Only the largest companies benefit from split VAT payments. Most companies are afraid of upsetting their financial liquidity.
The National Fiscal Administration data shows that in the first six months since the introduction of the split payment formula, it was used by ca. 400 thousand entities.
The mechanism of divided VAT payments is used mainly by state-owned companies and other large enterprises. Among SMEs, only one in four is interested in using it, one in three sees its advantages. Although the split payment is associated with certain benefits, it has a major impact on companies’ liquidity. Some of the money is immobilised in VAT accounts, which may force them to use additional credit.
Split payment, or divided payment, is related to the formula of payment for an invoice, which is received by the buyer who is a VAT payer. This formula assumes that the net amount flows into our contractor’s account, the so-called clearing account, while the VAT amount flows into the VAT account, access to which is limited.
From 1 July 2018, the entrepreneur can divide the payment into two parts. The part that goes to a separate VAT account can only be used to settle the VAT payment with the tax office. The entrepreneur cannot use this account to settle, for example, the entire purchase invoice, income tax or social security contributions.
The mechanism of split payment is associated with certain benefits – it allows to reduce VAT liability – the faster the tax is paid, the bigger discount the taxpayer receives, and to receive a VAT refund in the accelerated period of 25 days, and also protects against additional sanctions in case the tax authorities question the right to deduct input VAT from the purchase invoices paid using this mechanism.
Split payment is mainly used by entities that receive large amounts of VAT on their own VAT accounts, with Treasury companies being the most prominent, which immediately accepted split payment to their contractors.
However, most companies are cautious about this solution. Last year’s survey shows that only one in four SMEs is interested in using split payments. Only one in three companies sees the advantages of using this solution. Most of them are afraid of the financial liquidity disturbance when a part of the money is blocked in the VAT account. In a situation where many entrepreneurs have problems with receiving timely payments from contractors, split payment may prove difficult to implement.
The more contractors pay a company on a split payment basis, the more cash flow problems it may have. In many relationships between counterparties, one can see actions that are deliberately aimed at not spoiling the counterparty’s cash flow.
The amendment to the VAT Act implementing mandatory split payment is likely to come into force in early 2020.