The receipt of a prepayment, advance or deposit by an entrepreneur on account of a future supply of goods or services results in a VAT obligation a as soon as it is received, according to Art. 19a (8) of the Polish VAT Act.
On the other hand, it is worth asking when does the advance payment become tax income? What conditions must be met to consider the advance payment as tax income?
As a rule, revenue from business activities is considered to be amounts due, even if not actually received. Incomes due include those for which the taxpayer is entitled to claim them and thus create a receivable. On the other hand, the date on which revenue from business activity is recognized is the date on which an item is delivered, a property right is disposed of, or a service is provided, or a service is partially provided, no later than the date on which an invoice is issued or a payment is made. However, the payments in question are an exception to the rule, and in accordance with Article 12(4) point. 1 of the Polish Corporate Income Tax Act (and Article 14(3) point 1 of the PIT Act) “Iincome does not include: collected payments or accrued receivables for deliveries of goods and services to be performed in subsequent reporting periods (…).” So, the value of advances and deposits received was temporarily excluded from the revenue category.
In business we often encounter terms such as prepayments, advances or deposits , which are used interchangeably. However, the receipt of an advance or a deposit from the buyer will have different consequences if the contract is not fulfilled.
An advance is part or all of an amount for the future delivery of goods or services. It has a refundable nature, so it does not secure the performance of the concluded agreement. If the transaction does not take place, no matter through whose fault the agreement does not come to fruition, the person making the advance payment has the right to recover it. If the transaction is executed, the buyer is required to pay the difference between the agreement value and the advance payment made. At this point, it should be emphasized that an advance does not have a statutory definition, so its amount and method of settlement should be regulated by the agreement between the parties. The advance payment itself does not constitute revenue, as it is credited to future payments.
A recurring problem becomes the receipt of an advance in an amount equal to the final purchase price under the agreement. Tax authorities and administrative courts differ in their assessment of this situation. In court rulings, we will find interpretations indicating that it is not the nature of the payment and its amount relative to the final purchase price that is relevant, but the fact that the benefit in question is linked to a service/supply that has not yet been performed. According to the judgments of the Polish Supreme Administrative Court of June 2, 2010, ref. no. II FSK 274/09 and October 16, 2012, ref. no. II FSK 419/11 , an advance payment covering 100% of the amount due does not constitute taxable revenue at the time it is received, and such a state of affairs continues until the item is delivered or the service performed. Meanwhile, a different position of the fiscal in an individual interpretation dated June 6, 2022, No. 0111-KDIB1-1.4010.135.2022.1.AND, states that the value of the amount paid equal to 100% of the agreed remuneration cannot be treated as an advance. The Director of the National Tax Information Service considers this to be a definitive donation, which was determined in advance for the performance of a specific service or supply.
The seller’s collateral will be a deposit, which is of a different nature. Its purpose is to discipline the parties to honor the terms of the agreement. We can consider that the deposit is a special type of compensation. In the situation where, after paying the deposit, the buyer evades conclusion of the agreement, the buyer forfeits it to the seller. In the opposite situation, in which it is the seller who fails to fulfill the agreement, the seller will be obliged to return the deposit at double the amount. The mere receipt of a contractual deposit is not definitive, so we are not required to recognize revenue. The moment when such an obligation arises is the cancellation or default of the agreement. If the buyer is the party responsible for the failure to complete the transaction, the seller will receive revenue in the amount of the deposit booked. Similarly, if the seller is at fault, the buyer will show revenue in the amount of the difference between the amount previously paid and the amount reimbursed by the seller. On the other hand, if the agreement is fulfilled, the deposit is credited to the party who gave it and the revenue is recognized on the date of performance of the service or delivery of goods.
The last term, prepayment, refers to the value transferred to the seller after the agreement is concluded but before it is finalized. This is to confirm the arrangements made and to ensure that the agreement is fulfilled. The prepayment is part of the principal amount and may take the form of an advance or a deposit.
In summary, in order to consider that a given material gain (i.e., advance, deposit), has the characteristics of tax income, it is necessary to demonstrate their definitive nature, which implies their non-refundability, permanence and finality.. Thus, the entity receiving the cash can consider it due and freely dispose of it. This disposition does not preclude the performance of a service or the delivery of goods in the future. It is important to demonstrate that once the taxpayer receives the advance, it will not be returned in the future. The previously mentioned exclusions under Article 12 (4) point 1 of the Polish Corporate Income Tax Act (and Article 14(3) point 1 of the Polish PIT Act) are intended to prevent a situation in which we recognize as tax income a payment that is not final at the time it is made. The taxpayer has no assurance that the payment in question has a non-refundable character until the service or delivery of goods is performed. Thus, tax revenue recognition is deferred to future reporting periods.
Author: Marta Rawska, Accountant at MDDP Outsourcing.