Design documentation prepared by a construction company chargeable with VAT in accordance with general principles as a separate service
Since the reverse charge mechanism was implemented for subcontractors of construction services, proper classification of transactions and identification of an entity obligated to settle VAT has been causing a lot of problems for taxpayers. One of the problems is to specify properly the subject matter of services listed in Annex 14 to the VAT Act, including whether performance connected with those services as ancillary performance should be taxed as an element of the comprehensive service in the same way as the main service. This issue was also addressed in an individual binding ruling issued on 2 January 2018 by Director of the National Fiscal Information (ref. no. 0111-KDIB3-1.4012.562.2017.2.KO)
Performance of certain services must be preceded by preparing appropriate design documentation. And that was the case of a taxpayer providing services connected with construction, reconstruction and repair of electricity grid who applied to the tax authority with a question whether a service consisting in the preparation of design documentation (building and execution documentation) for the reconstructed line and the performance of construction and assembly works (covering e.g. supply and assembly of poles, lines, equipment, line reconstruction, works connected with start-up, performance of tests, disposal of the existing line) should be settled under the reverse charge procedure, treating it as a comprehensive service.
According to the company, the service provided by it should be treated as comprehensive performance, and consequently ancillary performance (preparing a design and performing formal and legal activities) should be subject to the same tax regime as the main performance (construction service). Since the services provided by the company should be included, as confirmed by way of interpretation of the Office of Statistics in Łódź, under PKWiU (Polish Classification of Goods and Services) code 42.22.2 “General construction works for electricity and telecommunication lines”, the entire service, as falling under Article 17 paragraph 1 item 8 in conjunction with paragraph 1h of the VAT Act, will be subject to reserve charge mechanism. To support its position, the applicant referred to a judgment of the CJEU of 27 October 2005 in case Levob Verzekeringen BV and OV Bank NV, which is of key significance for comprehensive services, as well as to the case law of administrative courts, and at the same time emphasised that the essence of activities performed by the company is to construct a specific facility (and so to provide a construction service), while ancillary activities, like preparing a design as well as formal and legal activities are indispensable for proper performance of the contract’s subject matter, so they are not a goal on their own, but only contribute to better performance of the construction service.
On the basis of the existing background information, Director of the National Fiscal Information made different interpretation of the provisions (ref no. 0111-KDIB3-1.4012.562.2017.2.KO), indicating that if the provided service is comprised of activities that do not only serve the purpose to perform the main activity but may be also of stand-alone nature, there are no grounds for treating them as an element of the comprehensive service. As emphasised by the tax authority, the company first prepares a design for its own needs because without a design it would not be able to perform the engagement (a design itself renders it possible to prepare technical documentation and obtain necessary building permits), and next the rights to the design are transferred to the purchaser. Hence, according to Director of the National Fiscal Information, the sale of designs (design documentation) is of stand-alone nature and constitutes separate performance, independent of performing construction services. The purchaser may buy both a design service and a construction service separately. Consequently, the reverse charge mechanism should be applied only to a strictly construction service, and preparing a design should be taxed in accordance with general principles.
The above position is in conformity with e.g. a binding ruling issued on 19 July 2017 (ref. no. 0115-KDIT1-3.4012.233.2017.1.APR), as well as explanations given recently by the Ministry of Finance. However, binding rulings to the contrary have also been issued to this topic. For example, a binding ruling of 5 April 2017, ref. no. 1061-IPTPP2.4512.64.2017.2.KW.
Important for taxpayers operating in the construction industry may be also a question for a preliminary ruling, referred by the Supreme Administrative Court on 28 November 2017 (ref. no. I FSK 65/16), regarding the significance of delivery and acceptance protocols. The CJEU is to decide whether in a situation where the parties agreed that in order to pay remuneration for construction or construction and assembly works, the contracting party must accept their performance in a respective acceptance protocol, a service is performed upon actual completion of works (the authorities and administrative courts are inclined to adopt such interpretation of the provisions, which is not favourable for taxpayers) or upon acceptance of the performance of works by the contracting party, expressed in an acceptance protocol.
In view of different positions of tax authorities regarding the treatment of services connected with construction works and construction and assembly works as a comprehensive service, we may hope that tax authorities will make their position uniform in this regard.
Barbara Otrzonsek, Tax Consultant, ATA Tax Sp. z o.o.