According to preliminary data from 2017 the performance of the construction industry has improved by more than 30%, which is far above the 4% growth of the Hungarian economy. Apart from the lower base data for the previous year, the tax relief measures approved in Hungary in respect of the VAT on new apartments also contributed to this, resulting in a drastic rise in the construction of new apartments. So what are these relief measures and how did they impact on the construction industry in 2017? How will the discontinuation of these relief measures from 1 January 2020 impact the construction industry in Hungary in the next two years and beyond, and how could we manage the related extremes? These are the questions we seek answers to in our article.
VAT on new apartments preferential for four years
From 1 January 2016, the VAT on new apartments was lowered from 27% to 5%. According to the current regulation, the VAT on new apartments will be preferential until 31 December 2019 in Hungary, after which the 27% tax rate has to be applied again.
If a private individual builds on their own property in a way that the work is not performed by a general contractor but by several contractors at the same time, the project will be subject to the general VAT rate of 27%. In specific cases, however, the builder may reclaim the VAT content of invoices issued in its name up to HUF 5 million (approx. EUR 16,000).
If it is not a private project as outlined above then a new apartment with a net value of approximately HUF 18 million (approx. EUR 58,000) can be purchased for less than HUF 19 million (approx. EUR 61,500) instead of the nearly HUF 23 million (approx. EUR 74,500) it used to be. Similarly, the former gross cost of the private apartment construction can also be reduced from HUF 23 million (approx. EUR 74,500) to nearly HUF 18 million (approx. EUR 58,000) if the maximum VAT amount of HUF 5 million (approx. EUR 16,000) is reclaimed. So up to this amount, the two types of relief are similar. If a new apartment with a value higher than this is sold (and here only the relatively generous size restriction is the limit), then the savings gradually increase, in contrast to the fixed VAT relief of private projects.
The upswing in the Hungarian construction industry in 2017 can naturally be attributed to several reasons, but besides the low baseline figures and the equally generous allowances for building family homes, the aforementioned tax benefits and the VAT on new apartments also played a significant role.
Higher prices and labour shortage
These processes have now led to a situation where the general rise in the labour shortage in the construction industry means projects are frequently rejected; parallel to this, prices are increasing significantly alongside such disproportionate supply and demand. It is not by accident that the government is paying close attention to the construction industry. For example, not long ago they created funding of HUF 20 billion (approx. EUR 65 million) to support engineering investments by companies in the construction industry, and thus mitigate the acute labour shortage.
But what is causing this overheated situation that is not being curbed even by the higher prices?
In my opinion, the deadline of 31 December 2019 for applying the preferential 5% rate plays a significant role. Upon starting the construction of 20-50 or possibly 100 apartments, not even today can a general contractor be sure that the completed apartments will be sold by 31 December 2019. So the number of apartments which are almost 20% cheaper will soon become a fixed number, and demand will be a multiple of this, which suggests rocketing prices.
What is the solution then?
There is a willingness on the part of the government to prolong the deadline for applying the preferential VAT rate, but the decision on this is not expected before autumn this year. Even if the situation can be managed somehow until then, it would still be worth drawing up the temporary detailed rules that will be in force when the 5% rate is increased to 27%. During the opposite transition at the end of 2015 and at the beginning of 2016 the VAT of services billed with advance or partial invoices remained at 27% in Hungary, and the preferential 5% rate was only applicable to payments in 2016. In the reverse case it can only be hoped that the temporary detailed rules will change in the same way, but advantageously for taxpayers, i.e. all paid advances and partial payments will be subject to 5% VAT. In this case, whether the parties agreed on gross or net settlements will make the difference. Creating these detailed rules as soon as possible could mitigate the overheated situation even now.
If the regulation is even more generous, i.e. the government ensures the application of the preferential VAT rate for the whole period of commenced construction projects, the situation could be normalised almost completely, apart from the fact that an unusually high number of constructions would start prior to 1 January 2020. However, this would secure an appropriate construction volume in 2020-21.
If the above is implemented the prolongation of the 2019 year-end deadline would only be the icing on the cake, and announcing it would not be that urgent either.