Advance payment for 100% of the order - settlement

Service-Tax

In many cases, companies charge their clients with advances for the performance of a future service or delivery of goods. It is a kind of protection of entrepreneurs against the possible resignation of the customer from the purchase. However, the collection of an advance payment has certain consequences in terms of VAT. In this article you will learn how the advance payment for 100% of the order should be settled!

What is an advance payment?

VAT regulations do not provide a specific definition of an advance payment. However, an advance payment is a prepayment made for future deliveries of goods or services. It is, in a sense, a guarantee that neither party will withdraw from the transaction. It should be mentioned here that if the service is not performed or the goods are not delivered, the buyer who has paid the advance can claim a full refund from the seller.

Advance payment and VAT tax obligation

According to the law, the seller is obliged to show the advance payment in his VAT sales register on the date of its receipt. The tax obligation under VAT arises in relation to the amount received.

Settlement of the advance payment and income tax

In the case of income tax, the situation is a bit different. The Personal Income Tax Act states that advances collected for the performance of a future service or delivery of goods are not considered revenue if they are performed or delivered in the next billing period. Therefore, if the advance payment is only a part of the total value of the good or service, then in the light of the law it is not income. Unfortunately, in the case of advance payments for 100% of the contract value, the matter is more complicated, as different tax authorities represent two completely different positions.

The first position is based on the above-mentioned Personal Income Tax Act and indicates that income can only be considered when the goods or services are delivered, and not when the advance payment is made. The second position, on the other hand, considers the advance payment to be part of the payment, while the receipt of 100% of the advance payment determines the value of the entire salary, so it should be considered as income and taxed.

Documenting the settlement of advances

The rules according to which advance payments should be documented depend on whether they constitute part or all of the value of the contract.

When the entrepreneur receives advance payments, which are partial payments for goods or services, he is obliged to issue an advance invoice, and after the contract is completed, to issue a final invoice, which is the basis for settlement both for the seller and the buyer of the service.

Important!

An entrepreneur may issue one invoice for all advances received in a given month from one contractor. Such an invoice should be issued by the 15th day of the following month, however, the VAT obligation arises in the month in which the advance payments were made.

 

Attention!

When the advance invoice does not cover the entire payment for the goods or service, the final invoice should reduce the sum of the value of the goods or services by the sum of the received advances, and the VAT amount should be reduced by the sum of the tax amounts shown in the advance invoices. In addition, the final invoice should have a number other than the advance invoice.

In the case of an advance payment of 100% of the contract value, the entrepreneur only needs to issue an advance invoice and indicate VAT in the sales register. The revenue is posted only when the goods are delivered or the service is performed, in column 7 of the revenue and expense ledger - sale of goods and services - and the basis for the entries is the advance invoice.

Important!

Pursuant to Art. 106f paragraph. 1 of the VAT Act, the advance invoice should contain:

  • the date of its issue;
  • a number given within one or more series that allows for unambiguous identification of the invoice;
  • the first and last names or names of the taxpayer and the buyer of the goods or services and their addresses;
  • the number by which the taxpayer is identified for tax purposes;
  • the number by which the buyer of goods or services is identified for the purposes of tax or value added tax under which he received the goods or services;
  • the date of the delivery or completion of the delivery of goods or the performance of the service or the date of receipt of the payment referred to in art. 106b paragraph. 1 point 4, if such date is specified and differs from the invoice issue date;
  • payment amount received;
  • the tax amount calculated according to the formula:

    KP = ZB x SP / 100 + SP
    where:
KP - tax amount
ZB - the amount of the payment in whole or in part
SP - tax rate
  • order or contract data, including:
    - name of the product or service,
    - net unit price,
    - quantity of ordered goods or services,
    - value of ordered goods or services without the tax amount,
    - tax rates and tax amounts,
    - order value including the tax amount.

Settlement of advances at the recipient

The provisions of the Personal Income Tax Act do not prohibit entering advance payments into expenses, however, it should be remembered that an advance payment, even up to 100% of the contract value, is not fully binding and may be returned.

The advance payment applies to orders that are yet to be processed, so the relationship between it and the company's revenue will only arise when the goods are delivered or the service is performed. The buyer may deduct VAT from the advance invoice, as a rule, in the settlement period in which it is received.