Change in VAT regulations on temporary employment

According to the regulations of the VAT Act in force, the value added tax is paid by the recipient of the service for the supply of goods and services in the case of hiring or posting labor, providing staff or using the services of a school co-operative or a public pensioner cooperative (reverse taxation). Including activities that are not subject to a building authority permit or building authority acknowledgment procedure.

From 1 April 2021, the scope of reverse taxation in the field of temporary employment is going to be narrowed. The VAT Act was amended due to the fulfillment of the obligation to harmonize the law of the European Union, after the European Commission did not support the request of Hungary in which it requested the further maintenance of the generally applied reverse VAT regarding temporary employment.

All this means that from 1 April 2021, temporary employment will no longer be subject to reverse taxation in general.

Reverse taxation will only apply to temporary employment related to construction work in connection with the following activities:

• supply of goods, i.e. the transfer of real estate created by construction and installation work to be entered in the real estate register according to point d) of § 10 of the VAT Act, or
• construction and installation work for the creation, extension, alteration of real estate and other installation work

It is also worth keeping in mind that according to the regulation of the VAT Act, temporary employment may be sub-ject to reverse taxation in case of construction work, regardless of whether the construction work itself is subject to a permit for which the labor is outsourced.

However, reverse taxation will only continue to apply in the remaining cases if the other conditions for reverse taxa-tion are met, so all the parties concerned are domestically registered taxpayers, and none of them has a legal status un-der which the tax cannot be claimed from them.

If the temporary employment is no longer subject to reverse taxation in accordance to the rules in force from 1 April 2021, the cases in which the rules on direct taxation are to be applied first shall be determined in accordance with the following:

The main organizing principle for the transition period

The date of performance has a fundamental importance in the classification of transactions, as according to the VAT rules, the factual realization of the transaction, i.e. the performance results in a tax liability. Consequently, when deter-mining whether the rules of reverse taxation or direct taxation are applicable to a given transaction, it is necessary to examine whether or not the date of performance of the given transaction is before the date of entry into force of the amendment of the VAT Act.

In the field of temporary employment, the service is mainly accounted for periodically, for which special perfor-mance rules (Section 58) are set by the VAT Act. However, even in these cases, the main management principle must be followed.

Detailed presentation of the change

If the performance date of the transaction is before the effective date of the amendment, the reverse charge rules will still apply.

Similarly, if the performance date of a given periodic transaction under the regulation of Section 58 is before 1 April 2021, the rules of reverse charge shall be applied, even if the particular period extends the ef-fective date partially or the whole period follows the date of entry into force.

In such cases, the taxpayer carrying out the transaction must issue an invoice which does not include the value added tax or the tax rate and the words 'reverse taxation' must be indicated on the invoice.

The tax payment obligation of the taxpayer using the service arises (according to the regulations of § 60 of the VAT Act) at the earliest of the dates listed: upon receipt of the invoice certifying the performance of the transaction, or upon reimbursement of the service, or on the fifteenth day of the month following the perfor-mance.

If the date of the transaction is the same as the effective date of the amendment or a later date, the rules of direct taxation apply, so the taxpayer performing the transaction must already charge VAT on the issued in-voice.

If the performance date of a given periodic transaction is on or after the effective date, the rules of direct taxation shall apply even if the entire period is before the effective date.

In the case of periodic transactions, if the period stretches through the effective date, the period does not need to be split and treated as partly a reverse VAT transaction and partly as a direct VAT transaction. On the other hand, depending on whether or not the date of performance of a given transaction is after the effec-tive date, the transaction as a whole should be treated as reverse VAT or direct VAT.

Due to the significant change and in order to avoid tax risks, both the invoicing company and the company receiving the invoice must pay close attention when determining the VAT obligations in the transaction.