One of the most important questions in the
construction industry is properly determining the VAT treatment of transactions
from the domestic reverse charge point of view. Although the legislation has
been valid for a while, our experience shows that implementation is not
consistent across the market, which results serious penalties.
The Hungarian VAT Act eliminates the need for
VAT financing for specific services connected to immovable properties; meaning
that the supplier need not charge VAT but the recipient self-charges and
ideally deducts VAT at the same time in its VAT return under the so-called
domestic reverse charge procedure. This possibility is available in connection
with construction and other similar works, which are treated as services
supplied for the purpose of building, expansion, remodeling and any other form
of alteration of a property, including where a property is terminated by
demolition, provided that this is subject to processing by the competent
building authority of which the customer shall supply a statement in advance
and in writing to the supplier of the service.
Incorrect qualification, however, may result in
significant penalty sanctions for either the supplier or the recipient. This
might be come from a tax shortage deriving from the uncharged VAT for the
supplier if the reverse charge method is used incorrectly. Similarly, unlawfully
deducted VAT could pose a problem for the recipient if the reverse charge
method is not applied in a case where it should have taken place. Both cases generate
a tax penalty of up to 50%, plus late payment interest, and a default penalty
up to HUF 500,000 (approximately EUR 1,560).
The qualification of a transaction is based on
several criteria that must be fulfilled simultaneously. There is a long list of
cases in which the domestic reverse charge is not applicable. This includes
design, scaffolding, removal of building materials, demolition debris, rental
of crane or other machinery, gardening, technical inspection, installing a
lift, and the sale of building materials. In real life, however, it is often
difficult to clearly qualify the services, as the contracts include elements of
both goods supply and service supply, falling or not under the reverse charge.
For such cases, the substance of the contract shall be determined to see what
the main goal and contractual intent of the parties was, and particularly of
the recipient. If it is a “mixed” transaction, and one of the transactions
supports the completion of the other work as an ancillary activity (performed
by the same entrepreneur), it shall be treated in the same way as the taxation
of the main activity. The same applies to “complex” transactions, when the
separate activities combined result in a new transaction regarding its
substance.
Built-in materials and components and the
relative volume of elements connecting to supply of goods vs. the services
itself, the timing of work prior to or after the release of the occupancy
permit, and different procedures at the construction authority are among areas that
may also typically lead to qualification problems.
Although it is required by law that the principal
makes a prior declaration about the eligibility of the project for the reverse
charge method, in practice it is often difficult to obtain such a declaration. This
is probably because of the risk associated with mis-characterization and due to
the surrounding uncertainties.
In the light of the above, agreements with
contractors and subcontractors must be assessed carefully, with an emphasis on
the substance and nature of the work. The involvement of a tax specialist in
the process may also help avoid penalties. In LeitnerLeitner you will find an
excellent partner: with the help of our EU-wide VAT network, we open a window
to Europe as a whole through one single contact person. LeitnerLeitner is a
member of the VAT Expert Group set up by the European Commission, which is a
further guarantee of our expertise.
