The VAT reverse-charge mechanism for construction work is being modified. And the new conditions for exercising VAT deduction according to actual use will create legal uncertainty. Those are the two major new developments in the area of VAT to consider in early 2023. We will explain both of them in detail.
Traditionally, we give you an overview of some of the new VAT developments you can expect to see in 2023.
Reverse-charge of VAT on construction work
The rule that the payment of VAT on construction work is mandatory reverse-charged if the work is performed for a VAT taxpayer who files periodic VAT returns (also known as the "co-contractor" arrangement) is amended in two respects.
Not established in Belgium, but having Belgian VAT number
If the customer is a company that is not established in Belgium but has a Belgian VAT number, then reverse-charging of VAT for construction works is only possible today if the company appoints an individual tax representative. This is not required for companies based in the EU, and by extension the UK and Norway. They can apply "directly" for a Belgian VAT number. If the customer is a company that is not established in Belgium with direct Belgian VAT registration, then VAT must be charged today on the invoice for construction work.
From 1 January 2023, VAT on construction work must also be reverse-charged if the customer is a foreign company with direct Belgian VAT registration.
Special exemption regime
VAT taxpayers benefiting from the special exemption regime for “small enterprises” or the special regime for“agricultural enterprises” do not file periodic VAT returns. For that reason they are not allowed to communicate their Belgian VAT number to Belgian contractors who carry out construction work for them. Contractors must always charge VAT to such VAT taxpayers for construction work in Belgium. To prevent contractors from unfairly applying the reverse-charge for construction work, the regime changes as follows with effect from 1 January 2023:
- The prohibition for “small enterprises” and “agricultural enterprises” to communicate their VAT number to Belgian contractors is lifted. If they communicate their Belgian VAT number, they must inform the contractor from now on that they do not file periodic VAT returns.
- If a VAT taxpayer-customer fails to disclose that it does not file periodic VAT returns, the contractor must issue a “VAT reverse-charge” invoice for the construction work. In addition, the invoice must contain the following mandatory reference:
Reverse-charge. In the absence of a written dispute within a period of one month from receipt of the invoice, the customer is deemed to acknowledge that it is a taxpayer required to file periodic returns. If that condition is not met, the customer is liable with respect to that condition for the payment of the tax, interest and fines due.
This statement releases the contractor (except in the event of collusion between the parties) from its liability with regard to the VAT status of the customer, if the latter does not dispute the invoice in writing.
Exercise of VAT deduction according to actual use
A mixed VAT taxpayer exercising its right of deduction according to actual use:
- has full entitlement to VAT deduction under the normal rules for goods and services intended exclusively for its activity that gives entitlement to deduction.
- has no entitlement to VAT deduction for goods and services intended exclusively for an activity that gives no entitlement to deduction.
- For the VAT on goods and services intended for both activities, one (or several) special ratio(s) should be established if possible.
Today, the prior agreement of the competent VAT administration is required to exercise the right of deduction according to actual use. From 1 January 2023, a correct and timely (i.e. prior) notification to the VAT administration will suffice for this purpose. This prior notification must be done through the electronic declaration of commencement or change of activity (E-604A or E-604B).
However, this seemingly simplifying measure contains some unexpected pitfalls.
- The prior notification must take place before the end of the period covered by the first VAT return of the calendar year. This is either before 31 January for monthly submitters or before 31 March for quarterly submitters.
- For companies that on 31 December 2022 already apply their right of deduction according to actual use, this notification must take place before 30 June 2023.
- When the economic activity commences or changes so that the company becomes a mixed taxpayer, this notification must be filed before the last day of the first VAT reporting period following the commencement/change of activity.
Effective date of the notification
- The notification shall take effect on 1 January of the calendar year in question. When such notification is the result of the commencement or change of the company’s activity, the effective date is the first day of the VAT reporting period following the commencement or change of that activity.
- The notification is effective for an indefinite period that runs at least until 31 December of the third year following the effective date of the notification.
Communication of certain data
- A company that applies the principle of actual use must communicate certain structured data annually through the VAT return in INTERVAT.
- Those data must be communicated when filing the periodic VAT return for the first quarter or one of the first three months of the current calendar year.
Important note: what if the prior notification is not made in a timely manner or the additional data have not been communicated? In that case, the company cannot exercise the right of deduction according to actual use. This can be done at the earliest from 1 January of the following calendar year, subject to timely prior notification.
Refusal of actual use
- The VAT administration may, by a reasoned decision, refuse the exercise of the right of deduction according to actual use or subject the application to other criteria that are acceptable to the VAT administration.
- This refusal decision is communicated no later than 31 December of the year following the year in which the initial notification by the company took effect. This gives the VAT administration almost two years to notify its decision! This means that, before the end of that period or before such a refusal decision, a company cannot know for sure whether the criteria it used in the original notification will be accepted by the administration.
- Moreover, that refusal decision has retroactive effect for an indefinite period of time from the first day of the VAT reporting period in which the notification was made by the company.
- Finally, a refusal decision may take the form of a correction notice or a report in the case of a subsequent regularisation.
The question arises what remains of earlier agreements or rulings on the conditions of deduction according to actual use. Does the VAT administration now have two years to reconsider?
Mandatory application of the principle of actual use
- The VAT administration can still require a mixed taxpayer to exercise the right of deduction according to actual use. This can happen when the administration finds that the application of the general ratio leads to inequality in the levying of VAT. For example, when applying the general ratio results in a significantly higher deduction than when the principle of actual use is applied. The conditions of this procedure are now being defined more specifically.
- The administration's decision is communicated by registered letter and specifies the date from which it has effect. This is, in principle, on the first day of the reporting period of the notification of this decision, but may in certain cases also be retroactive.
If you have questions about what these new developments mean for your business, please do not hesitate to contact our VAT team.