Italy wins EU approval for VAT split-payments
- Jun 14, 2015 | Richard Asquith
Italy has been granted approval from the European Commission (EC) to continue its controversial split-payments regime which involves public service bodies paying VAT on supplier invoices directly to the Italian Treasury instead of to the supplier.
Split-payments undermine core VAT principle?
The arrangement breaks with one of the key features of the EU VAT system, fractional payments of VAT by the companies in the supply chain until the final consumer. By instead requiring the public body to pay directly into a special, blocked bank account controlled by the Italian Treasury, the measure effectively turns VAT into a simplified Sales Tax. Italy recently had an application to introduce the VAT reverse charge on domestic sales in wholesale to retail supply chains. This anti-fraud measure would have similarly eliminated VAT staged payments from the system.
The split-payment measure was first introduced in January 2015 under the Italian Stability Law to help combat fraud involving public bodies, including hospitals and chambers of commerce. To continue to use the regime, Italy had to seek permission (a derogation) from the EC. It was estimated that Italy was losing €900 million per annum on public body VAT payments not being correctly remitted to the state.
The withholding of output VAT to the suppliers creates a cash flow problem for these businesses. Since they are not receiving any output VAT, they are being left with large input VAT credits from their own purchasing. Long delays in applying for refunds on these credit from the Treasury puts a big strain on these businesses. Since Italian VAT is currently 22%, this amounts to a huge burden on company finances and has hit the public construction sector the hardest.