Change in VAT treatment of temporary employment

On March 2, the decision of the Hungarian Minister of Finance related to the VAT treatment of temporary employment was published in the Hungarian Gazette, as a result of which the previous reverse taxation of temporary employment will be abolished as of 1 April, except in a special case.

In 2014, Hungary was authorized by the Council of the European Union (EU) to, contrary to the provisions of the EU VAT Directive, in Hungary, the taxpayer to whom the staff is provided (in the framework of temporary employment) should be liable to pay VAT.

This special opportunity was granted to Hungary first until 31 December 2017 and then as a result of an extension request until 31 December 2020. Hungary’s justification was the same when submitting both the original request and then the extension:

Several companies in the temporary employment sector engage in fraudulent activities by not paying VAT to the tax authority on the services provided. As this type of activity does not necessarily require a significant initial investment, the VAT passed on by such agencies often significantly exceeds the amount of deductible VAT passed on by suppliers to the agencies. Shortly afterwards, or even within a few months, several such agencies, often with few or no assets at all, will disappear, making it difficult or impossible to recover the unpaid VAT.

The suspensive effect of the 2017 (second) request thus officially expired on 31 December 2020, but in the summer of 2020, Hungary submitted another request for an extension to the body authorized to decide on this special rule (i.e. the European Commission).

However, in its decision of 17 December 2020, the EU Commission stated that it did not support Hungary’s further extension request, as it “does not fulfil the condition that the derogation can only be granted as a last resort and as an emergency measure” and the requested measure (reverse taxation) “does not appear to be necessary and proportionate, nor does it appear to be limited in scope to address the specific situation of fraud in the temporary employment sector”.

However, this decision of the Commission was not yet known when the Hungarian Gazette containing the 2021 tax changes was published on 26 November 2020, so it included a clause on the termination of the reverse taxation of temporary employment, according to which it shall enter into force on the 30th day following the publication in the Hungarian Gazette of the regarding decision of the minister responsible for tax policy. This ministerial decision was now published on 2 March (since, according to the Government Decree on the Duties and Powers of the Members of the Government, the Minister of Finance is the minister responsible for tax policy in Hungary).

From 1 April 2021, i.e. on the 30th day after the publication, the reverse charge can only be applied to the temporary employment of construction labour, which is related to the transfer of real estate specified in the VAT Act or related to the installation work that qualifies as the provision of services, which is intended to create, expand, transform or otherwise change the real estate (including its termination by demolition). In all other cases, the temporary employment will be subject to non-reverse charge (“normal”) VAT, i.e. the party providing such a service will be obliged to issue an invoice including also the VAT to the recipient of the service. 

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Should you have any questions about this newsletter or should you are unsure whether your company handles its temporary employment transactions correctly, VGD Hungary’s tax advisors are at your disposal.