Re-invoicing of incurred costs - when is it possible?

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A frequent case in cooperation between contractors is the ordering party's obligation not only to pay the main part of the contractor's remuneration, but also to reimburse costs related to the services provided. Examples of such additional expenses include travel, accommodation and other charges, the nature of which varies according to the type of business. Doubts may arise when settling them, because we have a choice of adding costs to the price of the main service or re-invoicing them, and sometimes even issuing a debit note. The general rule that we should follow is: the tax base is everything that constitutes payment - but let's check how it works in practice.

What does re-invoicing mean and when can it be used?

Re-invoicing has not been indicated directly in Polish regulations, but it is an activity that is very often used in business transactions. An entrepreneur who buys a certain service, which he later resells to his client without adding a margin, charges the final purchaser with the price of this service. Costs can only be passed on to the final recipient of the service if the service is purchased for resale in the same form.

Based on Article. 28 of Council Directive 2006/112 / EC of 28 November 2006 on the common system of value added tax and art. 8 sec. 2a of the VAT Act, we can say that re-invoicing is treated as the provision of a service, although we do not actually perform it, therefore it is an activity subject to tax on goods and services on general principles. A person re-invoicing a given service can usually use the VAT rate from the original invoice, but we have a number of exceptions discussed in the article: Re-invoicing in practice - it's worth knowing.

As already mentioned, Polish regulations do not refer directly to re-invoicing, so they also do not define specific rules for issuing documents, and thus the entrepreneur should apply general provisions in this area. Therefore, re-invoicing should be made no later than the 15th day of the month following the month in which the re-invoiced service was performed. There are also no contraindications to re-invoice before the service is performed, but not earlier than 30 days before its performance.

However, re-invoicing is not always possible, and all due to the tax base defined in the regulations and the numerous tax interpretations issued in this regard.

What is included in the tax base?

Pursuant to Art. 29a paragraph. 1 of the VAT Act, the taxable amount is everything that is the payment that the person delivering the goods or the service provider has received or is to receive from the buyer, recipient or a third party.

As a rule, any additional costs relating to the main service charged to the buyer should therefore be included in the taxable amount for the service provided. If we are dealing with a comprehensive service and we cannot break it down into individual components, and then sell each of them separately (they lose their right to exist separately), then all additional costs in the light of the VAT Act are part of the tax base of the service to which they relate. Due to the comprehensive nature of the service, all elements are subject to taxation at the rate applicable to the main service, regardless of whether it is the basic VAT rate or one of the reduced rates.

In what situations is re-invoicing unacceptable?

Service re-invoicing cannot be ancillary to the base service. This means that the expenses accompanying the performance of the main activity should not be re-invoiced because they are an integral part of this benefit, they are closely related to it, so they must be included in the tax base. Such a position was presented in the interpretation of the Tax Chamber in Poznań of July 13, 2010 (ILPP2 / 443-588 / 10-2 / MN), the subject of which was an inquiry by a lawyer about the possibility of reimbursement of travel, accommodation and subsistence costs on the basis of a debit note. According to the tax office:

(...) Taking into account the above, the costs of travel, accommodation and per diem incurred by the Interested Party should be included in the tax base for the service provided, and the entire benefit due from the Applicant should be documented by issuing a VAT invoice, using the tax rate corresponding to the service provided”.

What to choose - re-invoicing or adding costs to the main service?

In summary, we can say that the decision to re-invoice or include the costs reimbursed by the ordering service to the main service is not always obvious. In case of doubt, the safer option is the second option, i.e. adding up all incurred expenses and the base salary, thus determining the tax base.

However, if we want to use re-invoicing, we must first of all determine whether the individual costs are not closely related to the main service we provide, they do not create one indivisible economic service (comprehensive service), the possible separation of which would be unnatural. Only if it is clearly stated that the services sold are of a separate nature, we can re-invoice individual costs. Otherwise, all activities accompanying the main service should be added to the taxable amount of the service provided.

What expenses are not included in the tax base?

Pursuant to Art. 29a paragraph. 7 point 3 of the VAT Act, we know that the tax base does not include the amounts received from the buyer or customer as a reimbursement of documented expenses incurred on behalf and for the benefit of the buyer or customer and recognized temporarily by the taxpayer in the tax records kept by him.

In such a situation, the entrepreneur is not a party to the transaction, but only pays the expenditure on behalf of and for the benefit of his client as an attorney or intermediary, and then demands a refund from him. An example of this type of expenses are stamp duties, court fees, etc., incurred by proxies. Their reimbursement is therefore excluded from taxation with value added tax, because we are not dealing with the provision of the service, but only with its temporary payment on behalf of the client. The activity outside the scope of VAT is documented with a debit note and such a document should be issued to the actual buyer.

We do not apply this provision to re-invoicing, as it is done on our own behalf and on behalf of other people. The settlement of the dispute between the issuance of the re-invoice and the debit note therefore comes down to answering the question on whose behalf the costs are incurred.

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What to take care of when transferring costs to the final buyer?

It should also be borne in mind that any reimbursement of expenses by the ordering party, incurred as part of this service by the contractor, must always be the subject of agreements between contractors, i.e. it should be clearly specified in the contract. Re-invoicing is treated as the provision of services that can be performed only with the mutual consent of contractors.

When starting cooperation with another entrepreneur, first of all, it is worth taking care of a well-prepared contract. A cooperation agreement with the specified rights and obligations of both parties to the transaction in the event of any disputes will help us to resolve them quickly and without conflicts. The appropriate contract will guarantee us a sense of stability in the relationship with the contractor.