Split payment - the split payment mechanism and the bank account

Service-Tax

Split payment, i.e. the split payment model, is a way to tighten the tax system related to VAT and will operate in Poland from July 1, 2018. After introducing the split payment mechanism, the Ministry of Finance wants to obtain additional VAT revenues of nearly PLN 82 billion over 11 years, which will gradually increase from PLN 419 million in 2018 to PLN 9 billion in 2023 and subsequent years. For each VAT payer who has an account with a bank, the financial institution will open an additional account - kept solely for the purposes of settling the tax on goods and services. What are the obligations of financial institutions, what is the practical work with a VAT account and what are the limitations for the supplier and the buyer - we will answer all of your questions in this article.

What are the obligations of financial institutions?

Pursuant to the Act of December 15, 2017 amending the Act on tax on goods and services and certain other acts, which enters into force on July 1, 2018, banks are required to maintain at least one VAT account for an entrepreneur who has a current account. Banks will also be obliged to keep a VAT account for accounts kept within their own economy. Banking systems should be adapted to automatically split the payments of the buyer of goods / services into the net value of the invoice transferred to the basic current account of the supplier / entrepreneur and the amount of VAT transferred to the VAT account. Banks will not have the right to charge fees and commissions for maintaining a VAT account, while the funds accumulated on this account may be interest-bearing if such a provision is included in the customer's contract with the bank.

The split payment model will apply both to invoices issued after the effective date of the Act of December 15, 2017 amending the Act on Value Added Tax and certain other acts, and after its entry into force. It will only apply to entrepreneurs in the B2B segment. It will be the responsibility of the bank to prepare and provide also the documentation aspects. In addition to products related to the financing of invoices, banks also grant revolving and non-renewable working capital loans for the financing of VAT. In both cases, the entire loan documentation must be adjusted to the new regulations. So far, customers using working capital loans secured, for example, with a pledge on a VAT refund account, had the opportunity to dispose of the funds accumulated there. Currently, when using the split payment model, it will not be possible to freely use the funds on the VAT account. The closing of the VAT account will be made together with the closing of the current account kept in the bank for the company associated with the VAT account. The condition for closing the current account is a zero balance on the VAT account. If the balance is positive, then you must submit an application to the tax office for release of funds from the VAT account. In the case of closing the VAT account, the funds should be transferred:

  • to another VAT account maintained with the same bank indicated by the holder of the VAT account, or

  • to the indicated current account on the basis of the decision of the head of the tax office.

What does the practical work with a VAT account look like?

After the entry into force of the Act of December 15, 2017 amending the Act on tax on goods and services and certain other acts, the bank will open a VAT account for current accounts in PLN. Customers using split payment will be required to keep / open at least one VAT account. The first VAT account is issued by the bank without any special requests from the entrepreneur. However, when the entrepreneur would like to have more VAT accounts, he must submit an application to the bank. Customers will be able to apply for the opening of more than one VAT account used to settle transactions using the split payment method. The maximum number of VAT accounts should be equal to the number of customer accounts kept with a given bank. It will not be possible to issue payment cards to the VAT account. There will also be a restriction of access to funds accumulated on the VAT account. Only the following activities / options will be possible for customers:

  • transfer to the tax office as part of VAT payment,

  • transfer from the VAT account to the VAT account - of the same entrepreneur in the same bank,

  • a transfer made by the entrepreneur as part of the split payment,

  • derecognition of funds from the VAT account is possible only with the consent of the head of the tax office. His consent will be provided using the KIR message within 60 days (standard) or 25 days. The head may not consent to the transfer of funds from the VAT account to the entrepreneur's current account in the event that:

    • there is a justified concern that the tax liability will not be fulfilled, in particular when the taxpayer fails to permanently pay due liabilities due to this tax or performs activities consisting in the sale of property that may hinder or frustrate enforcement (Article 33 § 1 of the Tax Ordinance Act) ) or

    • in the course of tax proceedings conducted against the taxpayer in the field of tax, there is a justified fear of determining the tax arrears in tax or establishing an additional tax liability in the tax, or

    • the verification of the legitimacy of the application submitted by the taxpayer indicates that there is a justified fear of tax arrears in the tax.

The choice of the method of payment for the VAT invoice will be decided by the person who pays the invoice, i.e. the entrepreneur. The difference between an ordinary transfer and split payment is as follows:

The payer of the VAT invoice carries out an ordinary transfer

In this case, access to funds is unlimited.

The payer of the VAT invoice makes the transfer using split payment

In the case of funds accumulated on the client's current account, access is unlimited. Access to funds on the VAT account is limited. These funds can only be used for payments under the split payment transfer or for VAT payments.

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The VAT account may be credited only by an incoming transfer as part of the split payment via the KIR message and by a transfer from another VAT account of the same client in the same bank (internal transfer). If the transaction is returned using the split payment method, it will be possible to post it with a breakdown into a transfer in the net amount on the current account and in the VAT amount on the VAT account.In a situation where the entrepreneur does not have a VAT account maintained by the bank, and the funds using the split payment method are transferred to his personal account, the bank will be obliged to return such a transfer in the KIR message. All transfers coming to the bank as part of the split payment to the current account for which there is no VAT account will be rejected and will be returned to the sender of the transfer. Pursuant to Art. 62 c of paragraph 1. 11 of the Banking Law of August 29, 1997 (consolidated text): "If the payment for the invoice is made on the basis of a transfer message to the recipient's account for which the bank does not maintain a VAT account, the bank returns the funds using the transfer message" . Such a transfer will be returned to the sender using a split payment message, so that the net amount goes to the settlement account and the VAT amount goes to the sender's VAT account. The same rule will apply to transfers incoming to accounts in currencies other than PLN. The returnable currency transfer will be made to the sender without currency conversion. VAT accounts will not be subject to debt collection or other enforcement, including fiscal enforcement. According to the wording of Art. 62b paragraph. 2 point 9 of the Banking Law of August 29, 1997 (consolidated text), the VAT account may be debited only for the purpose of "carrying out a seizure on the basis of an administrative enforcement title relating to the enforcement of VAT receivables" - this means that only the seizure may be carried out on the basis of an administrative enforcement order relating to the enforcement of VAT receivables. Therefore, it will not be possible to carry out enforcement relating to other public-law receivables, e.g. CIT.

What are the restrictions for the supplier and buyer?

It will not be possible to perform the following activities on the VAT account:

  • Setting up a security in the form of e.g. a lien or a blockade on the VAT account

  • Setting a deposit on the VAT account

  • Execution of a transfer from the VAT account to the outside

  • Obtaining a card for the VAT account

  • Execution of a transfer from a VAT account to another bank account not belonging to the same entrepreneur

  • Making loan repayments from the VAT account

  • Withdrawal of funds from loans to the VAT account

  • Obtaining a credit limit in the VAT account.

Having a VAT account can significantly affect the company's creditworthiness. Entrepreneurs applying for a loan may, due to the new mechanism, be at risk of a negative financial liquidity analysis, because the money deposited in the VAT account will become unavailable to them, although earlier, until the tax is settled, companies could freely trade them. This is especially dangerous in crisis situations, when the money that can save the company from liquidity or even bankruptcy will be available only after approval of the head of the tax office, who has 60 days for it. The receivables turnover analysis may also be unfavorable for the company. Undoubtedly, split payment may also increase payment gridlocks.

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To sum up, the only operations that can be performed as part of the VAT account will be the following:

  • VAT settlements

  • Split payment transfer

  • Transfer from the VAT account to the VAT account of the same entrepreneur in the same bank.