We have also dealt with it a lot in recent days and now the Ministry of Finance (PM) has taken a stand on some of the issues with the increase in housing VAT coming into effect on January 1, 2020. Although there is a lot of uncertainty for both buyers and homeowners, the market now seems to have received good news. As a way of reducing VAT as an advance, only business risk is likely to be the limit, but some possible misunderstandings around blocked accounts should not be clear.
As is well known, as of January 1, 2020, 27 percent VAT on new housing construction will be restored. Since the news was released, both investors and home buyers have been keen on the VAT burden on investments that will be delayed to 2020.
You can pay the purchase price sooner
The ministry states in the prospectus that the rate of VAT depends on when the advance is paid. Thus, the VAT burden can indeed be reduced if the buyer pays the purchase advance within the 5 percent period, regardless of the fact that the actual delivery of the dwelling is delayed to the 27 percent period.
By doing so, the Ministry essentially confirmed that the legality of the advance payment does not depend on the degree of completion of the apartment. In other words, paying the down payment can be a legitimate way to reduce the VAT burden even if construction has not yet begun. However, the Ministry warns that such solutions are expected to be less popular because they pose significant legal risks to the buyer.
According to the Ministry’s announcement, in order for the consideration to be considered an advance, it is necessary for the seller to actually have it, it will be credited to it. Thus, a transaction in which the buyer pays the purchase price in 2019, for example, on a custody account, so that the developer can only actually receive the amount under some condition, does not provide a solution to reduce VAT.
However, according to the law firm, this restriction should not apply to so-called locked accounts, which are favored in the construction of bank-financed housing. In most real estate developments, the developer is able to start the investment because he himself needs a bank loan. And the developer’s financing bank encapsulates its credit with collateral.
As a common form of these collateral, the financing bank usually requires the developer to accept the money received from the customers on a special, blocked or security account. This makes sense for the bank to control what the seller uses for the amount received.
The use of a locked account of the above type
Although limiting the seller’s right of disposal to the benefit of his own bank, does not, according to the expert, result in the advance payment from the buyer not being credited to the seller.
Moreover, the seller is exercising his right of disposal when debiting the amount of money collected from the buyer. Thus, the logic of the PM’s statement is that there is no reason to prevent the advance payments on these types of blocked accounts before 2020 from falling below 5% VAT.