When performing construction works related to renovation or modernization, contractors often ask the question about the possibility of applying a preferential VAT rate of 8%. The topic, although it appears in the media many times, can still raise doubts.
At the outset, it should be noted that, in principle, in accordance with Article 41 sec. 12 of the Polish VAT Act (in connection with the relevant provisions concerning the applicable rate), the rate of 8% applies to the supply, construction, renovation, modernization, thermal modernization or reconstruction of buildings covered by the social housing program.
Taking into account the provision formulated in this way, the 8% VAT rate applies to:
- delivery, construction, renovation, modernization, thermal modernization or reconstruction;
- but it applies only to buildings covered by the social housing program.
According to the statutory definition, this construction is considered to be residential buildings or parts thereof, excluding commercial premises, residential premises in non-residential buildings classified in the Polish Classification of Buildings in Chapter 12, and buildings classified in the Polish Classification of Buildings in class ex 1264.
The situation seems clear. However, it should be borne in mind that many times, the above-mentioned renovation or modernization concerns only part of the building, e.g. reconstruction of the chimney. Will the preferential rate also apply in such a case?
If we are dealing with:
- comprehensive service consisting in the construction or installation of a fireplace permanently connected to the building or
- reconstruction or replacement of elements of the chimney system constituting renovation or modernization of the building;
then such activities will be able to benefit from the VAT rate of 8%.
This is confirmed, for example, by the Binding Rate Information of the Director of the National Tax Information of 13 June 2022 (file ref. no. 0111-KDSB2-1.440.90.2022.2.AZG)
As follows from the above-mentioned provisions, the condition for the application of the 8% tax rate, pursuant to Article 41 sec. 12 of the Polish Value Added Tax Act, is the fulfilment of two conditions. Firstly, the scope of activities to be performed must relate to the delivery, construction, renovation, modernization, thermal modernization, reconstruction or maintenance works concerning buildings or parts thereof. Secondly, the buildings or parts thereof to which the above activities relate must be classified as construction covered by the social housing programme. Failure to meet at least one of the above conditions means that the transaction cannot benefit from the preferential 8% tax rate.
Taking into account the above, in the present case it should be pointed out that “modernization” means not only modernization or permanent improvement, but also modernization aimed at increasing the utility value of a single-family residential building, by equipping it with an additional element, fulfilling primarily heating functions, and at the same time enriching the building with aesthetic values – in the case of the service indicated in the application, it is the delivery and installation of a fireplace insert (…).
Therefore, the comprehensive service (service) described in the application, consisting in the supply and installation of a fireplace insert (…), in single-family residential buildings with a usable area not exceeding 300 m2 classified – as indicated by the Applicant – in the Polish Classification of Buildings in grouping 1110, constitutes a service of modernization of a building object classified as a construction covered by the social housing program and consequently is subject to taxation according to the VAT rate of 8% pursuant to Article 41 sec. 2 in conjunction with Article 41 sec. 12 and Article 146aa sec. 1, 2 and 1a of the Act.
What is important, however, is that the 8% VAT rate applies to the comprehensive construction works service.
When a taxpayer purchases (sells) a chimney as a good (and not a construction service), then such a transaction is subject to taxation at the standard rate of 23%.
This is confirmed by the Binding Rate Information of the Director of the National Tax Information of 26 July 2021 (file ref. no. 0115-KDST1-3.440.65.2021.3.BK).
To sum up, it should be remembered that the application of the 8% VAT rate for construction works is justified if:
- we are dealing with a service constituting a renovation, modernization or reconstruction of a residential building,
- it is performed in a house covered by a social housing program,
- The subject of the sale is a comprehensive construction service, not the delivery of goods (e.g. a chimney), which will then be assembled independently.
