VAT on construction work due at the time of its formal acceptance

Recently, the CJEU issued an important judgment regarding the VAT settlement of construction services, which can be of major significance for construction companies operating in Poland. The Budimex ruling may affect the practice on the Polish market, primarily in the area of:

• dispute proceedings regarding construction works. Until now, the lack of invoices and non-payment of tax on work awaiting acceptance was associated with significant tax and penal-fiscal risk.
• drafting construction contracts – not every form of acceptance will affect VAT, the VAT obligation will arise at the time of acceptance of works only if it is a prerequisite for determining whether the result actually corresponds to prior arrangements. Other formalities will not have the same effect.
• VAT refunds – taxpayers who paid VAT in similar circumstances as indicated in the Budimex case may consider applying for the reimbursement of previously paid VAT.

On 2 May 2019, the Court of Justice of the European Union handed down a precedential judgment in a case between Budimex S.A. and the Ministry of Finance (case no. C-224/18) stating that VAT on construction work and assembly work is due at the time of their formal acceptance, not at the moment of their actual performance.

However, according to Polish law, VAT liability for construction work arises when a respective invoice documenting such work is issued or upon the lapse of 30 days following their actual performance where an invoice is not issued.

Due to the above, from the Polish VAT perspective it is crucial to determine the moment of actual completion of construction work. According to the common approach presented by the Polish tax authorities, the obligation to pay VAT arises at the time of the actual performance of construction work and/or a notification about its completion.

However, in the discussed case, the Court stated that VAT cannot be due before the formal acceptance of the construction work where the contracting party had a right to check whether such work complies with the terms of the contract, and at the same time the supplier was obligated to carry out the necessary modifications, and it is impossible to determine the service fee prior to this acceptance.

Consequently, construction work is considered to have been performed at the time of its formal acceptance by the contracting party, not at the moment of its actual performance. Therefore, VAT on such work can be charged after that acceptance.

Simultaneously, the Court provided that the formal acceptance has to be stipulated in the contract and has to reflect the conventional rules and standards in the field in which the service is provided.

In practice, the discussed judgment should limit situations where a supplier is obligated to pay VAT on construction work at the moment of its performance but is unlikely to receive payment from the contracting party due to some of the work being disputed (in some cases payment could be withheld until the end of a court dispute). The judgment will also affect how construction work contracts are drafted.

Furthermore, taxpayers who paid VAT in similar situations may also consider applying for tax refunds.