Domestic reverse charge in construction

What it means

The domestic reverse charge in construction is a mechanism under which VAT on construction work between two VAT payers is accounted for by the customer rather than the contractor. The contractor issues an invoice without VAT marked as reverse charge, and the customer calculates the tax, declares it and deducts it at the same time.

The aim is to curb fraud where a contractor collects VAT and never pays it over. For an ordinary payer with full deduction the mechanism is tax-neutral, but it changes cash flow: the contractor receives no VAT on the invoice and the customer does not pay it to the supplier, only reports it in the return.

Classification is what counts. The mechanism covers construction work falling within the relevant section of the statistical classification of products, and the supply of a building or part of one where it is carried out as construction work. This includes work under contracts for work, subcontracting on sites, installations and similar.

How it works in practice

Before invoicing, assess whether the work counts as construction under the classification. Installing air conditioning in a building usually does, while supplying the unit without installation does not. In borderline cases it is worth asking the statistical office for a classification opinion.

The reverse charge applies only if both parties are VAT payers in Slovakia. If the customer is a private individual or not VAT-registered, the contractor invoices with VAT in the normal way. The customer's registration must therefore be checked as at the supply date.

The customer reports the invoice received in the return as both output and input tax, and both parties include it in the VAT control statement. For retention money and advances, the tax point follows the general rules on supply or receipt of payment.

What to watch out for

Misclassification affects both sides. If the contractor charges VAT where reverse charge should apply, the customer is not entitled to deduct that tax, and the authority may assess the tax against the contractor. In the opposite case the output tax is missing.

A contractor invoicing mostly under reverse charge may be in permanent excess deduction, as it pays input VAT but charges none. This must be factored into cash planning, along with more frequent audits of excess deductions.