The customer makes the payment on the tax invoice. Payment terms (marked as “Period 2” in the table below) are generally considered an unavoidable delay and the number of days is usually subject to detailed negotiations. In future issues of this series, we will look at the impact of the payment certificate on the availability of funds for the entrepreneur and the overlay created by different types of payment security. Payment certificates result in payment made by the customer to the contractor. In general, payment certificates can either be issued regularly during the work, such as certificates. Provisional B (which are usually issued monthly), i.e. indicate that a certain stage has been reached, i.B., practical completion. The customer undoubtedly has an interest in maintaining the payment certificate process – and sometimes the main reason is the delay in payment that it will cause. However, the procuring entity must also ensure that it has funds for the required payment. In a project-financed environment, the customer involves the lenders in the payment certificate (for example. B through an independent certifier or lenders` technical advisors).
This ensures that lenders agree with the outcome and provide funds to the principal for payment. In the second scenario, the contractor undergoes a payment certification process. In this case, since it only issues a tax invoice for the undisputed amount, it only pays taxes on that amount. He does not have to finance the tax on the disputed amount until the dispute is resolved and the entrepreneur is entitled to charge another amount. To this end, the contractor must submit a payment request after reaching a payment milestone or making progress. The payment request is usually accompanied by documents proving that the stage or progress of the payment has been reached. Although there is usually a delay in the preparation of the payment request, this period is under the control of the contractor and can be shortened by streamlining the contract management processes. The payment request must then be verified by the customer and certified (in whole or in part) for payment.
The time it takes the Customer to evaluate a payment request, as well as any request for additional information, is generally considered by the Contractors to be onerous and highly undesirable (this period is marked as “Period 1” in the table below). A construction project involves many different parts. B e.g. financiers, employers, prime contractors, subcontractors, subcontractors and suppliers. Payment processing is crucial and difficult between the parties involved, so there are many different payment arrangements that are used during construction projects. Contractors should implement payment certification processes, as they not only allow the client to finance a project, but also the contractor to reduce the tax burden for disputed amounts. The parties should work together to clearly define payment milestones and streamline the payment certification process to avoid unnecessary delays and possible misuse of the process. Depending on the timing of payment to the tax authorities and the rate of GST or VAT (or similar), the cash flow advantage for the entrepreneur can be very significant.
Entrepreneurs can enjoy cash flow benefits if they go through the payment certification process and payments are controversial. To illustrate this, let`s explore two scenarios. If a payment is disputed, the payment certificate improves the contractor`s liquidity The payment of the valuation is made when issuing provisions during the work until practical completion, after which another certificate of release of the overdue funds (including half of the retained funds) can be issued. Subsequently, the contractor or subcontractor submits a final declaration to the employer`s architect, contract manager, quantity surveyor or prime contractor, and a reconciliation of the order amount is made, replacing the value submitted during the progress of the work with the values actually spent. This includes adjusting provisional amounts or approximate quantities that have been authorized. But what about the entrepreneur? Although period 2 seems inevitable, most entrepreneurs would prefer not to undergo period 1. Entrepreneurs will often say that they would be happier if they could simply file their tax bill. Upon receipt of the proof of payment, the contractor will issue a tax invoice in an amount equal to the proof of payment. If the payment certificate does not cover the full amount requested in the payment request, the parties must resolve the dispute and, depending on the outcome, the contractor may be able to charge the disputed amount once the dispute is resolved. In a typical payment attestation process, the contractor is not allowed to file a tax invoice unless they have gone through this process.
But who benefits from the payment certification process? Sophisticated manufacturing contracts often include a payment attestation process that adds several procedural steps for the contractor to receive payments from the principal. Generally seen by entrepreneurs as an unnecessary deferral of payment, the actual value to entrepreneurs is often not understood. In the first scenario, the entrepreneur issues the tax invoice immediately without a payment certificate. If we assume that the contractor pays GST or VAT (or similar sales tax) on a deferral basis, they must pay taxes on the total amount indicated in the tax invoice. If the amount claimed is disputed in whole or in part, the entrepreneur must – as a first step – finance the tax on the disputed amount. The payment certificate should not be considered an abuse by the customer For advice on construction law issues, please contact our director Gerald Arends of Pegasus Legal. To learn more about Pegasus Legal and our experience in the construction and energy sector, please visit www.pegasus-legal.com/experience. .