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Legal aspects of the split payment mechanism


5 June 2018 


The regulations concerning the split payment mechanism with respect to value added tax will enter into force on 1 July. The benefits of this solution for state revenue in other countries which have implemented it (Italy, Czech Republic) are unquestionable. The mechanism is not regulated in the same way everywhere. In Italy, for instance, the mechanism is obligatory in sale to public institutions while in the Czech Republic it is optional.

Split payment – an option or an obligation?

Poland has decided to make the split payment mechanism voluntary. The Ministry of Finance emphasises that the split payment is voluntary and up to the buyer of goods and services. However, this freedom of choice may soon be taken. On 7 May 2018, the government approved the Finance Ministry's request to ask the European Commission for approval of the obligatory split payment mechanism in certain industries. The obligation would apply to e.g. construction and trade in electronics, steel and fuels. If the European Commission gives the government the green light, the obligation may start to apply at the beginning of the next year.

The right to dispose of the money in the VAT account

An interesting thing to consider if an enterprise chooses to split the payment is who owns the money on the VAT-registered taxpayer's account. According to the Polish legal definition of ownership, the owner has generally full title to a thing, including the title to posses, use, derive benefits and other income from it and the title to dispose of the thing.

Technically, the money in the VAT account belongs to the taxpayer, but to be able to dispose of it as usual (in compliance with the ownership right) the taxpayer will have to submit a relevant request to the Head of the Tax Office. The Head of the Tax Office may not agree to release the money in the VAT account to any other bank account. The lawmakers have given the taxman an open list of grounds for refusal to transfer the money to the taxpayer's ordinary account (Article 108b(5)(2a) of the Value Added Tax Act).

It is easy to see how the split payment mechanism violates the owner's rights to a thing (money in this case) as it limits the right to lawful disposal of the money. The inevitable conclusion is that the taxpayer is the owner of the money on his VAT account but it is the taxman who actually controls it. This is the fictional ownership of the money.
Businesses are afraid of losing their right to dispose of the funds in the VAT account as this may affect their financial liquidity.

Can a supplier avoid the split payment mechanism?

The issue of avoidance of the split payment mechanism marks a fine line between the tax laws and the freedom of contracts, which is regulated in the Civil Code. The interrelationships between those two branches of law are often unclear. That is why of key importance is the case-by-case examination of the legal relations between business partners to search for solutions which conform to the corporate standards, the letter of law, and the contracts already signed. In practice, the relations between the buyer and the supplier are not always based on written contracts that describe mutual rights and obligations of the parties. Very often the business dealings are based on an order form or oral arrangements. This poses an additional risk of misunderstanding as to the payment method for the services or goods.

Summing up, it is up to the enterprise to decide if it wants to actively manage the money earmarked for VAT in line with the company's financial strategy on the basis of the enterprise's review of the written and oral contracts signed with its business partners.


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Renata Kabas-Komorniczak

Tax adviser (Poland)

Managing Partner

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