1. BACKGROUND

Pursuant to Article 395 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (the VAT Directive), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance. As this procedure provides for derogation from the general principles of VAT, in accordance with the case-law of the Court of Justice of the European Union (CJEU), the national derogating measures referred to in Article 395 of the VAT Directive which are allowed ‘in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance’, must be interpreted strictly and those measures must also be necessary and appropriate for realising the specific objective which they pursue and have as little effect as possible on the objectives and principles of the VAT Directive.

By letter registered with the Commission on 17 June 2020, Hungary requested an authorisation to continue applying a measure derogating from Article 193 of the VAT Directive. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 16 September 2020 of the request made by Hungary. By letter dated 17 September 2020, the Commission notified Hungary that it had all the information it considered necessary for appraisal of the request.

As a general rule, the person liable for the payment of VAT to the tax authorities under Article 193 of the VAT Directive is the taxable person supplying the goods or services. The purpose of the derogation whose extension Hungary requests is to place that liability on the taxable person to whom the supplies are made (the so-called reverse charge mechanism), in the case of supplies of staff engaged in activities other than those covered by point (a) of Article 199(1) of the VAT Directive. Article 199(1)(b) of the VAT Directive allows Member States to apply the reverse charge mechanism to supply of staff engaged in construction work, including repair, cleaning, maintenance, alteration and demolition services in relation to immovable property. Therefore, the derogating measure allows Hungary to apply the reverse charge mechanism to the supply of staff in all sectors of economic activity. The aim of the requested derogation is the fight against fraud.

2. REVERSE CHARGE

The person liable for the payment of VAT pursuant to Article 193 of the VAT Directive is the taxable person supplying the goods or services. The purpose of the reverse charge mechanism is to shift that liability onto the taxable person to whom the supplies are made. The reverse charge is often used in order to tackle VAT fraud taking place in targeted sectors of the economy, in particular through the use of ‘missing trader’ structures.

Missing trader occurs when traders sell goods or provide services, collect the VAT from their customers and subsequently disappear without remitting the VAT they collected from their customers to the tax authorities. By designating the person to whom the goods or services are supplied as the person liable for the payment of VAT in such cases, the domestic reverse charge mechanism has been found to eliminate the opportunity to engage in that form of tax evasion.

In the additional information submitted to substantiate its request, Hungary stated that the fraud committed on the supply of staff sector had similarities with missing trader structures, given that these services are easy to provide and the main cost for service providers is the cost of employees, which does not entail any VAT to be paid. Therefore, the gain for fraudsters is, in practice, the whole amount of VAT charged to the customer.

3. THE REQUEST

In order to combat VAT fraud in the sector of temporary employment agencies, Hungary requested in 2014 authorisation to introduce a special measure derogating from Article 193 of the VAT Directive to provide that, for supplies of staff engaged in activities other than those covered by point (a) of Article 199(1) of that Directive, the person liable for payment of VAT is the taxable person to whom the supplies are made. The authorisation was granted by Council Implementing Decision (EU) 2015/2349, and expired on 31 December 2017.

In 2017, Hungary submitted another request in order to make, for the same services involving the supply of staff, the recipient liable for the payment of VAT. As a result, Council Implementing Decision (EU) 2018/486, granted that authorisation until 31 December 2020.

Hungary now requests, under Article 395 of the VAT Directive, that the Council, acting upon a proposal of the Commission, authorises it to continue applying this special measure derogating from Article 193 of the VAT Directive as regards the application of the reverse charge mechanism to domestic supplies of services involving the supply of staff engaged in activities other than those covered by point (a) of Article 199(1) of that Directive.

The request covers the supply of staff provided through temporary employment agencies, secondment of staff, school cooperatives, pensioners’ cooperatives and to all supplies of services which are not provided under these legal forms, but in terms of their content actually entail the supply of staff. Therefore, the authorisation whose extension is requested, allows Hungary, in practice, to apply the reverse charge to all services consisting of the supply of staff.

According to the Hungarian request, the supply of staff sector is extremely vulnerable to tax fraud. The main costs for temporary employment agencies are the salaries and related taxes and contributions, which do not entail any input VAT, while their purchases are insignificant by comparison. Consequently, if the reverse charge is not applied, the amount of VAT charged by operators in the sector to their customers, that is to say the output VAT, is far higher than the amount of deductible VAT, the input VAT. This should normally lead to a position of debt towards the Treasury regarding VAT. Further, supply of staff services are very simple to provide, as no special knowledge neither special equipment are required to start the economic activity, making very easy to enter the supply of staff market.

Fraudulent undertakings providing temporary employment agency services typically build up a chain, and the undertaking at the end of the chain that actually provides the supply of staff service does not pay the VAT applicable to the service. This practice distorts competition thus jeopardising the operation of law-abiding undertakings. Furthermore, tax evasion in the sector involves not only VAT, but also employment taxes and contributions, which are about 40 per cent of the total cost of employment.

According to the information submitted by Hungary, the introduction of the reverse charge in the supply of staff sector led to a reduction in the number of providers operating in the sector, despite an increase in the taxable amount of the supplies provided. This trend, in their opinion, indicates an effect of “cleansing” of the market.

Hungary states in its request that the measure has proved to be an appropriate and effective instrument in combating abuse and has helped reducing VAT fraud in the sector. Considering the specific nature of the temporary employment agency sector, which does not require any particular expertise to operate and where the amounts of VAT to be paid are much higher than the amount of deductible VAT, if the reverse charge mechanism could no longer be applied the original conditions would according to Hungary soon be restored and the fraudulent chains would re-emerge in no time.

Furthermore, Hungary stresses that the worldwide economic downturn caused by the COVID-19 pandemic has seriously affected employment and, in particular, the supply of staff sector. Flexibility as regards the use of workforce would help businesses to recover from this situation. Thus, it is expected that the rate of leased workforces through the temporary agency services will exceed the rate before the outbreak of the COVID-19 pandemic. This could be an incentive for fraudsters to try to enter this sector. Therefore, the extension of the derogating measure would help avoiding the appearance of fraudsters in the sector.

4. THE COMMISSION´S VIEW