The year 2018 will come with significant changes in the application of VAT on the construction industry. The changes will not only impact those working in the industry but also taxpayers who need to receive renovation services or purchase construction materials, as going forward the reverse charge of VAT will be applicable not only to services but also to goods.
Amendments have been made to Section 142 of the VAT Law, which notably expand the application of the reverse charge. The reverse charge will now be applied to any construction work regardless of whether or not there is a construction permit or any other certification on performance of construction work. It is not however clearly specified in the VAT Law to which services the reverse charge arrangement is going to be applied, neither has it been delegated to the Cabinet of Ministers to provide such an explanation. The only source containing an explanation on how to apply this provision is the methodical material prepared by the State Revenue Service (“SRS”) entitled ‘On the application of the special regime of VAT to construction services and supply of construction materials as of 1 January 2018’ (hereinafter – Methodical Material).
According to the SRS, the basic condition for the application of the reverse charge is whether the service impacts the internal or external walls of a building, and the floors or ceilings. This gives a rough idea to which construction works the reverse charge will be applied. It is explained there that all works related to the finish of floors/walls/ceilings, including tiling, wallpapering, painting, decorative finish of the façade, etc. are considered as construction works to which the reverse charge arrangement is applicable.
At the same time, the reverse charge is not applicable to maintenance of engineering communications or engineering networks, technical maintenance and other similar work. It is also emphasised in the Methodical Material that as far as VAT is concerned plumbing replacement, checking the natural gas system and making repair works, as well as replacement of electricity, water, gas and heat meters and similar works are not considered as construction works.
It will also be possible to continue to apply the current provision which permits application of the reverse charge to all services included in the total estimate in cases when a contract is signed on performing complex construction work. In such cases, construction work can also include installation of meters, landscaping, preparing construction designs, transport of construction materials etc. However, if these services are provided separately, the reverse charge is not applicable and the general VAT application principles must be used.
As of 1 January 2018, the reverse charge will also be applicable to deliveries of construction materials. It is specified in Section 142(8) of the VAT Law that supplies of construction materials are any “delivery of a product and industrially manufactured structure intended for building into a construction” but no additional explanation is provided either in the VAT Law or Cabinet regulations. It is therefore recommended to follow the guidance provided in the Methodical Material which explains how to apply VAT. The appendix to the Methodical Material entitled ‘Categories of goods to be used to determine construction materials’ contains a list of construction materials to which the reverse charge is applicable going forward. This list is developed based on Annex IV ‘Product areas and requirements for tabs’ to Regulation (EU) No 305/2011 of the European Parliament and of the Council laying down harmonised conditions for the marketing of construction products and repealing Council Directive 89/106/EEC. The annex includes products of 35 categories, including blocks, internal partition kits, covers, structural bearings, baulks, pipelines, windows, doors, etc., and products that are not initially associated with the term of the law “product and an industrially manufactured structure”, for example, angular rock, gravel and sand, ground and paints, nails and screws, glues, etc. Consequently, it is recommended for taxpayers who are in any way related to supplies or purchases of such goods to carefully examine the list available on the website of the SRS, and the documents underlying the list, to be able to assess which tax regime is applicable to the particular supplied or purchased goods.
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