The introduction of a compulsory split payment is linked to high expectations of the effectiveness of this system in the fight against VAT fraud. At the same time, the introduction of such a solution means admitting that the previously developed reverse charge system in domestic transactions failed to pass the test.
A few days ago, the Sejm adopted a bill that introduces a mandatory split payment mechanism, the so-called split payment in certain sectors.
Additional note on invoices
The mandatory use of split payment will apply from 1 November 2019, will concern transactions carried out in the course of trade in goods and services indicated in the new annex to the VAT Act, whenever the gross value resulting from the invoice exceeds 15,000 PLN gross.
The mandatory application of this mechanism means that for such transactions it will not be possible to exclude it (e.g. in the rules or in a contract with a counterparty). It is an additional formal obligation to include in the invoice the words "the mechanism of the split payment".
The legislator attaches great importance to posting this entry on invoices, as it is one the procedures to prevent irregularities in invoices, therefore, for not including such an invoice provision, it is possible to impose a tax penalty of 30%.
At the same time, the possibility of non-application of penalties was provided for where, despite the absence of an appropriate invoice marking, the purchaser would regulate in the split payment mechanism the amount corresponding to the amount of tax per delivery.
The mandatory use of split payment will apply from 1 November 2019, will concern transactions carried out in the course of trade in goods and services indicated in the new annex to the VAT Act, whenever the gross value resulting from the invoice exceeds 15,000 PLN gross
Elimination of fraud
The extension of the scope of the compulsory split payment is linked to actions aimed at eliminating fraud, including carousel type. According to the justification for the draft law, the proposed solution aims to replace the current reverse charge regime for sectors at risk of fraud and extortion.
When presenting the bill, the authors pointed out that the system of reverse charge developed so far in domestic transactions was not effective. As a result of the efficacy analyses carried out, it was found that the use of reversed loads in certain industries (e.g.
trade in steel products), with which one of the parties achieved the desired results, since in this area the operation of the tax carousel has been practically prevented; however, the other parties to the tax carousel system have moved their activities to other areas, to other industries.
Such application of the reverse charge system selectively — addressed to taxable persons operating in industries considered to be at risk of extortion — has thus indirectly caused a very negative effect on the “infection” of subsequent areas of the economy by criminal activity.
The fiscal impact from the state budget was also unsatisfactory, as in the years when the reverse burden on selected industries was introduced the VAT gap increased rather than the expected reduction in the scale of fraud. This means that the organizers of effective carousels were still one step ahead of the tax administration.
It has been noted that due to the need for analyses, and then the legislative process, this temporary delay effect may persist permanently. It was therefore necessary to seek an alternative solution that would make it more difficult or even impossible to operate procedures for extortion.
Practice of use
The split payment mechanism in which taxpayers have a limited possibility of having funds for VAT settlement purposes can fulfil this role. The split payment mechanism successfully functions, among others, from 2015 in Italy, where the recovery improvement soon exceeded the original assumptions.
However, the Italian split payment is based on the bank accounts of the tax authority, which is a significant difference to the Polish model in which the VAT bank account and the funds collected on it remain the property of the taxpayer, but with restrictions on the availability of these funds.
This mechanism operates in Poland since 2018 as a voluntary form of payment regulation. Due to its transparency, it was decided that it would be an appropriate tool to limit criminal activities in areas exposed to extortion.
The introduction of a compulsory split payment will entail the resignation of the reverse charge in domestic transactions in Poland.
Since its application means the need to change the mandatory elements of VAT invoices, which is related to the Community system of value added tax, Poland had to obtain the approval of the EU Council to derogate from Article 226 Directive 2006/112, which regulates the content of the invoices used in the Community system. Appropriate agreement to introduce a specific measure derogating from that provision was obtained by Poland in Council Implementing Decision (EU) Directive 2019/310 of 18 February 2019
The scope of the compulsoryplit payment is to cover economic sectors related to the turnover of scrap metal, electronics, engine and automotive parts and accessories, the provision of construction works.
We encourage you to check whether transactions carried out by your company will be covered by the mandatory split payment from 1 November This year: Annex 15 VAT - available below.
Author
Leszek Dutkiewicz Partner at Russell Bedford.
From 2011 related to Russell Bedford Poland. In years 2008 – 2011 worked for leading consulting companies (Ernst&Young, KPMG, BDO) providing tax advisory services. He specializes in tax and economic law, primarily in international tax law, tax proceedings, VAT and transaction prices. Author of a publication on tax, civil and international law issues. Lecturer in tax law training. He has legal education, in 2008 graduated from the Faculty of Law and Administration of the Jagiellonian University.