The split payment mechanism
Regulations introducing the split payment mechanism for VAT entered into force in Poland on 1 July 2018. This mechanism in B2B transactions is designed as a weapon in the fight against VAT fraud.
The essence of split payment is that the net amount due for goods or services (excluding VAT) is paid by the buyer to the seller’s ordinary bank account (or settled in some other way), while the VAT portion is paid into a special, segregated account of the seller’s—a VAT account.
Payment via the split payment mechanism is made using a tool provided by banks (and thrift institutions—SKOK) known as a transfer note (komunikat przelewu). It may be described as a special transfer format or form in which the customer ordering a bank transfer provides additional information about the issuer of the invoice or the invoice itself. This enables the bank to divide the payment into two streams so that the correct amounts are charged and credited to the current account and the VAT account. The specific technical solutions involving the transfer note depend on the bank and can differ from bank to bank. In addition to details identifying the recipient, the transfer note must also include the following information:
- The amount corresponding to all or part of the VAT under the invoice which is to paid via the split payment mechanism. The taxpayer itself indicates the amount of tax to be paid to the VAT account (equal to all or part of the VAT), and the bank is not required to verify the correctness of how this amount is defined by the taxpayer.
- An amount corresponding to all or part of the gross sale price. It appears that the entire gross amount due under the given invoice should be stated here, and it may differ from the amount of the transfer (the sum of the amount designated as VAT and the net amount being paid via the split payment).
- The number of the invoice in connection with which the payment is being made. There seems to be nothing preventing the buyer from providing several invoice numbers if the buyer wishes to use one split payment to settle multiple invoices issued by the same seller.
- The number by which the supplier of the goods or services is identified for VAT purposes. Here the NIP number of the seller shown on the invoice should be provided.
Who gets split payment?
The split payment mechanism is applied only for transactions involving payment to other VAT payers, i.e. business-to-business transactions. Consequently, the mechanism does not affect purchases made by consumers (not operating a business), who have no legal means or factual interest in making split payment (particularly given the limitations on use of funds in the VAT account).
However, the split payment mechanism may apply to any entity with the status of a VAT payer, including those not necessarily registered for VAT purposes in Poland. The VAT regulations define a VAT payer (or “taxable person” in VAT parlance) as any entity that independently conducts economic activity, regardless of the entity’s legal organisational form or the aim or result of the activity. The status of a taxpayer is connected exclusively with the subjective side of VAT. In particular, the construction of a taxable person is distinct from the notion of a tax obligation, and ascribing the tax obligation to another entity does not eliminate the status of being a VAT payer. A taxpayer for VAT purposes is an entity that conducts economic activity, but not necessarily activities that are subject to VAT and thus would be subject to a tax obligation (regardless of the territory of taxation). What is key for determining the status of an entity as a VAT payer is that the entity is deemed to be performing economic activity. In this respect, the economic activity need not be conducted in Poland, but can be conducted anywhere. This can be vitally important for foreign entities, particularly as they usually have a lower awareness of Polish law than entities from Poland. From the technical side, it can also be key to determine whether a bank account in Poland is a business account (for which the bank is required to open a VAT account).
The split payment mechanism can be applied only in payments made by transfer, regardless of the amount due.
Split payment may be used only to pay invoices indicating an amount of VAT. It may not be used to pay invoices documenting activities exempt from VAT or not subject to VAT (as when using split payment, some amount of VAT must be paid). The net amount alone may not be paid using split payment. On the other hand, the split payment mechanism may be applied regardless of whether the amount of VAT indicated in the seller’s invoice is subject to deduction by the buyer.
Split payment may be made only in Polish zloty. This is because VAT must always be indicated in the invoice in PLN, regardless of what currency the invoice is denominated in. This does not mean, however, that an invoice denominated in foreign currency may not be paid using split payment. For example, split payment may be used where only the VAT is paid in this form (in zloty), while the net amount of the invoice is paid from a foreign currency account (using an ordinary bank transfer).
Voluntary, but not entirely
Split payment is a voluntary solution for taxpayers. But information from the Ministry of Finance suggests that work is underway aimed at making split payment mandatory in certain industries. This refers to payments for invoices involving purchase of “sensitive goods,” i.e. those listed in Appendix 13 to the VAT Act. According to reports from the market, state-owned companies are making extensive use of split payment.
Generally the decision to use split payment is made entirely by the buyer of goods and services. Under the VAT regulations, the entity most interested in the use of this solution, i.e. the issuer of the invoice who is to receive payment, cannot oppose the use of this solution. Thus, if the parties do not agree otherwise, the customer paying an invoice has a choice as to the form of payment, including the right to use split payment. However, there do not appear to be any legal barriers preventing the parties to a transaction from exercising the freedom of contract to agree on solutions:
- Encouraging the buyer not to use split payment, or even
- Actively discouraging the use of split payment, including prohibiting the use of this payment method. (But this raises the question what damages the seller could claim or what loss it could require to be redressed for violating such a prohibition. Thus, for such a prohibition not to be illusory, a contractual penalty could be provided for, to be charged to the buyer for paying the invoice using split payment.)
However, the VAT Act reserves to the buyer the right to use split payment. Thus any contractual provisions concerning the use of split payment would be binding only between the parties.
If nonetheless the split payment mechanism is used, the seller may need to introduce mechanisms for tracking payments, particularly in terms of linking receivables with bank statements. Moreover, if the seller has more than one VAT account, it may present difficulties in determining the current amount of funds in those accounts available for use (for purposes permitted by the regulations).
Undoubtedly the split payment mechanism has an unfavourable impact on taxpayers’ financial liquidity. Funds in a VAT account can be used only for:
- VAT payments to the tax office account
- VAT payments to a supplier’s VAT account
- VAT refund (under a corrected invoice).
Only at the taxpayer’s written and justified application, the head of the tax office may, within 60 days, issue an order consenting to other use of funds in the taxpayer’s VAT account. This prevents the use of excess funds in the VAT account to pay other obligations—even other taxes.
Joint and several liability
The split payment mechanisms can also result in joint and several liability for VAT obligations on the part of entities other than the supplier of goods or services. If a payment using the split payment mechanism is made to a taxpayer other than the one indicated in the invoice, the taxpayer to whom the payment is made is jointly and severally liable with the supplier of the goods or services for the unpaid tax arising out of the supply of goods or services, up to the amount received in its VAT account. But joint and several liability of such a taxpayer other than the one indicated in the invoice to whom a VAT payment is made is excluded in the event of:
- Payment by that taxpayer to the VAT account of the supplier of the goods or services indicated in the invoice
- Refund of the payment, in the amount received, to the VAT account of the taxpayer from whom the payment was received, promptly after learning of receipt of the payment.
It is understood that these provisions apply to entities intermediating in the transfer of payments under VAT invoices, e.g. factors or providers of securitisation services.
An intermediary may also be released from joint and several liability if it makes the payment to the supplier indicated in the invoice before receiving payment from the buyer (debtor), as it should be irrelevant if these events occur in the reverse order.
Joanna Prokurat, tax adviser, Tax practice, Wardyński & Partners