Domestic reverse charge VAT for construction services in the Netherlands
Construction projects typically involve a great number of contractors, subcontractors and companies outsourcing staff. In the Netherlands, special VAT rules can apply to the invoicing between companies involved in construction work. Similar to the reverse charge mechanism for intra-European B2B transactions, under certain circumstances, companies involved in construction work in the Netherlands are obliged to apply the reverse charge mechanism on the invoices for domestic B2B transactions. This means that the VAT liability is ‘reversed’ to the contractor or hirer of personnel on the invoice.
Incorrect application of this domestic reverse charge mechanism may lead to the loss of the right to deduct the VAT on the invoice. Risk of incorrect application is higher for foreign companies involved in Dutch construction projects, as whether or not the domestic reverse charge mechanism applies is also dependent on whether or not a fixed establishment exists. Therefore, foreign companies involved – or contemplating to get involved – in Dutch construction work, such as the building of new data centers, are advised to carefully analyze whether this regulation also applies to their invoices.
The reverse charge mechanism
When a company supplies goods or services to another company within one of the Member States of the European Union (EU), the selling company puts its VAT number on the invoice and charges the buyer VAT on the sale price. The selling party then puts the amount on the invoice as VAT turnover in the periodical VAT return and pays the VAT accordingly to the tax authorities. When bought as a business expense, the buyer can then put the VAT on its purchase in its VAT return and claim a refund for that amount.
In B2B transactions between companies each residing in a different Member State, this process can be subject to the reverse charge mechanism. Via the reverse charge mechanism, it is not the selling party but the buying party that is responsible for collecting and handing over the VAT amount to the relevant tax authorities. As such, the buyer puts its VAT number on the invoice – preventing the selling party from potentially having to register for VAT in the country it sells to – and puts the amount as turnover in its VAT return. Insofar a right to VAT deduction exists, the buyer can claim a refund for the VAT paid in the same tax return and as such the impact of the reverse charged VAT becomes nil.
Domestic reverse charge in construction
EU VAT legislation leaves its Member States some room to create additional reverse charge rules on certain domestic transactions. Designed as an anti-fraud protection, the Netherlands has opted to include amongst other areas construction work to apply these rules. This reverse-charge regulation is only applicable for physical work done for immovable property or ships (for instance construction, renovation, demolition, restoration). For non-physical work, like design or administrative work regarding the construction work, the reverse-charge regulation does not apply.
Under the domestic reverse charge procedure, the buyer (contractor) accounts for the VAT rather than the supplier (subcontractor). The supplier hands over an invoice without VAT, but reference must be made that the special reverse charge regime applies.
When subcontractors use other subcontractors for their work, the first subcontractor becomes the contractor in its relationship with the second subcontractor. As such, the second subcontractor should apply the reverse charge mechanism on its invoice to the fist subcontractor. The first subcontractor, however, will still reverse charge the VAT on its own invoice to the main contractor.
Not applying the reverse charge
When the subcontractor or company outsourcing staff wrongly omits the application of the reverse charge on the invoice, it hands out an invoice with VAT that suggests it will pay the VAT itself to the Dutch Tax Authorities. In principle, as a consequence, the company becomes liable to pay the VAT to the tax authorities, even though the VAT liability should have been reversed on the invoice.
In case the subcontractor or company outsourcing staff has already paid the VAT to the Tax Authorities, a VAT refund is generally allowed as a form of lenience upon discovery. However, when the VAT has not yet been paid, the Tax Authorities will not allow a refund and the VAT becomes an unnecessary liability.
Foreign companies involved in construction projects in the Netherlands should pay close attention as to whether the domestic reverse charge mechanism applies. Without a fixed establishment in the Netherlands, the domestic reverse charge mechanism does not apply as the VAT is to be reversed to the Dutch buyer on the basis of the rules regarding intra-community supplies. When the presence of a foreign company does constitute a fixed establishment in the Netherlands, however, it becomes relevant to check whether the domestic reverse charge mechanism applies.
Special rules apply to construction work when determining whether the presence constitute a fixed establishment in the Netherlands. A fixed establishment is usually only assumed in construction work after 12 months, although the precise details of the construction project can influence the outcome. If you have any doubt whether you should apply the domestic reverse charge on your invoice or whether your presence in the Netherlands constitutes a fixed establishment, please contact the VAT team of Crowe Peak.
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