Since 4 July 2014, a mechanism for reverse charging VAT has been in place in the construction and public works sector, where work is carried out by a subcontractor on behalf of a principal who is liable for VAT.
The tax due on construction work carried out by a subcontractor must henceforth be paid by the principal. Subcontractors are no longer required to pay the VAT due on such work.
However, subcontractors will still have to comply with VAT reporting requirements and with tax representation requirements in the case of those who are not established in the Principality of Monaco.
Types of work covered
Reverse charging of VAT applies to construction work, including repairs, cleaning, maintenance, alterations and demolition carried out on a property by a subcontractor (regardless of its level in the case of subcontracting chains) on behalf of a principal who is liable for VAT.
It applies only to subcontracting (of work on a property), which is defined as a process whereby a contractor, through a contract (known as the subcontract) and under its authority, entrusts to a subcontractor the execution of all or part of a contract to provide services, or part of a public contract which has been concluded with the client. The subcontractor always acts on behalf of the principal contractor who bears liability.
The measure applies only to subcontracting agreements relating to a property located in the Principality of Monaco (or any quote, signed purchase order or other document which enables the agreement between the parties to be established) which was concluded after 4 July 2014.
Services supplied in accordance with purchase orders, supplementary agreements or the exercise of contract options on conditional lots after 4 July 2014 but which relate to framework contracts or subcontracting agreements signed before this date are not affected, unless the contract or agreement was subject to renewal by tacit agreement after this date and the services themselves were provided subsequent to the date on which the tacit renewal took effect.
NB: an identical VAT reverse charging procedure applies in France to services supplied as part of agreements to subcontract work relating to a property in France signed on or after 1 January 2014 (more information by clicking here).
The following activities are not covered by the VAT reverse charging procedure:
- Cleaning activities which are part of a separate subcontracting agreement
- Delivery of a tangible asset that will be used to equip the property which is the object of the works (for example, when the company holding the contract or the subcontractor asks another company to manufacture equipment or carry out specific pieces of work)
- Intellectual services entrusted by construction companies to research consultancies, building economists or engineering companies
- Contracts for the hire of machines and site equipment, including where the hire includes onsite installation and dismantling
Reverse charging mechanism
Previously, VAT was invoiced to (and therefore collected from) the principal by the subcontractor, then declared and remitted to the State by the subcontractor when the invoice was paid. Henceforth, the tax must be paid by the principal, that is, the contractor who holds the contract.
For the subcontractor
A subcontractor who carries out work covered by this mechanism should no longer invoice VAT for the work.
In addition to the usual information, invoices must include the following note: “reverse charging – VAT payable by purchaser – Article 62-4e of the Turnover Tax Code” to explain why the subcontractor has not collected the tax and make it clear that VAT is payable by the taxable principal.
The total cost of the work excluding tax must be recorded on the VAT declaration under “Other non-taxable activities” (line 12).
Tax paid as a result of completing this work can be deducted according to the conditions laid down by law.
Where the subcontractor is paid directly by the client, the client should pay the amount excluding tax and the principal contractor (who subcontracted the work) reverse charges the VAT.
For the principal contractor
The principal contractor is now responsible for the VAT on construction work which it subcontracts.
The purchaser of such services must declare the cost excluding tax of works which have been carried out on its behalf under “Other taxable activities” on its turnover declaration (line 9 and line 32 for the breakdown of the VAT owed).
The tax can be deducted according to the conditions laid down by law (deductible VAT should be broken down on line 73).
Note: failure to reverse charge the tax is punishable by a fine of 5%.