Levente Bihari

VAT can cause a lot of complications when it comes to interpreting our regular contracts. Does the purchase price include VAT if the parties have not explicitly stated so? Should a guarantee withholding be made from an amount that includes VAT? Does the stamp duty need to be paid on the gross or the net price of the property? These questions are particularly timely in light of the recent reduction in the VAT rate on newbuild homes: who stands to benefit from this – the builder or the apartment buyer?

With VAT or without it?

If the contract does not include VAT 

In a contract concluded with a consumer, it is relatively clear that the stipulated purchase price includes VAT. The consumer does not, after all, have the option of reclaiming the VAT; for him or her, the gross amount represents the actual cost. However, things are not so clear in business-to-business contracts. Generally, businesses in their VAT returns can deduct the VAT they pay, and so for them, VAT does not represent an actual expense. 

The rulings of the courts have already confirmed on several occasions that the purchase price or consideration indicated in a contract without specifying whether this is the net or gross amount is to be deemed as inclusive of VAT, regardless of whether the contracting parties are businesses or consumers. So, if we sign a contract that simply says that the price is HUF 10,000, then after delivery, the supplier can issue an invoice only for the amount of HUF 7,874 + VAT, not for HUF 10,000 + VAT. This is a big difference, so it’s worth paying particular attention to this. 

The same is true for properly purchases contracts if VAT rate changes as the build progresses. If, in relation to a contract already concluded, the amount of VAT payable on one of the instalments changes due to a change in the statutory rate of VAT, who gains and who loses from this will be down to the wording of the contract. If the contract specifies only the gross purchase price or gross instalments, the advantage resulting from a reduction in the VAT rate can be fully pocketed by the seller. If, on the other hand, the purchase price is set at fifty million forints + VAT, the buyer will have to pay less at the end of the day.

Stamp duty base: gross or net? 

A serious dilemma arises in property purchases as to whether the buyer should declare the gross or the net value of the property for stamp duty purposes. Both the law and judicial practice are clear on the fact that the stamp duty should be paid on the market value of the property. So it is not the gross or net value of the property that needs to be declared, but its market value. But that does not answer the question: which of the two is the market value of the property – or whether a third value may need to be considered as the market value. 

In deciding the issue, it is worth considering the circumstances of the parties to the sale and the use of the property. In the case of a property bought and sold by businesses (e.g. a warehouse or an office building), it may be appropriate to use the net value as the basis for determining the market value. However, in the case of a property sold to a private individual who is not entitled to offset the VAT (e.g. a residential property), the gross value may well be the starting point. Of course, there are always individual cases, such as when a residential building is purchased by a property dealer entitled to offset VAT. 

One thing, however, is always worth keeping in mind. The value given as the market value may be reviewed by the tax authority. In practice, the probability that the authority will set the market value lower than the declared value is small. If, on the other hand, it sets it higher, this will not result in a fine or other adverse consequence for the buyer (unless the declared value was manifestly untrue). In the case of uncertainty, it may therefore be a good idea to declare the lower value. 

Guarantee withholding: and which amount should you start from here? 

In business-to-business contracts, especially in the construction industry, it is often stipulated that the customer withholds a certain percentage of the contractor’s fee (e.g. 5%) to cover the latter’s warranty obligations. The question then is whether the percentage withheld applies to the net or gross fee. In other words, if someone carries out construction work of HUF 100 million + 27% VAT, then the amount of the 5% to be withheld is HUF 5 million or HUF 6.35 million? 

The withholding does not mean that the contractor will not become liable for VAT on the amount withheld. Based on the above example, the contractor will have to pay the full amount of VAT on the HUF 100 million to the government once he completes the job. If the customer withheld the VAT amount too, then this would be an additional burden for the contractor and an additional benefit for the customer (since he could offset the total amount of the VAT charged to him, including the VAT on the 5%). Therefore, the parties would be right to withhold only HUF 5 million and not the 5 million plus the VAT due on it (i.e. HUF 6.35 million). However, a possible dispute can be more easily avoided if the parties specify the withheld fee in their contract in a specific amount, or clearly state that the withholding is always a specified proportion of the net fee.