Split payment – how does the split payment mechanism work?

Are you wondering what the split payment mechanism is and how it may affect your business? This modern settlement system is changing the way payments for goods and services are made, increasing transaction security, and tightening the tax system. Learn about the key aspects of split payment and find out how it can impact your company.

What is the Split Payment Mechanism?

The split payment mechanism, also known as split payment, is a settlement system introduced to increase VAT collection efficiency and reduce tax fraud. Its essence lies in automatically splitting payments for goods and services into two separate parts:

• The net amount – transferred directly to the seller’s account
• The VAT amount – automatically transferred to a special VAT account

This solution allows for better control over the circulation of tax and more effective prevention of financial abuse.

How Does Split Payment Work in Practice?

Split payment is a payment method in which the buyer transfers the full invoice amount, and the bank automatically splits this payment. Here are the key principles of how this mechanism works in practice:

1. The buyer instructs the transfer of the full gross amount.
2. The bank splits the payment into the net amount and VAT.
3. The net amount is transferred to the seller’s regular account.
4. The VAT amount is directed to the seller’s special VAT account.
5. The seller has limited access to the VAT account funds – they can only use them for settlements with the tax office or to pay VAT to their suppliers.

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These principles ensure greater transparency of transactions and make it easier for tax authorities to monitor the flow of VAT-related funds.

When Was Split Payment Introduced in Poland?

The split payment mechanism was introduced in Poland relatively recently as a response to the growing VAT gap:

• July 2018 – introduction of voluntary split payment in Poland
• November 2019 – mandatory split payment for selected industries and transactions above PLN 15,000
• October 2020 – expansion of the mandatory split payment scope

It’s worth noting that Poland was one of the first countries in the European Union to implement this solution on such a large scale. The aim was not only to tighten the tax system but also to increase the competitiveness of honest entrepreneurs by eliminating unfair market practices.

Benefits and Drawbacks of the Split Payment Mechanism

The split payment mechanism (split payment) offers numerous benefits, but also presents certain challenges for entrepreneurs. Its main goal is to enhance transaction security and reduce the VAT gap.

Key Benefits Include:

• Reduced risk of tax fraud
• Simplification of VAT settlement processes
• Enhanced ability of tax authorities to monitor financial flows
• Increased VAT revenue and improved competitiveness of honest businesses

Split Payment – Benefits for Entrepreneurs

Split payment provides several measurable benefits for entrepreneurs:

• Increased transaction security – the mechanism guarantees that the VAT amount will be transferred to the correct account.
• Simplified tax settlements – automatic payment division simplifies accounting and VAT settlement.
• Faster VAT refunds – businesses using split payment can expect faster refunds of overpaid tax.
• Protection against dishonest contractors – the system minimizes the risk of getting involved in VAT carousel fraud.
• Eligibility for discounts – some regulations offer benefits to companies using split payment, such as exemption from joint VAT liability.

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It’s important to note that the split payment mechanism helps improve business liquidity by allowing faster VAT recovery and eliminating the risk associated with improper VAT settlement by contractors.

Split Payment – Drawbacks and Challenges for Businesses

Despite its many advantages, split payment presents several challenges for businesses:

• Limited access to funds – the VAT amount in the special account can only be used for specific purposes, which can affect financial liquidity.
• Additional administrative responsibilities – managing a separate VAT account and adjusting accounting systems.
• Potential delays in payments – in case of errors in transfers, the clarification process can extend the time required to complete transactions.
• Complexity of certain transactions – especially for international settlements or unusual business operations.

While the initial implementation of split payment may be challenging, in the long term, this system contributes to market stabilization and increases trust between business partners. It is essential for businesses to prepare adequately to use this mechanism, allowing them to fully benefit from its advantages while minimizing potential difficulties.

Which Sectors Are Primarily Affected by Split Payment?

The mandatory split payment mechanism was introduced in Poland as an effective tool to combat tax fraud. This system applies to selected industries and transactions considered particularly prone to VAT abuse. It primarily affects sectors such as:

• Fuel sales
• Precious metals trade
• Electronics sales

Entrepreneurs operating in these sectors must apply split payment for transactions exceeding a specified value. Importantly, this obligation applies to both sellers and buyers. This solution allows tax authorities to more effectively monitor VAT-related fund flows, contributing to tightening the tax system and increasing state budget revenues.

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Split Payment – Legal Regulations and Guidelines

Mandatory split payment in Poland is regulated by the VAT Act. Key legal aspects include:

• Subject scope – specifying the industries and types of transactions subject to the obligation
• Threshold amount – the obligation applies to transactions exceeding PLN 15,000 gross
• Penalties for non-compliance – financial penalties for entities avoiding the use of the mechanism
• Exemptions – precise definition of situations where split payment does not need to be applied

It is important to note that regulations regarding mandatory split payment are regularly updated to adapt to changing market conditions and the need for tightening the tax system. Entrepreneurs must monitor these changes to remain compliant with the law.