VAT at 6% on building works “unworkable” say accountants

Portugal’s Association of Chartered Accountants (OCC) says that the government’s outline bill to reduce VAT on construction for own permanent housing is “unworkable” as it currently stands.

This is because it says it “ties the application of VAT to later checks done by a third party” which in the case of a person acquiring the property is after it was built.”

Paula Franco, president of the OCC, says she does not agree with the way that the measure has been worked out, and warns that “if it is passed like that, the only thing we can advise accountants is to advise no-one to apply” for the lower VAT rate”.

In other words, people could contract a builder to built them a house thinking the builders will only pay 6% only to discover afterwards that it might actually be the full 23% VAT rate.

Paula Franco will attended a hearing on the Budget, Finances and Public Administration Committee in parliament on Tuesday about the outline bill proposed by the government which aims to encourage more housing supply through the VAT reduction, providing the property is for own and permanent use by the acquirer and whose sale value does not exceed €648,000, regardless of location, be that new build or refurbishment of an existing property.

The association has overall been positive about the government’s outline bill, recognising the general need to have measures to respond to Portugal’s housing crisis by increasing offer and cutting costs.

But it has raised reservations of a technical nature regarding the VAT reduction because it raises legal and tax uncertainties for builders and accountants.

This is because it falls on the builders to decide if the properties they are building meet all of the requirements to benefit from VAT at 6%.

And there is an inversion of the taxable person in the sense that it is the contractor who issues the invoices without VAT and it is the developer who then self-assesses them and delivers them to the tax authorities afterwards.

Because if doubts arise later over the application of VAT at 6%, the tax authorities will chase the developer and ask for the accounts.

And it is here that the OCC sees problems. “How can the building firm, during construction, when they receive invoices and have to assess if it is 6% or 23%,  really be sure about the true situation later on?”

Because if the price, which is up to the individual builders, has to be corrected – in cases where someone will acquire a property that they may not actually live in as their permanent resident – this is completely beyond the developer’s control.

And if the conditions were not all met, there will have to be corrections, meaning the developer will have to pay the difference between the 6% VAT rate and the normal 23% rate.

“This represents a huge risk, and could take away all of the profit margin, because in practice it is a lottery”, says Paula Franco.

And the only way to sort out the problem is to no longer insist on the property being for own and permanent housing while also taking into account that in the case of regularizations interest rates may well also be applied.

The Architects’ Association, on its side, argues that architect projects should always be taxed at 6% and not just after the project is integrated with the building project as is foreseen.

SOURCE: Negócios

Image: OCC