On May 2, 2019, the CJEU delivered the judgement of paramount importance for the construction industry (ref. no. C-224/18 Budimex) concerning the establishment of the moment when the VAT on construction services is due.
In the case under consideration the Court presented the position that the VAT Directive’s regulations do not prevent establishment of the moment when a construction service is formally accepted by an ordering party. It is only required that the formality should be explicitly included in the agreement concluded by the parties, in line with the common standards of the industry, and be an effective finishing to the construction service, setting the final remuneration for the contractor.
The case under consideration was subject to the review from the CJEU as a result of a preliminary question from the Polish Supreme Administrative Court, which had been submitted in autumn 2017 in order to resolve the repeatedly communicated concerns on the part of the construction industry regarding the moment of the establishment of VAT taxability in case there was no properly issued invoice documenting the completion of service. The problem was whether VAT should be due at the date of the formal acceptance by the ordering party or at the moment when a construction service is actually finished, mainly understood as the moment when the contractor definitely vacates the constructions site. The latter position was presented by tax authorities bound by the general tax ruling issued by the Polish Ministry of Finance on 1 April 2016 no. PT3.8101.41.2015.AEW.2016.AMT.141. As a result, the tax authorities deemed that taxpayers often recognized VAT due too late, which consequently entailed the accrual of tax arrears interest, which, in case of multimillion construction contracts, had a major impact on the financial liquidity of the industry.
The CJEU judgement seems to effectively bring the above dispute to an end and it should be assessed positively as a ruling that takes into account the realities of the industry, particularly the common application of FIDIC standards, providing for the procedure of formal acceptance as an integral element of construction/assembly services.
What the judgement means for taxpayers in practice is that:
- firstly, their VAT reconciliations of construction services should be safe from now on. Even if they do not issue an invoice or issue it improperly, the establishment of taxable moment will not be too difficult. It is only important to bear in mind the requirements set by the CJEU in the judgement
- secondly, it will be possible to verify past VAT reconciliations and, if necessary, correct them in such manner that the VAT due will be recognized later than originally (if the taxpayer acted in line with the tax authorities’ practice). Potentially, if the establishment of VAT moment was subject to the scrutiny by authorities during formal proceedings, it will be possible to challenge the final decision within a one month term after the publication of the judgment sentence in the Official Journal of the European Union.