Cyprus reverse charge VAT for construction services

21 June 2012

As of 9 March 2012, B2B construction services in Cyprus are to be supplied at zero VAT as part of harmonisation with European VAT compliance rules.  The taxable entity will be the recipient of the services, not the supplier.  The  recipient of the services, for example a principal building contractor receiving construction services from a sub-contractor such as a joiner, will require to use the reverse charge mechanism to account for the VAT on the transaction.  This requires the recipient of the service to charge itself on its periodic return declaration, the correct percentage VAT amount on the supply made, but as it is a purchase, and provided it is allowable, the input VAT suffered can also be deducted. 

Cyprus has followed other EU member states with the introduction of the reverse charge to the building services sector. The aim of the finance ministry was to provide a much needed boost to the industry.   Cyprus, like Spain and other Mediterranean countries involved in tourism linked property development, has suffered a melt-down since the economic crisis kicked in.  There has been significant unemployment.  A second aim of course is to ensure that VAT is properly accounted for with no leakage in terms of sub-contractors late or non-payment of their tax liabilities.

While there are clear benefits to main contractors, the sub-contractors who as part of their services are dependent on the supply of goods such as building materials, aluminium, windows, doors, timber, suffer.  The sub-contractor requires to pay VAT to its suppliers for these goods.   Now, under the new rules, the sub-contractor will not be able to utilise the facility as before when it was possible to deduct the VAT suffered from the VAT collected.   As no VAT is collected, the sub-contractor’s VAT return declaration shows a credit.

To obtain a cash refund when returns are quarterly, could take a further 3 months or longer for this to actually take place, resulting in significant cash hardship for smaller sub-contractors.  Many are traditionally finely balanced entities without the necessary wherewithal to stand the cash flow broadside.  

It is clear from recent news that Cyprus businesses in the sector are highly dissatisfied.  It was reported by “Cyprus Property News” that demonstrations took place on 31 May.  Members of the Cyprus Employers and Industrialists Federation and the Chamber of Commerce protested outside parliament buildings, calling for the abolition of the new mechanism. The authority, it is also reported, stood its ground, restating what it considered was the benefit to the industry in general; asking for parties to give the new regulations time following implementation; promising refunds in reasonable time; and advising that VAT should not be considered as part of business operating capital.  The statements will be unlikely to placate the protestors, whose placards referred to bankruptcy, unemployment, and family distress as a result of the new rules.

If you wish further information on Cyprus VAT please click here

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