Service-Tax

Lump sum or VAT - which type of taxation to choose?

People who decide to start their own business often ask themselves the question - lump sum or VAT? This query is framed as if the two options are mutually exclusive. Nothing could be more wrong. The concepts refer to two different taxes under the law. Let's check what a flat rate and VAT is, and when each of these taxes can be applied.

Lump sum or VAT - two different taxes

As mentioned above, flat rate and VAT are two different taxes. Lump sum is a type of income tax, while VAT is a tax on goods and services, which - interestingly - does not always have to be settled by the entrepreneur. The legislator provided for a number of exemptions in this respect. Taxation with VAT is independent of the form of income tax applied by the entrepreneur. Let's check who and when should apply the flat rate and VAT.

Lump sum as a form of income tax

Lump sum on registered revenues is one of the four basic forms of taxation, next to:

general principles,
flat tax and
tax card.

Lump sum taxation cannot be used by everyone. Art. 8 sec. 1 point 3 of the Lump-sum Income Tax Act mentions directly a list of entities that cannot obligatorily tax their income with a lump sum. Among them, the following are mentioned:

pharmacies,
trade in parts and accessories for motor vehicles,
activities involving the purchase and sale of foreign exchange values,

Lump sum is a specific form of settlement with the tax authorities, in which the tax base is income. This basis is not reduced by the tax deductible costs incurred in the given period.

Revenues obtained by entities paying with a lump sum may be taxed at the following rates: 17%, 15%, 12.5%, 10%, 8.5%, 5.5%, 3% or 2%.

The lump-sum rate depends on the type of business activity performed, some examples are presented in the table below:

Lump sum in 2021	Type of income
17%	Income achieved in the performance of the so-called liberal professions.
15%	Income incl. from the provision of services: a) data processing (PKWiU ex 63.11.1), transmitting audiovisual streams via the Internet (PKWiU 63.11.2), b) by temporary employment agencies (PKWiU 78.20.1), c) by agents and travel intermediaries in the field of ticket booking (PKWiU 79.11.1), by agents and travel intermediaries in the field of booking accommodation, cruises and organized tours (PKWiU 79.11.2), by tour operators (PKWiU 79.12.1), related to the promotion of tourism (PKWiU 79.90.11.0), in the field of tourist information (PKWiU 79.90.12.0), by tour leaders and tourist guides (PKWiU 79.90.20.0), in the field of booking real estate owned jointly (PKWiU 79.90.31.0), d) photographic (PKWiU 74.20), subject to Annex 2 to the Act, f) counseling for children on educational problems (PKWiU ex 85.60.10.0)
12,5%	on the surplus over PLN 100,000 due to: a) referred to in art. 6 sec. 1a of the Lump-sum Income Tax Act ..., i.e. due to money and monetary values received or made available to the taxpayer in the calendar year as well as the value of benefits received in kind and other free benefits under rental, sublease, lease, sublease or other agreements of a similar nature, b) referred to in art. 14 sec. 2 point 11 updof, i.e. from rental, sublease, lease, sublease and other contracts of a similar nature, assets related to business activity, c) providing accommodation services (PKWiU division 55), d) providing rental and servicing of own or leased real estate (PKWiU 68.20.1), e) providing services in the field of scientific research and development works (PKWiU division 72), f) rent and lease: - passenger cars and vans, without a driver (PKWiU 77.11.10.0), - other motor vehicles (excluding motorcycles), without a driver (PKWiU 77.12.1), - unmanned water transport means (PKWiU 77.34.10.0), - unmanned air transport means (PKWiU 77.35.10.0), - rail vehicles (without service) (PKWiU 77.39.11.0), - containers (PKWiU 77.39.12.0), - motorcycles, caravans and cars with a living quarters, without a driver (PKWiU 77.39.13.0), - intellectual property and similar products, excluding works protected by copyright (PKWiU 77.40), g) providing social welfare services with accommodation (PKWiU section 87), other than those provided within the framework of liberal professions
10%	- for the provision of services for the purchase and sale of real estate for own account (PKWiU 68.10.1), - from the sale of property rights or real estate for consideration, being: a) fixed assets or intangible assets subject to inclusion in the list of fixed assets and intangible assets, b) items of property referred to in Art. 22d paragraph. 1 updof, with the exception of ingredients whose initial value, determined in accordance with art. 22g updof, does not exceed PLN 1,500, c) assets which, due to the expected period of use equal to or shorter than one year, have not been included in fixed assets or intangible assets, d) components of property constituting a cooperative right to a business premises or a share in such right, which are not included in the list of fixed assets and intangible assets, e) items of the company's assets in decline, irrespective of the period of their purchase, even if they were withdrawn from non-agricultural economic activity before the sale, and between the first day of the month following the month in which the asset was withdrawn from activity and the date of its sale, six years have not elapsed
8,5%	a) from service activities, including revenues from catering activities in the sale of beverages with an alcohol content above 1.5%, subject to item no. 1st, 2nd, 3rd indent, 4th and 6-8th indent of the table, b) providing services related to fire fighting and fire prevention (PKWiU 84.25.11.0), c) from the provision of education services (PKWiU section 85), other than those provided within the framework of liberal professions, d) for the provision of services related to the operation of libraries, archives, museums and other services in the field of culture (PKWiU division 91), e) from the activity of manufacturing objects (products) from the material entrusted by the contracting authority, f) commissions obtained by a commission agent from sales under a commission contract, g) commission obtained by a press distributor on the basis of a press distribution agreement, h) referred to in art. 14 sec. 2 point 12 updof, i.e. compensation received for damage to assets related to business activity or running special departments of agricultural production
8,5%	up to PLN 100,000 for: a) referred to in art. 6 sec. 1a of the Lump-sum Income Tax Act ..., i.e. due to money and monetary values received or made available to the taxpayer in the calendar year as well as the value of benefits received in kind and other free benefits under rental, sublease, lease, sublease or other agreements of a similar nature, b) referred to in art. 14 sec. 2 point 11 updof, i.e. from rental, sublease, lease, sublease and other contracts of a similar nature, assets related to business activity, c) providing accommodation services (PKWiU division 55), d) providing rental and servicing of own or leased real estate (PKWiU 68.20.1), e) providing services in the field of scientific research and development works (PKWiU division 72), f) rent and lease: - passenger cars and vans, without a driver (PKWiU 77.11.10.0), - other motor vehicles (excluding motorcycles), without a driver (PKWiU 77.12.1), - unmanned water transport means (PKWiU 77.34.10.0), - unmanned air transport means (PKWiU 77.35.10.0), - rail vehicles (without service) (PKWiU 77.39.11.0), - containers (PKWiU 77.39.12.0), - motorcycles, caravans and cars with a living quarters, without a driver (PKWiU 77.39.13.0), - intellectual property and similar products, excluding works protected by copyright (PKWiU 77.40), g) providing social welfare services with accommodation (PKWiU section 87), other than those provided within the framework of liberal professions
5,5%	a) from manufacturing activities, construction works or in the field of cargo transportation using a fleet of vehicles with a carrying capacity of more than 2 tons, b) commissions obtained from commercial activities in the sale of single-use public transport tickets, stamps for monthly tickets, postage stamps, tokens and magnetic cards for vending machines, c) from the sale of certificates of origin, referred to in art. 14 sec. 2 point 14 updof
3%	a) from catering activities, with the exception of revenues from the sale of beverages with an alcohol content above 1.5%, b) from service activities in the field of trade, subject to item no. 2nd and 3rd indent of the table, c) for the provision of services related to animal production (PKWiU 01.62.10.0), d) activities of sea and floodplain fishermen in the sale of fish and other raw materials from their own catches, with the exception of the sale of canned goods and preserves of fish and other raw materials from the catch, e) referred to in Art. 14 sec. 2 points 2 and 5-10 updof, f) from the sale of movable assets used in non-agricultural economic activity, even if they were withdrawn from this economic activity before the sale, and between the first day of the month following the month in which the asset was withdrawn from activity and the date of its sale, no more than six years, being: - fixed assets subject to inclusion in the list of fixed assets and intangible assets, - assets referred to in Art. 22d paragraph. 1 updof, with the exception of ingredients whose initial value, determined in accordance with art. 22g updof, does not exceed PLN 1,500, - assets which, due to the expected period of use equal to or shorter than one year, have not been included in fixed assets or intangible assets, g) from the sale of movable assets of the enterprise inheritance for consideration

A person starting a business, wishing to choose a lump sum as a form of taxation, should indicate it on the CEIDG-1 form. On the other hand, entities taxed in a different way, wishing to change into a lump sum on recorded income, may do so only after the end of a given year, by the 20th day following the month in which the entrepreneur achieved the first income in the new tax year.

Entities taxed with a lump sum show revenues in the revenue record broken down into individual lump sum rates. For individual accounting periods (months or quarters), a flat-rate tax payable to the tax office should be calculated. Calculation and payment of tax should be made by the 20th day of the month for the previous month (quarter). For this reason, the taxpayer does not submit periodic settlement declarations. Importantly, after the end of the tax year, the flat-rate fee is obliged to submit the PIT-28 annual tax return. Pursuant to Art. 21 sec. 2 point 2 of the Act on flat-rate income tax on certain revenues earned by natural persons, the taxpayer is obliged to submit an annual tax return according to the established formula with the amount of the income obtained, the amount of deductions made and the lump sum due on recorded revenues from February 15 to the end of February of the following year after the tax year. A declaration submitted before the beginning of the period is deemed to have been submitted on February 15 of the year following the tax year.

Lump sum as a form of taxation of business income has several significant advantages and disadvantages:

Lump sum advantages	Lump sum disadvantages
relatively low tax rates, simple accounting, the possibility of settling the lump sum for quarterly periods (after meeting certain conditions).	no possibility of joint settlement with a spouse or as a single parent, no possibility to take advantage of the relief for children in the PIT-28 tax return, no possibility of resigning from the lump sum during the year, no possibility of accounting for tax deductible costs.

VAT, i.e. tax on goods and services

Filing for VAT purposes is a separate process and has nothing to do with the flat rate. When setting up a business, a future entrepreneur must decide whether he will become an active VAT payer or whether he will benefit from the exemption in this respect.

According to Art. 113 paragraph. 1 of the VAT Act, the entrepreneur may benefit from VAT exemption due to the turnover limit - PLN 200,000. In the case of entities starting their activity during the tax year, this limit is set proportionally. The subjective exemption from VAT cannot be used by, inter alia, taxpayers:
- supplying new means of transport,
- delivering construction sites,
- providing legal services,
- providing jewelery services.
This issue is regulated by Art. 113 paragraph. 13 of the VAT Act. In addition to the subjective exemption from VAT, there are objective exemptions regulated, inter alia, in in art. 43 sec. 1 of the VAT Act and regulations issued pursuant to Art. 82 sec. 3 of the Act. The most popular are:

universal postal services provided by the operator obliged to provide such services, and the supply of goods closely related to these services;
medical care services for the prevention, preservation, rescue, restoration and improvement of health, as well as the supply of goods and services closely related to these services, performed as part of medical activities by medical entities;
sanitary transport services;
foreign language teaching services;
rental or leasing services relating to residential real estate, or part of real estate, for own account, solely for residential purposes;
insurance services, reinsurance services and intermediation services in the provision of insurance and reinsurance services, as well as services provided by the policyholder in the scope of insurance contracts concluded by him for someone else's account, excluding the disposal of rights acquired in connection with the performance of insurance contracts and reinsurance contracts.

If the future entrepreneur intends to conduct activities regulated by these two provisions, then he does not register for VAT purposes.

However, an entity that does not provide the above-mentioned services, as a rule, may benefit from the subjective VAT exemption. Then there is also no obligation to register for VAT purposes.

On the other hand, when the entrepreneur does not want or cannot take advantage of the subjective exemption, he should register as an active VAT payer. For this purpose, he should complete the VAT-R form and submit it to the tax office. Importantly, the entrepreneur does not incur any additional costs due to the registration.

When is it worth being an active VAT payer?	When is it worth using the VAT exemption?
when sales are made primarily to entities that are also active VAT payers; when sales are taxed at a rate below 23% VAT, and purchases at a rate of 23%; when we plan large investments - the excess of input VAT (on purchases) will then be returned and may be a source of improvement of the company's financial situation.	when sales are made primarily to non-VAT entities, e.g. retail; when the entrepreneur does not plan to make significant expenses.

Active VAT taxpayers are required to submit periodic uniform control files:

JPK_V7M in the case of monthly settlements;
JPK_V7K for quarterly settlements.

Importantly, regardless of the frequency of VAT settlements (monthly or quarterly), the JPK_V7 file is submitted by the 25th day of the month following the month to which it relates.

Lump sum or VAT - these taxes may appear together

As already mentioned in the introduction, the flat rate and VAT are two different taxes, therefore in practice we can deal with two types of connections:

lump sum + active VAT payer,
flat rate + VAT exemption.

Let's check which of these solutions will be more beneficial.

Example 1.

An entrepreneur running a commercial activity consisting in selling flowers decided to tax his activity with a lump sum. The rate appropriate for this type of activity will be 3%. Importantly, the entrepreneur uses preferential ZUS contributions, he started operating on March 1, 2020:

social contributions: PLN 246.8,
health insurance contributions: PLN 362.34 (a deduction is PLN 312.02).

In May, the entrepreneur purchased the goods on the invoice:

net value: PLN 10,000
8% VAT tax: PLN 800
gross value: PLN 10,800

The seller is an active VAT payer

Also in May, he made a sale for the amount of:

net value: PLN 15,000
VAT 8%: PLN 1,200
gross value: PLN 16,200

The seller is an entity exempt from VAT

Also in May, he made a sale for the amount of PLN 15,000.

Let's calculate the amount of tax liabilities on the basis of income tax and profit for both of these cases.

Ad.a.

Determining the lump sum to be paid to the tax office:

Calculation stage	Calculation of the tax liability
Income less social contributions paid in a given period	PLN 15,000 - PLN 246.8 = PLN 14,753.2
Tax (flat rate 3%)	PLN 14,753.2 * 3% = PLN 442.6
Deduction of paid health insurance	PLN 442.6 - PLN 312.02 = PLN 130.58
Tax liability to be paid (rounded)	PLN 131

Determining the profit:

Name of the profit-influencing item	Profit calculation
Profit from selling	PLN 15,000
Costs of purchasing goods	PLN 10,000
Lump sum tax payable to the tax office	PLN 131
VAT to be paid	400 PLN (1200 PLN - 800 PLN)
Profit	PLN 4,469

Ad.b.

Determining the lump sum to be paid to the tax office:

Calculation stage	Calculation of the tax liability
Income less social contributions paid in a given period	PLN 15,000 - PLN 246.8 = PLN 14,753.2
Tax (flat rate 3%)	PLN 14,753.2 * 3% = PLN 442.6
Deduction of paid health insurance	PLN 442.6 - PLN 312.02 = PLN 130.58
Tax liability to be paid	PLN 131

Determining the profit:

Name of the profit-influencing item	Profit calculation
Profit from selling	PLN 15,000
Costs of purchasing goods	PLN 10,800
Lump sum tax payable to the tax office	PLN 131
Profit	4069 PLN

As can be seen from the above calculations, the first option (flat rate + VAT) is more profitable in this case. Nevertheless, it should be remembered that sales are made at prices higher than the VAT-exempt entity. This is only a listing for the purposes of indicating the methodology, therefore it does not mean that always the choice of flat rate + VAT is the better option.

Lump sum or VAT in the online accounting system

An entity that decides to run a business taxed with a lump sum, who is also an active VAT taxpayer, as well as benefiting from VAT exemption, can make settlements for his company using the online accounting system - wfirma.pl.

In order to be able to properly settle the activity taxed with a lump sum in the wfirma.pl system, after logging in to the account, go to the SETTINGS »TAXES» INCOME TAX tab, where you should select the INCOME RECORD box, select the tax office, the default lump-sum rate and indicate the frequency of settlements for lump-sum income tax .

The next step is to select the settings for VAT issues. To define them, go to the SETTINGS »TAXES» VAT TAX tab where, in the case of:

active VAT payers, check the VAT PAYER box and indicate other parameters related to this settlement (frequency of settlements, tax office, etc.)

entities exempt from VAT, uncheck the VAT PAYER box and indicate the legal basis for the exemption.

Sales invoices should be issued in the tab REVENUE »SALE» EXHIBITION »INVOICE or INVOICE (WITHOUT VAT) - depending on whether the flat-rate payer will be an active VAT payer or will benefit from an exemption in this regard.

Start a free 30-day trial period with no strings attached!

Detailed information on invoicing can be found in our articles:

How to issue a VAT invoice?
How to issue an invoice (without VAT)?

Costs related to business activity should be recorded in the EXPENDITURE »ACCOUNTING» ADD »VAT INVOICE / INVOICE (WITHOUT VAT) / EXPENSES tab, which is discussed in detail in the article: Accounting of expenses. Taxpayers settling on the basis of a lump sum on recorded revenues, who are also active VAT taxpayers, book expenses for the purpose of VAT deduction, even though the flat rate does not allow to deduct them from revenues on the basis of income tax. At the end of each settlement period, the entrepreneur must draw up a ZUS DRA declaration. In addition, remember that at the end of the month or quarter:

calculate the flat-rate income tax payable to the tax office
prepare a JPK_V7M or JPK_V7K file, depending on the VAT settlement, monthly or quarterly (in the case of active VAT payers)