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Building industry warns of action over new VAT law

The island’s Employers and Industrialists Federation has called for the immediate abolition of the new VAT law, warning that failure to do so will lead to the construction industry taking “dynamic measures”

unemployed construction workers
THE NEW law on VAT in the construction sector is starving an already cash-strapped industry of liquidity at a time when bank loans have dried up, threatening to neutralise efforts towards economic growth while increasing unemployment, warned building contractors on Thursday.

Vice-president of the Cyprus Employers and Industrialists Federation (OEV) Sotos Lois yesterday called for the immediate abolition of the new VAT law implemented on March 9, warning that failure to do so will lead to the construction industry taking “dynamic measures”.

According to Lois, before March 9, building contractors would charge buyers 17 per cent VAT on a house, which would be paid in stages during construction of the property. The contractors would use that 17 per cent to pay subcontractors (electricians etc) and suppliers during the building of the house. Any leftovers would be deposited with the VAT Service.

The government then decided to change the system, scrapping the VAT that contractors would charge buyers in an effort to jumpstart the construction industry, which has seen one of the biggest downturns in revenue since the economic crisis started, resulting in thousands of unemployed.

Under the new system, the buyer does not pay VAT but the building contractor does on all supplies, such as for metal, wood, glass etc., which counts for about 30 per cent of the total costs, said Lois.

However, contractors are no longer expected to pay VAT to subcontractors after March 9, the government’s thinking being that by and large, subcontractors remember to charge VAT but tend to forget to pass it on to state coffers.

So, with the new law, building contractors do not get paid VAT but are expected to find the money to pay VAT on construction supplies which they then request back from the government every three months.

“Given the way bureaucracy works, it could take anywhere between six and nine months to get it back. This is wrong and unfair,” said Lois, who argued that the government was effectively borrowing.

He warned that many contractors will end up buying supplies from abroad or from the north using the Green Line Regulation where VAT is not charged, creating a knock-on effect for the Cypriot industries supplying bricks, aluminium, plastics, and other materials.

The new system will end up having the opposite effect of its intended purpose, creating serious cash flow problems for the industry, resulting in further layoffs, he argued.

Lois was flanked by representatives of a number of construction industry associations at the OEV offices during Thursday’s press conference.

Head of the Building Contractors Association Aristos Aristotelous said, as a result of this law, the construction industry will end up having between €150m and €200m tied up during a six-month period as contractors wait for the state to pay VAT returns owed.

Readers' comments

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  • john says:

    Real story

    Property buyer applied and recieved VAT refund(housing grant) of €10,000 as a first time buyer

    Later the developer contacted the buyer to say he would help him to reclaim the VAT(housing grant) of €6,000

    Buyer informed the developer he had already claimed €10,000 and would not need his help

    Developer says I have not paid the VAT and most of my subcontractors (from the north) were cash paid and I have no VAT paperwork

    One way of collecting taxes, good on them

  • Andrew says:

    Why worry about VAT? If the government will not issue Title Deeds at the point of sale then very little property will ever be built and subsequently sold.

    Therefore very little VAT can be charged or collected.

    In this scenario the only losers are the construction industry and the government. That is a refreshing change.

  • Costas Apacket says:

    Dynamic action, some would call it scamming, in the Cypriot property industry has brought us to where we currently are.

    I dearly hope that the Developers, Lawyers and Banks lose their silk shirts and BMW / Mercs due to this dynamism.

    Not a very nice crowd.

  • There appears to be some confusion between property developers and building contractors; I will try to explain:

    Property Developers – with one or two notable exceptions, property developers do not undertake the actual construction of property. They do the design, marketing and sale of property and invite tenders from building contractors to carry out the building work. The contractors then submit bids and the developer awards the contract to the successful bidder.

    Building Contractors – build the property. There will usually be a main contractor, who has overall responsibility for the construction work. The contractor will also appoint sub-contractors to carry out specific tasks, such as the plumbing, carpentry, aluminium works, electrical and mechanical engineering, etc.

    Generally speaking, building contractors are not the fat cats. They have to work to very tight budgets as more often than not, it’s the lowest bidder who gets the contract.

  • Peter G Davis says:

    The Cyprus Government were sitting on a gold mine. They had expats from the UK, in the most genteel people who were no drain on the economy but contributors to the Cyprus Island spending money brought in from overseas.

    Unfortunately the Government thought it payback time to treat them shabbily for past history. Some thought they were being clever in overcharging ‘Rich Brits’ for whatever reason the Brits no longer come. Cyprus now has a reputation which will take years to lose as a place of avaricious greed and skulduggery.

    Not so clever now are we?

  • Alex says:

    @Alison, even in the worst scenario you mention, the greatest headache of Cyprus developers is that they get their money with 3 years DELAY. But they get it!

    Now contrast this with problem of buyers, should developers succeed: they will be charged with 17% VAT they WILL NEVER RECOVER.

    Quite a difference, I suppose.

    Your example can be correct in general, but in particular case of Cyprus it is hardly applicable. “Hard working businesses” is the last term I would apply to local developers.

    I think there is a mistake in the article – VAT IS STILL CHARGED, but at 5% and without any refunds given, rather than at 17% with some refunds, as it was before.

    Now, let’s see how the “problems” of developers look like in practice.

    Assuming developers pay 17% on the supplies they purchase, and these supplies constitute about 30% of total costs, the calculation would be as follows:

    Total cost: 100,000 EUR
    of which liable to VAT: 30,000 EUR
    VAT at 17%: 5,100 EUR (paid by developer to suppliers)
    Selling price: e.g. 120,000 EUR
    VAT at 5% on the selling price: 6,000 EUR (paid by the buyers to developer)

    So, even after the abolition of 17% VAT on property sales, developers get MORE VAT money, than they actually pay on their purchases.
    And they still compain!
    Who will take pity on the fleeced buyer, I wonder?

  • Simon Edwards says:

    Cannot people choose to pay the VAT directly to the government ?

  • Simon Edwards says:

    I don’t have a lot of sympathy I’m afraid. How can these people be having difficulties. Did they not put anything away during the good times? How can a self proclaimed success be in this position? These guys think they are big power players with big names puffing on cigars and posturing. They have been in business for many years often following their fathers how can they be in a cash-flow situation after so many great years. How can they have multi-million pound loans is this a success?

    I am calling your bluff please show us the dynamic measures I am waiting. I believe these tight times are cause by the dynamic measures of the prospective buyers. OKy I understand newcomers to the industry may be in difficulty but in all honesty i don’t think it makes a good business plan at the moment to attempt to join this market.

  • confused says:

    Can somebody clear something up for me, just a little confused…

    So the Contractor doesn’t charge its customer VAT but what about the 5% VAT that the customer pays? is that now 0%?

  • Alison says:

    I appreciate there has not been much sympathy for the developers but this problem exists in many businesses here such as butchers where they charge 5% (was 0 until March) but can reclaim 15% on purchases. They have to have an overdraft while they wait for the government VAT office to refund the VAT due to them in some cases 000’s of euros. This can take 3 years! In other EU countries VAT refunds are applied within 30 days. In effect the VAT office is using the money from hard working businesses to finance its coffers. Come into line with the rest of the EU with VAT refunds and not only do you satisfy the developers but many other struggling businesses threatened with closure over this ridiculous system.

  • Ann Agrievedbuyer says:

    Totally agree with the comments thus far. Money grabbing and using the VAT payment system to their own advantage to date and now have to actually pay the Tax to the tax man!! Heavens above whatever next!!

    Cypriot builders AND employers – Wake up and get with the program – welcome to reality and the EU !!

  • Gavin Jones says:

    Threats of taking “dynamic measures” have been the order of the day from public service unions, taxi drivers and now developers. Get on with it, then. Do your worst as if the rest of us care.

    I’m reminded of the opening scene in the film Saving Private Ryan when an American soldier yells at his comrades not to shoot when Germans, whose bunkers have been flamethrowed, come tumbling out on fire. His words? “Let ’em burn!”

    My exact metaphorical sentiments when it comes to developers and those connected to the Cypriot real estate business who’ve behaved fraudulently.

  • Martyn says:

    The downward spiral continues. What a shambles as the property/construction sectors continue to decline.

  • UBoat says:

    Who cares about the builders/developers? They do not care about anyone only themselves, they deserve all the problems I hope they all go bust.

    I thought the Greek Orthodox was the religion here ???

    Not money worshipping !

  • johnno says:

    I am not sure that Cyprus needs a building industry at all for the next decade or so. There is plenty of unsold property available to last for that period.

  • Mike says:

    ….”However, contractors are no longer expected to pay VAT to subcontractors after March 9, the government’s thinking being that by and large, subcontractors remember to charge VAT but tend to forget to pass it on to state coffers”….

    What a very diplomatic way of saying the contractors are fraudulently applying the VAT process to extort more money for themselves but do not contribute their fair share to the state’s tax revenue as each and every other citizen not registered for VAT is obliged to do. Do these self centred, egotistical people with a misplaced sense of self importance ever have any care or concern for the Country or it’s future during their worship of money?

    Thankfully they will get just what they deserve in the end and there are no pockets in the shroud that will cover them. So so sad.

  • Adrian says:

    Heaven forbid a Cypriot builder has to pay any kind of tax, they are so used to “somebody else can pay” mentality. Welcome to the real world.

  • Robert Briggs says:

    They are threatening to take “Dynamic Measures”?

    Well for a start, ensure that Title Deeds are available at exchange of contract / point of sale also to sort out the scumbags infesting their “industry,” who are causing problems and never ending nightmares for the buyers. R.B.

  • marktyler says:

    VAT is a tax on value added. This is totally unlike the VAT on land that Cyprus introduced in 2007. The latter was entirely counter-intuitive. Land, by definition, does not hold any “value added”; hence VAT is a totally inappropriate tax to levy on land. But it was the grasping nature of Cyprus leadership that applied it anyway, based on pure greed (perhaps they realised that those they govern are also so-inclined, so never mind).

    Although such tax has the natural effect of suppressing land sales, such has already taken hold n a major way alongside the collapse of confidence in Cyprus property market as a whole. The latter being directly attributable to the organised and wholesale cheating of the Cyprus Establishment.

    VAT on building work has its place, since such activity (in many parts of the world at least) really does add value. But, despite the logical arguments for VAT, hands up everyone who feels sympathy for these respectable people who build the homes in Cyprus that everyone admires?

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