The District Court of The Hague recently confirmed that a business operator who applies the reverse charge mechanism for VAT must prove that this mechanism has been applied correctly. The Court rightly notes that the applicability of the reverse charge mechanism is not determined by the parties, but depends on the facts of the case.
Case
The case The case concerned a contractor who was commissioned by the municipality of Strijen to construct a school building. The tender specifications state that the reverse charge mechanism must be applied for the purposes of VAT. However, the Tax and Customs Administration takes the view that the conditions of the reverse charge mechanism have not been met and has levied €626,427 in VAT on the contractor, plus €85,717 in tax interest (the ruling makes no mention of a surcharge in the form of a fine).
Whether the contractor can recover the additional VAT (and the interest on the tax) from the municipality of Strijen is, of course, not part of the tax proceedings.
Deferral scheme
The reverse charge mechanism applies to the relationship between the subcontractor and the contractor in the context of works contracts. It does not apply to the relationship between the contractor and the client, except where the client qualifies as a so-called “DIY builder“.
The contractor in the case described above claimed that the municipality of Strijen was acting as its own builder, but was unable to provide evidence to support that claim.
In order to be regarded as the principal builder, the construction of the school building must form part of the client’s (the local authority’s) normal course of business. To this end, it is important to determine whether the local authority had overall control of the construction. The contractor failed to prove this. After examining the minutes of the construction meetings and other documents, the Court concluded that the relationship was, rather, that of a client and a contractor.
The construction meetings were chaired by a member of staff from the architectural practice. Meetings were regularly held without the municipality’s representatives, whilst the contractor’s representatives were always present. Furthermore, it appears that the architect’s fee also covered the supervision and management of the construction work, for which an external expert had been appointed with the municipality’s consent. The invoices also show that this external expert was frequently present during the construction work, meaning that the contractor would have dealt primarily with him rather than with the municipality’s representative(s).
Burden of proof
The manner in which the Court allocates the burden of proof in this case undoubtedly applies equally to other applications of the VAT reverse charge mechanism. It is, after all, established case law that a trader resident or established in the Netherlands who does not pay VAT at the standard rate (21%) on a supply of goods or services bears the burden of proving that they are correctly deviating from this general rule. Businesses would therefore be well advised not to apply the reverse charge mechanism lightly, even if pressured to do so by the client. After all, a supplementary tax assessment will inevitably land on the doormat of any business that has incorrectly applied the reverse charge mechanism.