Split payment has been in operation since last year. However, until now, it was optional for those who wanted to use it. Now, starting from November 1st, it will be mandatory for everyone. What is split payment, how does it work, and what does it look like in the scrap metal trading industry, for example?
What is split payment and how does it work?
Split payment is another name for the split payment mechanism. It involves the payment ordered at the bank being divided into the net amount, going from the buyer to the seller, and the VAT amount, which is then transferred to a special account designated for tax funds. This account is free of charge and maintained by the bank for each taxpayer’s corporate account. Consequently, the seller can freely dispose of the net amount received from the buyer, while the VAT amount is retained in a special account and can be primarily used to settle this tax. The advantage of split payment is that the seller gains protection for transactions by minimizing the risk of falling victim to a fraudster who would evade VAT, as the funds are directed to a dedicated account, demonstrating proper diligence in tax settlement according to the tax authorities. However, split payment is not without its drawbacks. Entrepreneurs fear that it may lead to a loss of financial liquidity due to limited flexibility in utilizing the funds in the VAT account.
Split payment in “sensitive” transactions
Usually, the decision to pay the entire amount to the seller’s main account or to use split payment is made by the buyer. However, starting from November 1st, split payment will be mandatory, especially for companies operating in industries recognized by the Ministry of Finance as the most sensitive to fraud related to tax evasion. The mandatory split payment mechanism will cover 150 types of goods and services that were previously subject to reverse charge, transferring the obligation to settle the tax from the seller to the buyer. These will include construction services, electronics (laptops, tablets, TVs, processors, phones), coal and fuel, steel and steel products, metals, scrap, secondary raw materials, as well as vehicle parts. From November 1st, the delivery of goods to electronics or automotive stores will be invoiced with mandatory split payment.
The risk associated with split payment
Entrepreneurs are concerned that mandatory split payment will reduce their financial liquidity. This risk arises from the lower amount they have at their disposal, which is even 23% lower than the amount for traditional purchases. If transactions are settled with other VAT-registered entities, the split payment should not affect the company’s solvency. However, settlements with non-VAT-registered contractors can lead to losses for the seller, as a surplus may accumulate in the VAT account that they cannot utilize. However, starting from November 1, new regulations will come into effect, allowing the settlement of such surpluses with other public-law obligations, such as income tax. It is also important to note that the mandatory split payment applies only to transactions with an amount equal to or exceeding PLN 15,000, concerning goods or services classified as “sensitive,” listed in Annex 15 to the VAT Act. If the invoice does not contain the notation “split payment mechanism,” the issuer may face a 30% VAT penalty on the value of sensitive goods.
Split payment in scrap metal trading
The concerns about financial liquidity due to the introduced changes are particularly significant for companies in the secondary raw materials industry, including metals and scrap. The new payment mechanism is set to replace the existing method, which was developed and effectively combatted the grey market and carousel fraud in this industry, known as the reverse charge mechanism for VAT. Representatives of this industry proposed this solution as early as 2008, which proved to be successful. Concerns about the disruption of liquidity in the raw materials industry due to the changes are therefore justified, as this industry is already struggling. The split payment mechanism will result in a lack of any transaction security for transactions up to 15,000 PLN, which will need to be settled under general rules, and the introduction of additional control procedures for these transactions will incur high costs. While split payment may be a better solution for the electronics industry, for the raw materials and metal industry, the reverse charge mechanism brought more benefits.