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VAT fraud costs EU member states billions each year. One of the tools governments have introduced to address it is the split payment mechanism, a system that separates the VAT portion of a transaction from the net price at the point of payment, directing it away from the supplier and reducing the risk that it is never remitted. This guide explains how split payment VAT works, where it applies, and what businesses need to do to stay compliant.
VAT split payment is an anti-fraud mechanism. The basic premise is the separation of the VAT amount from the net price when a customer pays the supplier. Whether the VAT is transferred directly to the tax authority or to a separate designated bank account depends on each individual national system.
The split payment mechanism differs from the standard VAT system in that, whilst the latter sees suppliers generally collect VAT from customers and account for it through their VAT returns, the former seeks to reduce the risk that collected VAT is diverted or never remitted.
It is important to note that the application of this regime does not exempt businesses from complying with applicable VAT reporting and reconciliation requirements.
Example:
As of October 2026, the two EU countries that are key examples of mandatory split payment arrangements are Poland and Italy. Their systems differ in scope and operation.
Poland
Italy
Basic three-step flow:
Buyers
Buyers may be required to change their payment procedures and accounts payable systems to ensure that the VAT portion of the transaction is allocated correctly. Qualifying payments in Poland, for example, must use the prescribed split payment transfer mechanism.
Suppliers
The VAT funds held in a restricted account cannot be used for ordinary business expenses, which means suppliers may experience tighter cash flow. In Italy, suppliers may accumulate VAT credits as they do not receive the VAT charged on covered sales, making timely refunds particularly important.
From an accounting perspective, businesses must reconcile their invoices, payment allocations, VAT returns and bank records for the split payment regime to work effectively. They are also advised to:
For a broader overview of VAT compliance obligations, see our VAT compliance guide.
Both the split payment regime and the reverse charge mechanism address VAT collection risks, but there are key differences between the two.
The reverse charge commonly applies to qualifying cross-border B2B services under Article 196 of the EU VAT Directive. For more information on how the reverse charge mechanism works in practice, see our guide on when you need an intra-community VAT number and how to get one.
Which Mechanism Offers Stronger Protection
This largely depends on the fraud risk:
For a broader overview of VAT compliance risk in Europe, see our guide on VAT compliance risk in Europe.
It is important that businesses first establish whether their transactions fall within the national split payment rules before processing payments.
1. Check transaction eligibility: In Poland, verify whether the goods or services appear in Annex 15 and whether the invoice exceeds PLN 15,000 gross.
2. Issue compliant invoices: Include the mandatory split payment notation where required by Polish law and check the applicable Italian invoicing requirements for covered transactions.
3. Configure payment systems: Ensure bank transfers follow the prescribed procedure, currency and account requirements.
4. Maintain suitable bank accounts: Polish businesses receiving covered payments need an eligible business account with an associated designated VAT account.
5. Update accounting controls: Reconcile invoices, VAT account movements, input VAT deductions and tax returns.
6. Train finance teams: Ensure that staff understand payment thresholds, exceptions, correction procedures and deadlines.
7. Monitor penalties and changes: Review current national tax authority guidance regularly, particularly when trading across borders.
Which sectors are most commonly subject to VAT split payment?
In Poland, mandatory split payment covers specified goods and services listed in Annex 15, including categories such as steel, scrap, electronics and construction services. Italy’s system focuses on eligible public sector bodies and specified entities rather than a universal sector list. Businesses should check the specific national rules that apply to their transaction type and customer category before assuming split payment applies.
Can a business reclaim VAT held in a split payment account?
It depends on national rules. In Poland, VAT account funds can generally be used to pay specified VAT liabilities and other permitted obligations, whilst release for other purposes may require approval. In Italy, suppliers may instead need to claim refunds of eligible VAT credits. The process and timeline for reclaiming VAT differs between the two countries, so businesses should confirm the applicable procedure with the relevant national tax authority.
What are the penalties for non-compliance with split payment rules?
Penalties depend on the jurisdiction and the violation. In Poland, failures can trigger additional VAT liabilities, restrictions on tax deductible costs or fiscal penalties, subject to statutory exceptions. In Italy, the consequences depend on the nature and extent of the non-compliance. Businesses should check current national guidance before assessing their exposure and seek advice where the position is unclear.
Does VAT split payment apply to both goods and services?
Yes, depending on national legislation. Poland’s mandatory regime covers specified goods and services listed in Annex 15. Italy’s regime is defined primarily by the eligible customer and transaction rules rather than a specific goods or services list. Neither country automatically applies split payment to every taxable supply, so eligibility must be assessed transaction by transaction.
Which currency must split payment VAT accounts be held in?
In Poland, split payment transfers must be made in Polish zloty through qualifying bank accounts. Italy uses the euro, with eligible customers remitting the VAT directly to the Italian tax authority rather than into a supplier-held VAT account. Currency and account requirements must be checked under each country’s rules, as the two systems operate differently.
Split payment VAT creates additional compliance obligations that sit alongside your existing VAT reporting requirements. Whether you are operating in Poland, Italy, or assessing your exposure across multiple European markets, getting the process right from the start avoids the penalties and cash flow disruption that errors create.
Get in touch with our team to discuss your VAT compliance position.
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