Taxation of construction services provided to non-VAT taxpayers - rules
Value-added tax, shortly called VAT, covers the supply of goods for consideration and the provision of services for consideration. While the performance of a construction service by a VAT payer for another tax payer does not raise doubts among entrepreneurs, they may arise when it comes to the taxation of construction services provided for non-VAT payers. Therefore, it is necessary to consider how to tax a construction service to a buyer who does not have the status of an active VAT taxpayer.
The concept of a VAT payer
Pursuant to Art. 15 sec. 1 of the act on tax on goods and services (hereinafter: VAT), taxpayers are legal persons, organizational units without legal personality and natural persons performing independent economic activity referred to in sec. 2, regardless of the purpose or result of such activity.
Economic activities include any activities of producers, traders or service providers, including natural resource harvesters and farmers, as well as the activities of freelancers. Economic activity includes, in particular, activities consisting in the use of goods or intangible assets on a continuous basis for commercial purposes.
Pursuant to Art. 96 sec. 1 of the VAT Act, in order to obtain the status of an active VAT payer, entities referred to in art. 15 above of the Act, are obliged to submit a registration application to the head of the tax office, called the VAT-R form, before the date of the first taxable activity (these activities are specified in Article 5 of the VAT Act), subject to paragraph 3. Details on the registration application can be found on the website of the Ministry of Development: https://www.biznes.gov.pl/poradnik/-/scenariusz/VAT_REJESTRACJA
The concept of a taxpayer exempt from VAT
Please note that not all entities listed in Art.15 of the VAT Act, they are required to make the above-mentioned applications. Pursuant to Art. 96 sec. 3 of the VAT Act, the entities listed in art. 15, where the sale is exempt from tax pursuant to art. 113 paragraph. 1 and 9 or performing only activities exempt from tax pursuant to art. 43 sec. 1 or regulations issued on the basis of art. 82 sec. 3 may submit a registration application. This means that these entities have the right, and not the obligation, to register as an active VAT taxpayer, which in turn entails the possibility of using such "profits" as the right to reduce the amount of tax due by the amount of input tax. Moreover, the VAT Act provides for two types of exemption: subjective and objective.
Art. 113 sec. 1 of the VAT Act: sales made by taxpayers whose sales value did not exceed the total amount of PLN 200,000 in the previous tax year are exempt from tax. The amount of tax is not included in the sales value.
Art. 113 sec. 9 of the VAT Act: sales made by a taxpayer starting during the tax year are exempt from tax, carrying out the activities specified in art. 5, if the estimated value of the sale does not exceed, in proportion to the period of economic activity in the tax year, the amount specified in paragraph 1.
The subjective exemption is closely related to the VAT taxpayer and the sales value achieved in a given tax year.
Taxpayers who do not want to take advantage of this exemption, in accordance with Art. 113 paragraph. 4 of the VAT Act, they may waive the exemption specified in sec. 1 and 9, provided that a written notification of this intention to the head of the tax office before the beginning of the month in which they resign from the exemption, and in the case of taxpayers starting during the tax year, the activities referred to in article 1. 5, who want to resign from the exemption from the first action performed - before the date of performance of this action.
The catalog of goods and services that have been exempt from VAT by the legislator is specified in Art. 43 of the VAT Act. However, it should be remembered that this non-taxation is formal. Indeed, the price of goods and services that is ultimately exempt from tax includes VAT charged at earlier stages of the turnover, e.g. exemption from tax for the supply of buildings. VAT will not be paid on this delivery, but individual elements of the construction, such as the purchase of building materials, were subject to VAT, so this tax is indirectly hidden in the price of the building. Start a free 30-day trial period with no strings attached!
Taxation of construction services
Construction services are, in principle, taxed at the basic rate, i.e. 23% (i.e. the basic rate is 22%, however, from January 1, 2011 to December 31, 2018, this rate was increased to 23%) - it is taxation on the basis of general.
The legislator has established an exception for the supply, construction, renovation, modernization, thermo-modernization or reconstruction of buildings or parts thereof included in the construction covered by the social housing program. Therefore, the taxation of construction services will be based on the 8% rate (Article 41 (12) of the VAT Act).
Construction covered by the social housing program is understood as residential buildings or parts thereof, excluding commercial premises, and residential premises in non-residential buildings classified in the Polish Classification of Construction Objects in section 12, as well as buildings classified in the Polish Classification of Construction Objects in class ex 1264 - only buildings of health care institutions providing accommodation services with medical and nursing care, especially for elderly and disabled people, subject to paragraph 12b.
Construction covered by the social housing program does not include single-family residential buildings with a usable floor area of more than 300 m2 and residential premises with a usable floor area of more than 150 m2.
In the case of the provision of construction services, the so-called reverse charge mechanism. It consists in shifting the obligation to settle VAT from the recipient (contractor) to the service provider. Then the contractor of the construction service does not charge the VAT due on this account. The reverse charge transaction must be documented by including the additional information "reverse charge" on the VAT invoice. Art. 106e sec. 1 point 18 of the VAT Act: The invoice should contain: in the case of delivery of goods or performance of a service for which the buyer of the goods or services is obliged to settle the tax, value added tax or tax of a similar nature - the words "reverse charge". As a rule, the reverse charge mechanism applies to active VAT payers, which means that the taxation of construction services provided to non-VAT taxpayers may look completely different.
Taxation of construction services provided to non-taxable persons
Pursuant to Art. 17 sec. 1 point 8 of the VAT Act, taxpayers also include legal persons, organizational units without legal personality and natural persons purchasing services listed in Annex 14 to the Act, which is a list of construction services that may be covered by the so-called reverse charge, if all of the following conditions are met:
- 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,
- the service recipient is the taxpayer referred to in art. 15, registered as an active VAT taxpayer.
Therefore, for the reverse charge mechanism to apply, both the supplier and the customer must be active VAT payers.
On the other hand, when the sale of construction services is made to an entity that is not an active VAT payer (e.g. a private person), then the taxation of construction services provided to non-VAT payers is subject to taxation under general rules.
As a rule, the tax obligation arises when the goods are delivered or the service is provided (Article 19a (1) of the VAT Act).
In the case of providing construction or construction and assembly services, the tax obligation arises, in accordance with art. 19a paragraph. 5 point 3 lit. a of the VAT Act, upon issuing a VAT invoice documenting its performance.
Art. 106b sec. 1 of the VAT Act: The taxpayer is obliged to issue an invoice documenting the sale, as well as the delivery of goods and the provision of services referred to in art. 106a, point 2, made by him for the benefit of another taxpayer of tax, value added tax or a tax of a similar nature or for the benefit of a non-taxable legal person (!).
It should be emphasized that the above applies to issuing a VAT invoice to a legal entity
Pursuant to Art. 106i paragraph. 3 point 1 of the VAT Act, an invoice documenting the performance of a construction or construction-assembly service shall be issued no later than 30 days from the date of the service. Start a free 30-day trial period with no strings attached!
According to the judgment of the Provincial Administrative Court in Warsaw of 30 July 2015, III SA / Wa 393/15, the date of completion of construction and construction-assembly services is determined by their actual performance. The invoice is only a confirmation of this fact for evidence purposes. The actual date of performance of the service is essential and determinant for the emergence of a tax obligation. Issuing a VAT invoice documenting the performance of a construction service is of a secondary nature, however, it is significant from the point of view of determining the moment when the tax obligation arises.
In conclusion, it should be emphasized that in the case of a construction or construction-assembly service, the tax obligation arises no later than within 30 days of its actual performance (the service is provided to another VAT payer and the need to issue a VAT invoice), when ( at least in theory) a VAT invoice documenting the performance of the service should be issued. On the other hand, in a situation where the buyer is a private person or other entities that are not VAT taxpayers, then, firstly, the taxation of construction services provided for non-VAT payers will take place on general terms, and secondly, the tax obligation will arise upon the provision of the service.
Summarizing the above, if the sale of construction services is made to an entity exempt from VAT, this service should be taxed on general principles, i.e. at the rate of 23%.