Design services and the reverse charge
From 1 January 2017, changes were made to extend the scope of application of the so-called the reverse charge mechanism for transactions in construction services. Although the regulations have been in force since 2017, taxpayers who perform activities related to construction still have problems with taxing them. One of them is design services, which are often ancillary to construction services.
Reverse charge mechanism
Art. 17 sec. 1 point 8 of the Act of March 11, 2004 on tax on goods and services (i.e. Journal of Laws of 2017, item 1221, as amended), hereinafter referred to as the VAT Act, introduces a mechanism consisting in shifting the settlement obligation VAT on the taxpayer for whom the service listed in Annex 14 to the Act is provided, if the service provider is a taxpayer referred to in art. 15, where the sale is not exempt from tax pursuant to art. 113 paragraph. 1 and 9, while the recipient is the taxpayer referred to in article 2. 15, registered as an active VAT taxpayer. However, in the case of the services listed in item 2-48 of Annex 14 to the Act, the reverse charge mechanism applies if the service provider provides these services as a subcontractor.
Thus, the reverse charge mechanism presupposes that the buyer of the goods or services is obliged to settle the output tax on the performed activity subject to VAT. This mechanism is an exception to the general rule, according to which VAT is settled by the seller who supplies the goods or provides the service. This mechanism applies only to active VAT payers. Transactions relating to the provision of services listed in Annex 14 to the Act, performed by the contractor (general contractor) for the investor, are subject to taxation according to general rules, i.e. VAT is settled by the contractor (general contractor), while the investor receives an invoice for the amount due for the services provided, including tax.
The concept of a subcontractor
It should be noted that the VAT Act does not define the concept of a subcontractor, therefore, for the correct understanding of the term "subcontractor" it will be sufficient to use its common meaning resulting from its linguistic interpretation. According to the definition contained in the online edition of the PWN Polish Language Dictionary, the subcontractor is company or person performing work on behalf of the main contractor.
Consequently, it should be stated that the above legal regulations prove that in order for there to be a reverse charge mechanism for transactions in the field of construction services listed in item 2-48 of Annex 14 to the Act, their subject matter must be exclusively the above-mentioned construction services that are performed in the following relationship: subcontractor - main contractor.
Therefore, taking into account the above, it should be stated that determining whether a given service is accounted for in accordance with the reverse charge mechanism or whether the general principle of tax settlement will apply is individual. This means that in each specific case it should be examined whether:
the service in question is a service listed in Annex 14 to the Act,
the service is provided by a subcontractor.
In the event of further "subcontracts", the subcontracting becomes the prime contractor for his scope of work to the subcontractor and he is then obliged to settle the "subcontracted" construction services on a reverse charge basis.
Design services in the light of the VAT Act
Under Art. 5a of the VAT Act goods or services that are the subject of the activities referred to in Art. 5, listed in the classifications issued on the basis of the provisions on official statistics, are identified by means of these classifications, if for these goods or services the provisions of the Act or executive provisions issued on its basis refer to statistical symbols. In accordance with item 7.3 of the Methodological Principles of the Polish Classification of Products and Services included in the Annex to the Regulation of the Council of Ministers of October 29, 2008 on the Polish Classification of Products and Services (PKWiU), hereinafter: "PKWiU", including a given product in the appropriate grouping is the responsibility of the manufacturer (or service provider). This is due to the fact that the manufacturer (service provider) has all the information necessary to properly classify the product into the appropriate PKWiU grouping, i.e. information on the type of raw material used, manufacturing technology, design and purpose of the product or the nature of the service.
However, it should be emphasized that the classification made by the manufacturer (service provider) may not violate the principles of construction and logic of the PKWiU structure. In the event of difficulties in including a product (good) or service in the appropriate grouping in PKWiU, you can apply to the statistical authorities in this matter. The procedures for providing information on classification standards (including the Polish Classification of Products and Services) are specified in the Announcement of the President of the Central Statistical Office of 24 January 2005 on the procedure for providing information on classification standards.
Taking into account the above, design services should be qualified for PKWiU 22.214.171.124. Thus, they are not included in Annex 14 to the VAT Act. Design services are not subject to the reverse charge mechanism.
Design services performed together with other construction services
In business practice, the company often designs a building and then builds it. In the event that the above services are performed for the investor, the whole is subject to VAT. The situation is more complicated when the above is performed as a subcontractor. In such a case, taxpayers are faced with a dilemma as to whether design services can also be taxed on the reverse basis. Is it a comprehensive service in this case? The above was subject to an individual interpretation of the Tax Information Director of December 7, 2017, number 0114-KDIP1-2.4012.481.2017. Start a free 30-day trial period with no strings attached!
It should be emphasized that when qualifying given benefits in the context of considering them as complex activities, one should first of all look through the prism of the fundamental principle, according to which each service should be treated as separate and independent for the purposes of VAT taxation. It is only as an exception to this rule that the possibility of consolidating benefits into one may be allowed.
A complex (comprehensive) benefit takes place when the relation of individual activities (benefits) performed for one recipient divides them into basic benefit and ancillary benefits - i.e. those which enable the use of the basic benefit (or are necessary for the benefit of the basic benefit). ). However, if these benefits can be separated so that their nature or value is not changed from the acquirer's point of view, then such benefits should be treated as two (or more) independently taxable benefits.
Therefore, having regard to the above, it should be considered that the design services and construction services provided by the Applicant are independent in nature and may be performed independently of each other. As indicated in the supplement to the application, it is possible to perform design and construction services separately. Importantly, two orders were issued for the services in question, two separate cost estimates were made, then two separate acceptance reports were prepared and, consequently, two separate invoices were issued. Therefore, in the opinion of the Authority, both the design service and the construction service are a type of services that the buyer can buy separately, and therefore in the case at hand, we deal with separate services, i.e. the provision of construction services and the provision of design services, which should be taxed separately. VAT according to the rules applicable to them.