Success for SK&S’ tax team in VAT proceedings

SK&S’ tax experts – Piotr Andrzejak, partner heading the VAT practice, and Stanisław Gordziałkowski – obtained two favorable judgments from the Voivodship Administrative Court in Warsaw for a leading construction firm. The judgments confirmed the absence of VAT on the value of construction work which was stopped as a result of a dispute between the contractor and the client in a situation where the discontinued work was not paid for.

In the course of the tax proceedings, the tax authorities calculated the VAT obligation accepting that since the construction work was stopped, and that as a result of the dispute the works will not be continued, a VAT liability arose for the company with regard to the sums sought from the client. The company did not agree with this position, arguing that the construction assignment had not been completed as a result of a withdrawal from the construction work contract, and the claims sought by the company from the client also include compensation amounts and are questioned in their entirety by the other party. In the company’s view, the important fact was that there can be no question of performance of a construction contract (in full or in part) if the construction work was not accepted by the other party.

In two judgments (case ref. III SA/Wa 2586/15 and III SA/Wa 3598/15), the Voivodship Administrative Court in Warsaw set aside the negative decisions of the tax authority and fully agreed with the company’s position. The Court pointed out that, when determining the appellant’s tax obligation, what is important is not the date of performance of the service, but rather the moment of receipt of payment of all or part of the price. The Court essentially shared the view that with regard to construction work which was stopped and which was not finished in full or in part, and was not confirmed or accepted by a handover report, and in particular was not paid for by the client, the tax obligation does not arise until the moment of payment.

These judgments are of key practical importance for taxpayers who are in dispute with clients or investors because, to date, the tax authorities have stated that in a situation where work is stopped, the taxpayers are obligated to pay VAT on the value of the construction work at the time they were stopped (although the contractors did not receive payment for the work carried out), which in practice meant taxpayers were threatened with insolvency. Further of importance is that in its judgment, the VAC cited a pro-EU interpretation of the provisions of the VAT Act and in particular the judgment of the ECJ of 16 May 2013 in case C-169/12. As a result, although the case concerned the laws in force in 2013, the theses presented by the VAC may also be applicable to VAT settlements concerning the law as it stands at present.