In our recent issue of News Flash, we have informed you about changes introduced in the area of VAT as of 1 January 2016. One of the most important changes is an introduction of so-called reverse-charge in provision of construction works.
Reverse-charge mechanism
Taking effect in 1 January 2016 a taxpayer who is the recipient of a supply from another taxpayer shall be obliged to pay the tax attributable to:
- the supply of construction works that belong under section F of the statistical classification of products by activity according to Guideline of European Commission (EU) No. 1209/2014 of 29 October 2014 amending Regulation (EC) No. 451/2008 of the European Parliament and of the Council establishing a new statistical classification of products by activity (CPA) and repealing Council Regulation (EEC) No. 3696/93
(hereinafter referred to as “CPA classification”),
- the supply of construction or its part under any contract for work or another similar contract that belong to section F of the CPA classification,
- the supply of goods with installation or erection, if the installation or erection is a construction work that belongs under section F of the CPA classification
(hereinafter referred together to as „construction works“).
Conditions of reverse-charge
Inland reverse-charge from the provider of taxable supply to the recipient will apply in provision of construction works only in case, if the following conditions are met:
- the subject of delivery are construction works belonging under the section F of classification CPA,
- the place of delivery of goods or services is within the Slovak Republic,
- supplier and recipient are tax payers inland, i.e. they are registered for tax purposes pursuant to § 4, 4b, 5 and 6 of the Act on VAT.
New guideline in this matter
In this matter, we would like to draw your attention to the new Guideline on Classification of construction works into section F of statistical classification of CPA that has been issued by the Financial Directorate of the Slovak Republic recently.
We are ready to provide you with the English version of the Guideline upon request.
Section F – Constructions and construction works contain the following divisions:
- 41 – Buildings and building construction works (groups: residential buildings, non-residential buildings, construction works for residential and non-residential buildings – new works, additions, alterations and renovation works)
- 42 – Constructions and construction works for civil engineering (groups: roads and railways; construction works for roads and railways, construction and construction works for engineering infrastructure, other civil engineering projects and construction works for other civil engineering projects)
- 43 – Specialised construction works (groups: demolition and site preparation works, electrical, plumbing and other construction installation works, building completion and finishing works, other specialised construction works).
In the light of practical experience resulting from the application of reverse charge to the recipient of a supply in the building sector, in the context of classification, the cases of works the character of which can be linked to division 43 or division 33 of the CPA classification prove to be of concern. They involve installation works, repairs or maintenance of different devices that are firmly attached to buildings.
Please note that if more supplies are subject of a delivery within the established contractual relationship, for the correct tax regime of value added tax will be important to find out if there is single composite supply with one tax base or several different supplies.
In case of the single composite supply, it is crucial to determine what is the main supply and which supplies are ancillary to the main supply. Reverse-charge will apply to the supply as the whole only if based on the agreed contractual conditions it is clear that there is only single composite supply and the main service, which determines the character of provided supply, is a service of construction Works classified in the section F of classification CPA.
Otherwise if a single composite supply is a subject of the contractual relationship, where the main supply does not belong to the section F of the classification CPA, the normal tax regime will apply to the supply as a whole, and this also in case when within this supply, constructions works that belong to the section F of classification CPA, are provided as ancillary to the main supply.
In case of several different supplies which do not constitute one inseparable economic supply, reverse charge will apply only by services of construction works which belong to the section F of classification of production and normal regime will apply to other single services.
If a taxpayer received a payment before the delivery of construction works before 1 January 2016, the normal tax regime will apply to the received payment, i.e. the supplier of construction works will be obliged to pay the tax on received payment (pursuant to § 69 par. 1 Act on VAT), and this also in case the delivery of construction works will be done in 2016.
After the delivery of construction works in 2016, the reverse-charge will be applied to a recipient of supply, a taxpayer, from the difference of the total tax base for construction works and tax base from the granted payment by which the tax duty has arisen to the supplier before 1 January 2016.
