In the field of real estate development and, specifically, in the execution of works carried out between developer and contractor, it is common to find the figure of reverse charge in this area; however, how does this figure work and how is it regulated?
First of all, it should be noted that reverse charge is the figure in which the legislation provides, in certain cases, that the taxable person is the business or professional who receives the supply of the goods or the provision of the service, being an exception to the general rule that the taxable person for VAT will be the business or professional who supplies the goods or provides the service. Thus, the recipient of the good or service will be the one who will charge VAT to himself, having input VAT and output VAT for the same transaction.
In the field of construction work, its regulation is contained in Article 84.1.2 letter f) in which the taxable person may opt for the inversion of the taxable person for this modality, with or without the contribution of material, as well as in the transfer of personnel, and which are the consequence of contracts directly formalised between the promoter and the contractor and whose object is the urbanisation of land or the construction or rehabilitation of buildings.
Thus, it is necessary to establish the definitions and requirements for VAT purposes for each of these modalities:
a) Land development: according to the DGT, the development of land is all those actions that are carried out to provide the land with the elements provided for by urban planning legislation (road access, water supply and drainage, electricity supply, etc.).
b) Buildings: the definition of buildings, in accordance with the provisions of Article 6 LIVA, which establishes that buildings are constructions permanently attached to the ground or to other real estate, both above and below ground, which can be used independently and autonomously.
c) Refurbishment: the definition of refurbishment can be found in the tax regulations themselves, where Article 20.Uno.22.B) states that:
- That more than 50 percent of the total project cost corresponds to consolidation works or treatments of structural elements.
- That the total cost of the works referred to in the project exceeds 25 percent of the purchase price of the building under certain conditions.
For practical purposes, and once the necessary requirements have been met to be able to apply the reverse charge in the execution of the work, the invoice issued must include a legend expressly stating that the transaction is covered by this type of reverse charge.
Therefore, the reverse charge in the execution of works is a modality that facilitates the liquidity of high value works in the real estate market with minimal interference from a tax point of view, since by using this figure, companies do not find themselves in the position of having to advance payment of VAT, despite its future deductibility and/or refund by the Tax Agency.
