Tax point in construction sector in the light of recent CJEU’s judgement
The rule for determining a tax point in case of construction and installation services is clearly specified by the Polish VAT regulations as the moment of issuing an invoice. Naturally, if the invoice has not been issued or has been issued too late, tax liability arises on the expiry of the time limit for issue of invoice, which is 30 days counting from the date of the supply of the considered services. Thus, the key point is to decide when the performance of service occur.
In practice, however, the concept of ‘when the services are supplied’ might be understood in different ways, as it is not defined in the VAT Act. Thus, the supplier of a service might consider his works as done, while the investor may refuse to sign the acceptance protocol because of notified defects or faults that have to be repaired. As a result, until the repairs are finished the ordering party may deem the same works as uncompleted, even over relatively long period of time. In fact, it is a standard procedure in construction sector that the ordering party should confirm the proper completion of service by signing the acceptance protocol. Usually only if this formality is fulfilled the contractor may issue an invoice.
However, over the past few years Polish tax authorities and courts assumed that in case of construction services the date when the service was actually supplied is crucial. Thus, the service was considered as completed, when the contractor notified the readiness for inspection in accordance with the general interpretation of Ministry of Finance dated on 1st April 2016.
Therefore, from the taxpayers’ point of view the judgement of the CJEU of 2nd May 2019 may have a positive impact on specifying the tax point. The main question to the Court of Justice in the case no. C-224/18 was, if performance of services occurs at the time of actual performance of the construction or installation works or at the time of acceptance of their performance by the client, assuming that both parties have agreed that payment for such works requires formal approval of the client. In its ruling, the Court noted that if the formality of acceptance was specified by the parties in the agreement, which reflects the economic reality of construction field and if obligation of signing the protocol by both entities is considered as a part of the service, then the date of formal acceptance shall be the date when the service is completed. Such approach is understandable taking into account the fact that until performed works, their quality and conformity with the contract are verified by recipient, the taxable base and as a result also VAT amount often cannot be specified. In such cases, as the Court noted, if it is not possible to determine the consideration due before the acceptance of customer, the VAT on such services cannot be chargeable before that final acceptance.
To sum up, the above judgement of CJEU, contrary to the current standpoint of Ministry of Finance and Polish courts, indicates that an acceptance protocol might be of key importance in specifying the tax point. However, it must be kept in mind that requirement of formal record of acceptance should be included in contract as an integral part of a service and necessary condition for payment. What is more, since the CJEU pointed out that such formality should reflect the conventional rules and standards of a particular sector, it would be advisable to ensure that acceptance procedures in agreements are in line with accepted principles and economic realities.
Junior VAT Consultant