Receiving an advance payment before the service is provided and income tax

Service-Tax

Sales transactions between entrepreneurs are relatively often preceded by making a prepayment for future services. It is not always possible to identify a given payment as an advance payment, as it may be final and generate taxable income in the month of payment. How should the receipt of an advance payment before the service rendered be interpreted?

What is income due?

Pursuant to Art. 14 sec. 1 of the Personal Income Tax Act, business income should be understood as amounts that are receivable from the recipient, even if they have not yet been actually received by the recipient. The legislator excludes from the catalog of due revenues:

  • value of returned goods,

  • granted discounts and rebates,

  • VAT at active VAT payers.

It should be added that due income is any kind of gain for which the taxpayer is entitled to claim and realize it, i.e. those resulting from a specific legal relationship.

When does the revenue due arise?

Taxable income arises in:

  • the date of delivery of the item,

  • the date of sale of the property right or performance of the service,

  • the day of partial performance of the service,

- but not later than one day:

  • issuing an invoice or

  • payment of receivables.

It should be noted that the following circumstances constitute an exception to the above rule:

  • issuing an invoice before the date of issue of the goods, sale of the right or performance of a service or partial performance of the service, then the date of the revenue should be the date of issue of the invoice,

  • payment of the amount due before the goods are released, the right is sold or the service is rendered or the service is partially performed, which in this case will result in the generation of revenue on the day of receipt of the payment.

On the other hand, revenues subject to taxation with personal income tax do not include collected payments or accrued receivables for the supply of goods and services that will be performed in the following reporting periods.

Payments for the organization of conferences, fairs, exhibitions received a few months before the provision of the service

Ms Marzena runs a business involving the organization of conferences, fairs, exhibitions and congresses throughout the country. The company is an active VAT payer and the expenses are accounted for on a cash basis. It often happens that Mrs. Marzena receives advances or other payments, often 100% of the service. There are situations where clients make advance payments even several months before the date of the service.

In addition, Mrs.Marzena indicated that the course of the transaction, from payment to service performance, has its own specific features:

  • advances always result from contracts relating to the participation of the entrepreneur in the conference, in the form of a product or company presentation, a lecture on the offered products or services, participation in events related to the conference, meals, accommodation, however, the frequency and variability of the above-mentioned elements is different,

  • advances may be returned if the service is not performed,

  • the advance payment is reimbursed when the scope of the contract changes or the contract is resigned,

  • settlement takes place after the end of the event,

  • there are also 100% advances before the event.

  • the contract includes the receipt of an advance payment,

  • sometimes there is a change in the amount of the advance in the form of an annex to the contract

  • the advance payment is part of the payment for the complete performance of the service, which is the subject of the contract;

  • if the payment is part of the payment for some element of the contract, it is treated as a partial payment and not as an advance payment.

  • receipt of an advance payment is confirmed by an advance invoice and the completion of the service is confirmed by a final invoice.

Ms Marzena had doubts as to when the income would be taxable with personal income tax.

In this situation, it should be emphasized that the nature of the payment is the main factor determining the amount of money received as income or as an advance payment. Payment that is taxable income must be definitive, while prepayments and advances are not of this nature due to the possibility of their return each time before the date of performance of the services for which they were paid. The essence of the payment as an advance payment must also result from the provisions of the contract concluded between the contractors.

However, if the received payment is definitive and final, i.e. the payment for the purchased goods or the performance of the service is made in advance, then the payment identified as payment of the amount due before sending the goods or providing the service constitutes income taxable with personal income tax in the month of receiving the payment.

The above is confirmed in the individual interpretation of October 13, 2017. with reference number 0113-KDIPT2-1.4011.267.2017.2.KO issued by the Director of the National Tax Information.

Payments for the organization of conferences, fairs, exhibitions received a few months before the provision of the service

Mr. Jerzy runs a non-agricultural business in the field of consulting and training services for business entities. Mr. Jerzy's company is an active VAT taxpayer, and the income is taxed according to general rules. Even before the training, companies make a 100% prepayment, even several months in advance.

Each payment is confirmed by Mr. Jerzy with a VAT invoice, which contains information such as the type, place and date of the training.

Sometimes the training is canceled due to the small number of applicants. Sometimes the client exceptionally resigns from the training service, then Mr. Jerzy returns the prepayment on the basis of correcting invoices.

In a situation where the training takes place, and there was a previously issued advance invoice, the income from this training is taxed by Mr. Jerzy on the day the service is provided.

Mr. Jerzy acts correctly recognizing the tax revenue on the date of the earliest of the events, i.e. on the date of the service, because the invoices issued before that date documenting the receipt of the advance payment before the service performed do not have a definitive nature of payment for the service.

A similar position is held by the Director of the Tax Chamber in Bydgoszcz in the individual interpretation of 09/04/2014. with reference number ITPB1 / 415-70 / 14 / DP.

Receipt of an advance payment before the service provided - payments for the organization of conferences, fairs and exhibitions

Mr. Norbert runs a catering business. The company is an active VAT payer. As part of the promotion and customer acquisition, vouchers were sold for the provision of the service within a period of no more than a year. Fixed value vouchers entitle to a cashless purchase of catering services.

The customer may transfer the purchased voucher to another person, but the voucher will not be able to be redeemed after the expiry of their validity period.

Vouchers apply to the catering service selected by the customer and do not make their implementation dependent on the purchase of another service. At the time of purchasing the voucher and paying for it, the customer knows what specific service he will receive. If it happens that the value of the provided catering service exceeds the value of the purchased voucher, then the customer pays the difference.

Due to the fact that the received prepayment or advance payment relates to a specific catering service selected by the customer, income in income tax will arise no later than on the date of issuing the advance invoice for the voucher sold, and in any case on the date of receipt of payment for the voucher from the customer.

The same position was expressed in the individual interpretation of 03/09/2015. with reference number IBPB-1-2 / 4510-203 / 15 / KP issued by the Director of the Tax Chamber in Katowice.