Advance payment with income on the date it is received

The assumption of the upcoming changes contained in the draft Act on facilitating business activity is - as the name suggests - the simplification of the rules related to running your own business. Among the planned amendments, the legislator provides for the equal recognition of revenue for VAT and income tax in the event of receipt of advance payments, when taxpayers register the sale at the cash register. However, will taxpayers really benefit from the planned change? Will the received advances constitute income when they are collected?

Collection of advances and tax obligation

Currently, in the event of receiving an advance payment for the future delivery of goods or performance of a service, the taxpayer shows income only for the purposes of VAT. It results directly from Art. 19a paragraph. 8 of the VAT Act. Therefore, the taxpayer is obliged to present the tax due on the received advance payment in the tax declaration submitted for this period.

In terms of income tax, the settlement of the advance payment looks a bit different now. Pursuant to the provisions of the PIT Act, income from activity is the amounts due - even if they have not been received. Referring the above to advances - the received advance does not constitute receivables, as the delivery or service has not yet been made, and therefore it is not an income from activity. It will arise only when the delivery or service is performed - no later than the date of the invoice or payment by the buyer.

The above rule also applies to persons recording sales at the cash register, who after the end of the settlement period are obliged to adjust the income for the received advances, for which the contract is to be performed in subsequent periods. Therefore, changes are planned in this matter.

Advance payment receipt and income tax income

One of the assumptions of the draft Act on facilitating business activity adopted by the Council of Ministers is the simplification of tax settlements, when the advance payments received by taxpayers are recorded at the cash register. In trade, such a situation often occurs, for example, in the case of the provision of construction, renovation or photography services.

Currently, taxpayers are required to register received advances at the cash register. If the transaction is finalized in different settlement periods, it is necessary to adjust the revenues for the amounts of advance payments included in the reports. Therefore, taxpayers should keep additional records of accepted advances, on the basis of which the revenue obtained in a given month should be adjusted for income tax purposes. The current differences between the settlement of advance payments for VAT and PIT cause many problems among taxpayers, which often lead to accounting errors.

In order to avoid inaccuracies and facilitate the settlements of people who record advance payments at the cash register, it is planned to equalize the emergence of the tax obligation in both cases. An entrepreneur who collects advances from private individuals for a future delivery or service will not have to keep additional records and correct income. Showing the received prepayment will be tantamount to obtaining income for both income tax and value added tax purposes.

It is worth emphasizing, however, that a given form of settling advance payments will not be obligatory for everyone. Taxpayers who decide to settle advance payments at the same time for both VAT and income tax will be required to notify the tax office about this fact by January 20 of the tax year. In the case of taxpayers who start recording at the cash register during the tax year, the decision should be reported by the 20th day of the following month. The draft act on facilitating the performance of economic activity was adopted by the Council of Ministers on June 10, 2014.