Receipt of advance payment and VAT

Service-Tax

In most transactions, the seller requires the buyer to make a full or partial advance payment for future supplies or services before the service or goods are delivered. Such an advance payment is a security to ensure that the buyer does not withdraw from the transaction causing losses to the service provider or supplier of the goods. Find out how to properly settle the amount received from the contractor.

Receipt of an advance payment - tax obligation under VAT

Pursuant to Art. 19a paragraph. 8 of the Value Added Tax Act, if all or part of the payment was received before the delivery of goods or the service, in particular: prepayment, advance payment, down payment, installment, construction or housing contribution prior to the establishment of a cooperative right to a dwelling or premises for another purpose , the tax obligation arises upon its receipt in relation to the amount received.

The legislator also provided for exceptions to the above-mentioned rule - receipt of a prepayment, advance payment or installment does not result in a tax obligation in the case of:

  • supply of electricity, heat or cooling as well as line gas,

  • provision of services:

    • telecommunications,

    • listed in item 140-153, 174 and 175 of Annex 3 to the Act (mainly services related to water supply, sewage treatment, waste collection and treatment),

    • rental, lease, leasing or services of a similar nature,

    • protection of persons and services of security, supervision and storage of property,

    • permanent legal and office services,

    • distribution of electricity, heat or cooling as well as line gas,

with the exception of services to which Art. 28B, which are the import of services.

Documenting the advance payment received

If the taxpayer receives an advance which gives rise to a tax obligation, he is obliged to properly document its receipt by issuing an advance invoice. This obligation is specified in Art. 106b paragraph. 1 point 4. As for the date of issuing such an invoice, the legislator also did not leave the entrepreneurs a choice, ordering the issuance of an advance invoice no later than by the 15th day of the month following the month in which the entrepreneur received the advance payment.

The amount of the advance payment actually paid by the buyer should be included in the issued advance invoice. VAT should be reported on it.

It should be mentioned that as a result of the advances received, no tax obligation arises in the field of income tax - it is quite troublesome in the case of sales records at the cash register, which is why the legislator introduced the possibility of simplifying the settlement of advances received - more on this topic in the article: Advance payment with income in date of receipt.

Receipt of an advance payment - customer resignation from the transaction

What should be done if the taxpayer receives an advance payment for future supplies of goods or services and the customer abandons the transaction? How to settle such a case for tax purposes?

The solution depends on the arrangements with the contractor - whether the advance payment will be refunded or will be credited as compensation for the seller due to the customer's resignation from the transaction.

If the entire amount of the advance payment is returned to the buyer, the solution is simple - a correcting invoice should be issued for the advance invoice.

If, on the other hand, the buyer is reimbursed only part of the advance payment or not at all, the matter is more complicated.

The director of the Tax Chamber in Katowice commented on this issue by issuing an individual interpretation number IBPP2 / 443-1076 / 13 / IK. In the discussed interpretation, the applicant asked whether the advances he retained after the customer resigned from the order were subject to VAT, or should he issue a correcting invoice to the originally issued advance invoice.

 

"To sum up, it should be pointed out that the fee for late cancellation of the booking as a compensation function, does not constitute a remuneration for the service provided (...), but is a compensation for the costs incurred by the Applicant or lost benefits caused later than resulting from the concluded cancellation of the booking agreement. Thus, the act of collecting the fee in question is not subject to VAT. As a consequence, the Applicant is obliged to issue a correcting invoice reducing the value of the tax shown on the advance invoice, despite not returning the advance to the client. "

 

It follows that even if the seller does not return the advance payment to the customer, but credits it towards compensation for lost profits, he is obliged to issue an invoice correcting the advance invoice. Additionally, it should be remembered that the retained advance will constitute income from another source, which should be shown in the KPiR in column 8, and thus - taxable with income tax.