Tax Partner at RSM Poland
In newsletter 15/2018, we informed that the Minister of Finance published tax explanations concerning the split payment mechanism (hereinafter referred to as: SPM). Today, I am presenting my first post about the details. Based on the explanations and questions we had received from you, we have created a list of frequently asked questions about the introduction of the SPM. If you are still wondering whether to use the split payment mechanism or not, I encourage you to read my comments.
WHAT IS SPLIT PAYMENT MECHANISM?
The SPM (split payment mechanism) is a new form of settling payables resulting from invoices received; it can be used between business partners to pay an invoice with VAT shown on it. The basic underlying assumption of the split payment mechanism is an automatic split of the amount payable into two streams:
- the amount corresponding to the amount of the standard invoiced VAT, transferred to a dedicated supplier’s bank account, known as VAT account and
- the amount corresponding to the invoiced net sales value, transferred to the settlement account/SKOK (Cooperative Savings and Credit Unions), linked with the VAT account.
WHO IS COVERED BY THE SPM?
The split payment mechanism is used only for B2B (Business-to-Business) transactions. This means that it is not possible to use the SPM for B2C (Business-to-Consumer) transactions.
WHEN DID THE SPM REGULATIONS ENTER INTO FORICE?
The split payment regulations entered into force in the Polish legal system on 1 July 2018 pursuant to the Act of 15 December 2017 amending the Act on Value Added Tax and certain other acts (Journal of Laws of 2018, item 62). This means that the SPM can be used for payments made from 1 July 2018 onwards, thus it may be used for payments resulting from invoices issued before 1 July 2018.
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MANDATORYIS THE USE THE SPM MANDATORY?
No. The split payment mechanism is voluntary: the purchaser of goods or services can (but does not have to) use a money transfer sheet splitting the amount of the VAT into a separate VAT account of the supplier. Under the Act on Value Added Tax, there is no obligation to use the SMP at present. The Ministry of Finance is now in a dialogue with the European Commission about introducing an mandatory split payment mechanism. At first, the mandatory split payment would be introduced in sectors with the highest levels of tax fraud, i.e. fuel, construction, electronics, scrap-metal or steel trade sectors. The decision of the European Committee is expected to be issued at the end of the year; we will keep you posted as regards any progress in this respect.
CAN A SUPPLIER OF GOODS OR SERVICES inTRODUCE a provision PROHIBITING ANY SETTLEMENTS IN THE SPM REGIME TO THE CONTRACT WITH THEIR CUSTOMER?
Yes. In the explanations, the Ministry of Finance clearly stated that the supplier (as the recipient of a bank transfer) may, in the contract, reserve the right to reject the SPM as a form of settlement with a given customer. This is possible mostly due to the freedom of contract, being one of the fundamental principles of trade. On the other hand, let us remember to exert caution in transactions with new customers whose integrity raises any doubts. Using the SPM is one of the premises of due diligence (more information can be found on our blog, e.g. HERE).
DOES THE PURCHASER HAVE ANY FREEDOM IN DECIDING ON HOW OFTEN AND HOW THE SPM IS USED?
Yes, it is the purchaser who decides which invoice will be paid using the SPM, in what part and for which supplier. It means that the split payment may be used selectively, both when it comes to invoices and customers. What is more, the purchaser can choose what part of the invoiced amounts they want to pay using the split payment regime. For they may pay either the entire or a part of the amount corresponding to the invoiced VAT amount.
HOW CAN THE TAXPAYER USE FUNDS ON THE VAT ACCOUNT?
Funds on the VAT account may be used for:
- paying the amount of invoiced VAT for the purchase of goods or services;
- paying VAT to the tax office;
- paying additional VAT payables or interest for late payment of VAT;
- paying tax on the intra-EU supply of fuel;
- if you have a couple of VAT accounts in one bank or one SKOK (Cooperative Savings and Credit Unions), funds on the VAT account may be freely transferred from one VAT account to another.
Unfortunately, paying any other public receivables, e.g. income taxes or social security contributions from the VAT account is prohibited. Funds on the VAT account may be used for limited purposes; however, the taxpayer has the right to request the head of a tax office to release the funds from the VAT account and transfer them to the linked taxpayer’s settlement account or a SKOK account (details of the procedure of releasing funds from a VAT account will be discussed in the next post).
WHAT COSTS ARE GENERATED BY THE SPM?
The opening itself and running of VAT accounts is free of charge. However, the use of the SPM will increase the costs of single bank transfers, as banks or SKOKs will charge standard fees for transfers within the SPM regime. In addition, we should consider the costs of an increased administrative burden.
DOES THE USE OF THE SPM REDUCE THE TAXPAYER’S FINANCIAL LIQUIDITY?
Unfortunately, the taxpayer may use funds on the VAT account for limited purposes only, which may cause problems with their financial liquidity. However, it all depends on the entrepreneur’s individual situation. Let us consider a situation in which the taxpayer’s main (or the only) supplier chooses the SPM regime for settling transactions with him. Undoubtedly, the fact that the amount corresponding to the tax value is blocked on the VAT account is going to diminish the supplier’s financial liquidity in this case. If you cannot use the funds on your VAT account, it may have negative implications, like a late payment of remuneration to employees or missing a profitable offer for the purchase of goods or services as there are no sufficient funds to buy them. As a result, entrepreneurs may incur additional liabilities, i.e. external funding which involves additional costs, obviously.
CAN ENTREPRENEURS WHO DO NOT USE THE SPM EXPECT MORE FREQUENT AUDITS?
There are no regulations or guidelines of the Ministry of Finance providing for more frequent audits of entrepreneurs who do not use the SPM. The Ministry assures that a taxpayer whose tax returns do not raise any doubts does not have to fear facing any additional tax audits only because they are not using the SPM.
How to proceed with a corrective invoice? Is it possible to make a collective transfer within the SPM regime? How to transfer funds from a VAT account to another VAT account or a settlement account? I will try to answer these and some other questions in the next part of our series. Therefore, if you have decided to use the split payment mechanism, I encourage you to read our blog.
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