The split payment mechanism for business-to-business transactions entered into force on 1 July 2018. Introduction of this mechanism was motivated by the aim of closing gaps in the tax system. But split payment affects not only the situation of VAT payers, but also banks.
In simple terms, the split payment mechanism enables buyers of goods and services in Poland to effect payment using a special transfer note, splitting the amount indicated in the VAT invoice they have received into a net portion, payable to the supplier’s regular current account, and a VAT portion, payable to the seller’s VAT account. The mechanism is voluntary, but whether to use it is left in the discretion of the buyer of goods or services, and it cannot be excluded that it will be become a nearly universal mechanism due to the domino effect—particularly as some large state entities have already declared that they will elect to use this mechanism.
Its introduction may have a major impact on the liquidity of taxpayers who have so far been able to make full use of the amounts paid under invoices to finance their current operations, and may also impact the situation of banks financing such customers. Below we present selected instances where the split payment mechanism will affect the relations between banks and their borrowers.
By operation of law, banks have been required to open and maintain VAT accounts for their customers.
A VAT account is an account to which the supplier has very limited rights. Basically, the funds in the VAT account may be used only to pay VAT (either to the tax office’s account as output VAT or to the account of its own suppliers as input VAT). The VAT account cannot be encumbered with security interests and is not subject to execution (except to collect VAT).
Until now, the funds which a borrower received from its customers as payment for VAT were not segregated from other funds, and the borrower could trade in those funds. Similarly, the accounts to which those funds were paid could be the subject to security for banks.
Enabling use of the split payment mechanism
The borrower’s use of the split payment mechanism is tied to certain advantages. The VAT Act provides that using split payment excludes the possibility of assessing an additional VAT obligation against the borrower, up to the amount of the payment made in that form (for example in a situation where the taxpayer erroneously calculated the amount due under a VAT declaration, or issued an invoice to a non-existent entity because it was entangled in a VAT carousel scheme). The act also limits the possibility of charging taxpayers using the split payment mechanism increased interest at 150% of the regular rate (more on which here). Consequently, the split payment mechanism can have significant advantages for borrowers.
Thus banks planning to accommodate their customers’ expectations should include appropriate mechanisms in their documentation facilitating the use of split payment. The solutions currently used in credit agreements, typically involving execution of transfers directly by the bank, do not provide for the possibility of executing a transfer using the special transfer note required for making split payments. Depending on the provisions of the specific credit agreement, enabling split payment may require major changes, particularly in instances where control of the borrower’s cash flow plays a key role for the bank (e.g. real estate loans and restructuring situations), or where the borrower’s cash flow is used to pay down debt (e.g. a revolving credit facility).
The bank should also consider whether admitting this possibility will be advantageous to it in every instance, particularly whether it generates a threat to repayment of financing (e.g. from the perspective of the borrower’s liquidity, or when a transaction financing the acquisition of assets by the borrower has not gone through and it is necessary to reverse the payment). Additionally, when drafting provisions enabling the use of the split payment mechanism, it is important to pay specific attention to the provisions introduced into the Banking Law governing the bank’s obligations connected with operation of VAT accounts and the method for debiting and crediting such accounts (e.g. in the case of borrowings in the current account).
Split payment and assignment for security
The split payment mechanism may have a major impact on the bank’s use of assignment for security—in particular due to the bank’s potential liability for amounts received through the split payment mechanism.
Under the regulations governing the split payment mechanism, a taxpayer who has received payment to its VAT account but was not indicated in the invoice is jointly and severally liable with the supplier (here, the borrower) for payment of the VAT which the supplier does not pay. Such liability is limited to the amount of the payment to the VAT account received by the bank. Such liability is excluded e.g. by transfer of such payment to the supplier (here, the borrower) or returning it to the buyer of the goods or services who made the payment.
If the assignment for security is unconditional, and payments are made directly to the bank, the parties should consider whether the provisions concerning receipts from claims assigned to the bank adequately reflect the possible inflow of funds under the split payment mechanism. In the case of conditional assignments, similar provisions should be considered in the event that the condition occurs. The absence of appropriate provisions could mean that from the point of view of the assignment agreement, the gross payments received by the bank in the split payment mechanism will be regarded as repayment of the debt, even though the bank does not have full access to those funds.
Introduction of the split payment mechanism may have a major impact on the legal situation of borrowers as well as the relationships between banks and borrowers. In establishing these relationships, the parties should consider both the benefits flowing from the split payment mechanism and the related risks (particularly arising out of the limited access to funds in the VAT account).
Joanna Prokurat, Tax practice, Wardyński & Partners
Artur Bednarski, adwokat, Banking & Project Finance practice, Wardyński & Partners