Deposit and taxation - basic information
If an advance payment is made for the future delivery of goods or services and receives an advance invoice, the entrepreneur has the right to deduct VAT (input tax). In turn, the issuer of the advance invoice is obliged to charge VAT (output tax). On the other hand, in terms of income tax, the advance payment does not allow it to be recognized in the tax costs of the buyer and adequately does not generate revenue for the seller. Does the same scheme apply when the deposit is received? Check what tax obligations are generated by the received deposit!
Deposit - definition
The deposit is a specific amount of money paid by the ordering party for the service or the contractor's goods. Its task is to secure claims in the event of default or improper performance. The deposit may also be provided to cover losses that arise during the performance of the contract.
The deposit is not part of the price and, above all, it is returnable, therefore it should not be equated with the advance payment. It generates completely different tax effects than the advance payment.
Received deposit and the effects on the basis of VAT
Due to the returnable nature of the deposit, it does not give rise to a tax obligation on the basis of VAT. The contributor cannot deduct VAT from the deposit. In addition, the payment of the deposit is not documented with an invoice, as it is in the case of an advance payment, where an advance invoice is required.
If the parties to the contract find that the deposit paid is counted towards the main amount due for the service provided or the ordered goods, the deposit should be treated as an advance payment. In such a situation, the seller should issue an advance invoice for the amount of the deposit received. The invoice will additionally entitle the buyer to deduct VAT, while the seller will be obliged to pay VAT.
Deposit as tax cost
In terms of income tax, the deposit is also not a cost. The situation is similar in the case of a bid bond. It is a fixed amount that is submitted as a security for compliance with the terms of the contract in an auction or tender. Therefore, it is an additional monetary restriction, which, at the request of the organizer, may be included in the terms of the tender or auction. It is returnable and is not recorded in company costs or revenues in the case of taxpayers settling under simplified accounting, i.e. on the basis of a tax revenue and expense ledger, revenue record or a tax card.
Art. 23 of the PIT Act contains a list of expenses that cannot be included in company costs. The deposit is not mentioned in it because it is refundable and should not be included in the company's costs or revenues.
Entrepreneurs should determine at the very beginning whether the payment they make or the funds received is an advance payment or a deposit. The method of documenting the paid funds and their recognition in the records will depend on this decision. It should be remembered here that the advance payment is entered only in the VAT register, and the deposit is not included in the VAT register or in the KPiR.