VAT on your own construction work: an explanation of the amended law

On 29 November 2017 amendments were made to several points in the VAT Code. This amended law was explained by the administration on 12 February (in the Circular 2018/C/20). In this article we aim to consider the consequences of the amended law for companies constructing their own company building or carrying out their own repair/maintenance or cleaning work.

Former situation
Whenever a VAT-registered party constructed its own company building to serve its own economic activity, this was considered under article 19, §2, 1st paragraph in the VAT Code as a service to itself. This meant that a “document” (internal invoice) was required as a tax measure, recording “the normal value” of the service undertaken and on which 21% VAT was charged. The normal value equated to the price that would have been charged between two independent parties for such services. The VAT could then be recovered by the tax payer depending on the extent to which he was entitled to such. New buildings are subject to revision period of 15 years. Therefore the VAT on the normal value came under the 15-year revision period.

Example
a company has purchased materials to the value of 500,000 EURO (excl. VAT) for the construction of a new building in which to carry out its taxable activities. If such construction had been carried out by an independent contractor this would have cost 800,000 EURO. In this case it would have been necessary to generate an internal document for an internal service to the value of 800,000 EURO + 21% VAT (168,000 EURO). The VAT could be deducted by the company in the same declaration, but remained subject to the 15-year revision period.

Criticism from Europe
The European Commission criticised the compatibility of our law with European legislation. After all, European law dictates that assimilation of a service for pecuniary interest should not entitle the intended tax payer to enjoy the full tax deduction right (article 27, in the VAT directive). Our national legislation was too broad because the service assimilation applied to all tax payers, regardless of whether they qualified for a full or partial deduction or no deduction at all.

Amended law
Modifications to the law dated 29 November 2017 have aligned the Belgian VAT Code with European legislation, with an amendment to article 19, §2. From now on, once the work is complete, the tax payer shall no longer be expected to take action to assimilate the service for pecuniary interest. The tax payer shall therefore no longer obliged to create a “document” (internal invoice) at that moment, in order to establish the taxable activity, and shall no longer be required to pay VAT on such activity. The construction of a new building does, however, remain an asset and, as such, all VAT that has been deducted on the expenses incurred to construct the building (e.g. the purchase of materials) must be considered for the VAT levied on assets subject to a revision over a 15-year period. The required details must, as such, be recorded in the table of company assets in order for these to be followed up.

The fundamental difference between the old and new legislation in terms of the revision obligation is therefore the amount of VAT that is subject to revision, should the building undergo a partial or full change in usage following construction and become one that does not qualify for VAT deduction. Under the old legislation the VAT amount requiring revision when a building was constructed was indeed the entire deducted VAT amount owed on the assimilation of the service performed for pecuniary interest, calculated on the normal value. Under the new legislation the taxable VAT amount for revision on the other hand is limited to the entire deducted VAT amount owed on the expenses involved in constructing the building.

Therefore, in our example, construction of the same building, for which 500,000 EURO worth of materials were bought, only 105,000 EURO VAT will be subject to the 15 – year VAT revision period (as opposed to 168,000 EURO under the former legislation).

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