Split payment mechanism – how to use it

by Monika Bartosiewicz

29 May 2018

The split payment mechanism will be added to the Polish legal system with effect from 1 July 2018 on the basis of a new chapter in the VAT Act.

The Ministry of Finance believes that the split payment mechanism will tighten up the value added tax system by, among other things, curtailing tax fraud and abuse. It is supposed to eliminate the risk of taxpayers who having been paid the VAT by their business partners vanish without remitting it to the tax authorities. The split payment procedure will apply exclusively to electronic payments (e.g. bank transfers) for B2B transactions or to direct debit transactions within the meaning of the Payment Services Act. The split payment procedure will be allowed only between VAT taxable persons that have an account with a Polish bank. The recipient of the transferred sum must hold at least one PLN account with a given bank. The split payment procedure may be used to pay trade liabilities in whole or in part.

The lawmakers wanted the split payment mechanism to work exclusively for the invoices received, so in theory it cannot be applied to pro forma invoices or used to make payments on the basis of an agreement only. Furthermore, theoretically, it will not work for mass payments either. However, the bank does not have to, and actually has no option to, check if the invoice number defined in the wire transfer message is correct.

Separate VAT account

Under this new procedure the purchaser transfers to the seller's (checking) account only the net amount shown on the invoice. At the same time, the equivalent of VAT is automatically transferred to the seller's dedicated VAT account.

Criteria for using the new solution

The most fundamental condition to be able to use the split payment mechanism is to receive a VAT invoice with the disclosed tax amount (Article 108a(1) of the VAT Act).

To fill in the wire transfer message, which is a technical requirement to proceed with the split payment, it is necessary to provide the following details also to confirm the buyer's will to use it:

1. the full or part of the tax amount shown on the invoice;
2. the full or part of the gross sales value (so if the invoice includes any other amounts that are not liable to VAT, those amounts should not be included);
3. number of the (correcting) invoice paid for;
4. tax identification number NIP of the supplier of goods or services.
   

The split payment mechanism may be used also when the supplier of goods or services issues a correcting invoice and money is refunded e.g. as a discount. The tax identification number NIP of the buyer has to be specified for that.

The split payment mechanism is not available to foreign enterprises which are registered for VAT in Poland but do not have an account here. Equally important, the split payment can be used for payments in Polish zloty only.

Wrong transfer – joint and several liability

If a buyer makes a transfer to a taxpayer other than the supplier of goods or services, the owner of the credited account and the supplier of the goods or services will be liable jointly and severally. Their liability will be limited to the amount of tax credited to the VAT account.

That liability is excluded if the amount transferred to the VAT account is refunded immediately after receiving a notification of the transfer or if the money is immediately transferred to the VAT account of the actual supplier of the goods or services. A taxpayer who receives the money by mistake should also use the dedicated wire transfer message and provide his tax identification number.

(Theoretical) benefits of the split payment

The split payment mechanism is voluntary for buyers. The following incentives have been designed to encourage taxpayers to use it (Article 108d of the VAT Act):

1. The first incentive is available to buyers of sensitive goods (listed in appendix 13). If such a buyer opts for the split payment he will be protected from regulations on joint and several liability, but only up to the amount of tax shown in the invoice paid for using the mechanism.

2. The second incentive deals with the penalty for filing incorrect VAT returns.  The authorities will not assess extra tax at the rate of 30% or 20% of the tax amount (under Article 112b(1)(1) and Article 112b(2)(1) VAT Act) shown in the invoice if a taxpayer files an incorrect tax return but pays for that invoice using the split mechanism.

3. Another incentive for users of the split payment mechanism is the waiver of the extra tax liability of 100% (under Article 108c(1) VAT Act) of the tax deducted from an invoice which:

• has been issued by a non-existent entity;
• is for transactions that have not taken place;
• is for an untrue amount;
• documents transactions governed by Articles 58 (absolute invalidity of legal transactions) and 83 (fictitious transactions) of the Civil Code.

Nevertheless, the tax authorities will assess extra tax or will claim that the joint and several liability laws apply to the taxpayer if the authorities establish that the taxpayer knew that an invoice paid for using the split payment mechanism was issued under any of the abovementioned circumstances.

Therefore, this incentive is likely to be used rather sporadically.

4. Another incentive is the waiver of the increased late payment interest (referred to in Article 56b of the Tax Act) whenever tax arrears arise in the accounting period in which the taxpayer discloses input tax of which at least 95% comes from invoices he pays in the split payment procedure. This privilege is restricted, too. If the tax arrears exceed twice the amount of input tax disclosed in the tax return, the taxpayer is obliged to pay interest calculated in line with Article 56b of the Tax Act.

5. The last of the new articles concerning the split payment in the VAT Act provides incentives to taxpayers who pay VAT before the statutory deadline. If a taxpayer pays the tax before the deadline using his VAT account, his tax liability will be reduced by the amount calculated using a formula defined in Article 108d(1) of the VAT Act.

The amount of the VAT rebate will be calculated as follows and rounded to full Polish zloty:
tax amount declared x NBP's reference rate as of two days before the tax payment x number of days before the payment deadline / 360.

In our opinion, most privileges which the lawmakers have designed for the users of the split payment mechanism are ostensible. This becomes particularly clear when you have a look at the Finance Ministry's guidelines for due diligence of buyers in domestic transactions. In fact, noteworthy is mainly the last of the incentives. Yet, it is not actually an incentive for the payer using the split payment but rather the recipient of such payments.