From 1 January 2016, the new rules apply to all taxable persons supplying periodically settled transactions!
You can read about the content of the new rules in our earlier post about periodically settled transactions. Now we would like to discuss the rules relating to the transfer to the new rules and give you a few practical examples on the types of transactions to which the new rules apply and on the settlement periods which are still judged according to the old rules.
Before starting to discuss the transitional rules, we have to note that the new rules introduced to accounting, audit and tax consulting services from 1 July 2015 are not only extended to all taxable persons supplying periodically settled transactions from 1 January 2016 but they are also modified at one point.
The modification is that from 1 January 2016, the 30-day rule relating to the term of payment changes to 60 days. Based on this amendment, if the due date of payment of the consideration falls on a date following the last day of the period concerned by the settlement, the date of settlement will be the due date with the supplementary requirement that the tax will have to be assessed on the 60th day following the last day of the period even if the due date falls on a later date. The new rule gives more room for the parties to the transaction in determining the due date of payment. The settlement date (and consequently, the date on which tax becomes payable) will be determined by the due date in the case of these transactions if the due date is not later than the 60th day following the given period. The new 60-day rule applies to all periodically settled transactions from 1 January 2016.
Probably the most interesting and most timely question regarding the new rules is when exactly they apply from, i.e. which is the first settlement period to which the new rules apply.
Based on the transitional provisions (Section 297) of the VAT Act, the new rules are applicable first for the periods involving settlement or payment starting after 31 December 2015 in the case of which payment is due and the date of issuing the invoice or receipt is after 31 December 2015.
What does this transitional rule mean exactly?
According to the wording of the act, in order for the new rules to be applicable, there conditions have to be fulfilled at the same time:
- the period in question must start after 31 December 2015,
- the due date of payment must be after 31 December 2015 and
- the invoice must also be issued after 31 December 2015.
If any of the three above conditions is not fulfilled, the old rules will apply to the transactions.
Now let us see a few examples to ensure correct transfer to the new rules.
Company “A” has a partner with whom monthly settlement was agreed. Based on their agreement, their settlement periods in the end of 2015 and the beginning of 2016 are from 26/11/2015 to 25/12/2015 and from 26/12/2015 to 25/01/2016. The due date of payment is the 15th day of the month following the given period in both cases (i.e. 15 January 2016 and 15 February 2016) and the invoices are also issued in 2016. The question is whether the date of settlement has to be determined based on the old or the new rules for to these periods.
As you probably guessed, the key to solving this case is in the transitional rules. We saw above that the new rules are only applicable to periods involving settlement starting in 2016 provided that the due date of payment and the date of issuing the invoice are also in 2016.
This means that the new rules will apply to both the settlement period 26/11/2015-25/12/2015 and the settlement period 26/12/2015-25/01/2016 as both periods started in 2015. This condition is enough in itself to preclude the application of the new rules because for the new rules to be applicable not only the date of issuing the invoice and the due date of payment have to be in 2016 but the settlement period must also start in 2016.
According to the old rule, the date of settlement is the due date of settlement of the consideration relating to the given period, i.e. the due date of payment (Section 58 (1) of the VAT Act). Therefore, the dates of settlement of the two periods will be 15 January 2016 and 15 February 2016. In the case of monthly tax return filing, these transactions have to be declared in the tax returns of January (to be filed until 20 February) and of February (to be filed until 20 March) respectively.
We have to note that if the service provided by company “A” was accounting, audit or tax consulting, the new rule would only differ from the old rule in that the rule relating to the due date of payment mentioned in the introduction would still be 30 days in this case. This does not change this specific example as in this case the due date of payment is the 15th day from the end of the period, i.e. it satisfies both the 30 and the 60-day rule.
The parties agreed on monthly settlement and their first settlement period for 2016 falls between 1 January and 31 January. Based on the parties’ agreement, payment is made in advance for each period, therefore the due date of payment for the January period is 31 December 2015.
As read above, in order for the new rules to be applicable all of the 3 conditions listed have to be fulfilled. In this case, not all of them are fulfilled as the due date of payment is in December 2015, therefor the new rules cannot be applied in this case even though the settlement period in question starts in 2016.
According to the old rule, the date of settlement will be the due date of payment of the consideration relating to the period of January 2016, i.e. 31 December 2015. For this reason, in the case of monthly return filing, the transaction will have to be included in the December tax return (to be filed until 20 January).
Now let us see an example to which the new rules apply.
In this case company “A” provides tax consulting services to company “B”. Similarly to the second example, the first settlement period between the parties is from 1 January 2016 to 31 January 2016. The parties agreed that the invoice has to be issued by the service provider on the last day of the period and the due date of payment is 15 March.
In this case, all three conditions of the transitional rules of the VAT Act are fulfilled as the starting date of the settlement period, the date of issuing the invoice and the due date of payment are all in 2016. From this it follows that the new rules will be applicable in this case, which also gives us the opportunity of presenting the rule amending the term of payment from 30 to 60 days.
According to the old rules, in this case the date of settlement would have been the 30th day following the given settlement period (1 March as we are talking about a leap year) because the term of payment is longer than 30 days from the last day of the settlement period (point b) of Section 58/A (2) of the VAT Act). However, according to the new rules, the 60-day rule must be used when determining the date of settlement, therefore the date of settlement will be 15 March in this case (point b) of Section 58 (1) of the VAT Act).
In the case of monthly return filing, the transaction will have to be declared in the tax return for March (to be filed until 20 April).
Transferring to new rules is never easy. However, before we start thinking about which new rule we have to apply, we must by all means ask ourselves the question whether we have to apply them already at all. We hope that this brief overview will help you in a seamless transition to the new rules.