer providing the services will issue an invoice using the reverse charge mechanism, i.e. without charging VAT using the NP rate. and an annotation on the invoice "reverse charge".

Importantly, the taxpayer in the submitted JPK_VAT and VAT declarations will also prove by settling the month of November 2019 a given sales transaction using the reverse charge mechanism.

In addition, he will submit a summary information VAT-27 for the month of November 2019, in which he will also indicate the above transaction.

Example 2.

On October 31, 2019, an active VAT payer received an advance payment for the production and assembly of the roof structure in the amount of PLN 25,000. The second advance payment in the amount of PLN 15,000. was received in December 2019 and the final invoice was issued this month. How should the seller settle the transaction?

In the presented circumstances, in relation to the advance payment received on October 31, 2019, the taxpayer taxes it using the reverse charge mechanism, i.e. without the VAT rate.

On the other hand, the second advance payment is taxed at the appropriate VAT rate for the services it provides. The same will be taxation in relation to VAT in relation to the remaining unsettled VAT amount resulting from the issued final invoice.

Reverse charge elimination, however, is not always the case

The reverse charge mechanism was in place for domestic sales transactions until the end of October 2019. As of November 2019, with exceptions, it no longer applies.

It should be emphasized, however, that the liquidated mechanism concerns only domestic sales transactions. Taxpayers are still obliged to issue invoices, e.g. in the case of providing services to contractors:

  1. from the European Union,
  2. outside the European Community

- with an annotation on the invoice, reverse charge - VAT (value added tax) is settled by the buyer of the service, except for the exceptions specified in art. 28c-f of the VAT Act.

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Taxpayer exempt from VAT and split payment

Many VAT-exempt taxpayers wonder if they are required to pay an invoice with the annotation "split payment mechanism" for a minimum of PLN 15,000 gross using the split payment mechanism.

Pursuant to Art. 19 point 2 of the Act on Entrepreneurs Law, taxpayers are required to use the split payment mechanism when paying for an invoice with a minimum value of PLN 15,000. gross.

There is neither the VAT Act nor the aforementioned the demarcation act, nor to emphasize that the payment for invoices with the annotation "split payment mechanism" is paid only by active VAT payers. Thus, all taxpayers who conduct business activity, i.e. active VAT taxpayers, taxpayers who are subject and subjectively exempted from VAT, as well as people who do not conduct business activity, but are registered for VAT, are obliged to pay for this type of invoice for the amount of at least PLN 15,000 gross.

The split payment mechanism in practice - when is split payment voluntary and when obligatory?

It is a problem for taxpayers to determine when it is obligatory to pay using the split payment mechanism, and when voluntarily.

The obligatory application of the mechanism should be used for invoices with a minimum amount of PLN 15,000. gross. But that's not all. This invoice must contain at least one service or good listed in Annex 15 to the VAT Act. However, in such a situation, the taxpayer has a choice:

  1. pay (obligatory) using the split payment mechanism only for this one item contained in Annex 15 to the VAT Act and the rest by a regular transfer,
  2. pay the entire invoice using the split payment mechanism.

Of course, if the invoice for a minimum of PLN 15,000. gross applies to all goods or services included in Annex 15 to the VAT Act, then the taxpayer is obliged to pay the invoice in full using the split payment mechanism.

However, what to do if the invoice is below PLN 15,000. and does it concern, for example, in whole or in part the goods or services from Annex 15 to the VAT Act?

In this case, the taxpayer has the option to:

  1. voluntarily pay the entire invoice using the split payment mechanism,
  2. voluntarily pay the entire invoice by standard bank transfer,
  3. voluntarily pay part of the invoice using the split payment mechanism and some using a standard transfer.