Loss of the right to tax the activity with a flat tax

Service-Tax

The flat tax is a very attractive form of taxation for some profitable industries. However, you should remember to be careful about several issues related to maintaining the right to tax income in this form for subsequent years of operation. Indeed, in some cases, the right to tax the activity with a flat tax during the tax year may occur.

Performance of work for a former employer

Pursuant to Art. 9a paragraph. 3 of the Personal Income Tax Act, if a taxpayer conducting business activity based on a flat tax achieves in the form of business:

  1. conducted independently or

  2. run as a partner in a partnership (due to the right to participate)

- revenue from the provision of services to the former or current employer, corresponding to the activities that the taxpayer or at least one of the partners performed or performs in the tax year in the form of an employment relationship or a cooperative employment relationship, this taxpayer loses the right to tax with a flat tax in the tax year.

The above provision should be considered in the aggregate category, i.e. the loss of the right to continue to apply the flat tax will arise if three conditions are simultaneously met:

  1. the taxpayer opens a business independently or as part of a partnership, chooses a flat tax as a form of taxation, and then he will sell goods or provide services to his former or current employer, and

  2. the type of service or sale performed for this employer will correspond to the scope of activities that the taxpayer performed for him when he provided work for him on the basis of an employment contract or a cooperative employment relationship. This issue will also apply to situations where at least one of the partners of the partnership made this type of sale to the former or current employer,

  3. the period of providing the same work as part of the activity and under the employment contract will take place in the year of taxing the activity with flat tax.

The scope of activities provided as part of the business is of key importance

As can be seen from the above conditions, the mere performance of work for the former, current employer - whether as an independent business or in the form of a partnership, does not yet result in any loss of the right to flat tax. The premise that will result in the loss of the right to tax the activity with a flat tax is the convergence of activities performed for this employer both as part of the activity and the concluded employment contract or cooperative employment relationship. On the other hand, if there is a situation in which the taxpayer performs work for the former, current employer as part of his activity, and at the same time has an employment contract with this employer, under which he performs completely different activities, then the taxpayer will not lose the right to tax the activity with a flat tax. An additional issue in this respect is the period of providing this work, i.e. in the tax year covered by the flat tax.

The above is confirmed in the individual ruling of 19 May 2016 issued by the Director of the Tax Chamber in Łódź, ref. No. IPTPB1 / 415-300 / 12-4 / 16-S / DJD.

The period of work as part of the activity

The issue of the period in which the taxpayer works for the former, current employer in terms of losing the right to flat tax is also of key importance. If the taxpayer performed work under the employment contract, e.g. until the end of August 2017, and from January 1, 2018, he started his activity subject to flat tax and, for example, performing the same services that were covered by the previous employment contract, despite these only the activities provided to the former employer, there will be no loss of the right to tax the activity with a flat tax, due to the fact that in the tax year 2018, i.e. in the year of conducting activity taxed with flat tax, he no longer has this employment contract for the benefit work to the same extent with the former employer as he currently performs for him as part of his business.

The above is confirmed in the individual ruling of April 5, 2017 issued by the Director of the National Tax Information, ref. No. 1462-IPPB1.4511.88.2017.1.ES.

Type of contract under which the taxpayer performed or performs activities for the employer

If the taxpayer performed work on the basis of an employment relationship, e.g. in 2017, and from January 1, 2018, he started business activity subject to flat tax and intends to re-establish cooperation with the former employer as part of conducting business in the same activities that he performed in the previous year on the basis of an employment contract, but in 2018 he will perform them on the basis of a cooperation agreement or a civil law contract, where there are no conditions such as:

  1. responsibility towards third parties for the result of these activities and their performance, excluding liability for committing unlawful acts, shall be borne by the party ordering the performance of these activities;

  2. they are performed under the direction and in the place and time designated by the ordering party;

  3. performing these activities does not bear the economic risk related to the activity conducted

- characterizing an employment contract and not constituting non-agricultural economic activity, in this case the taxpayer will still be able to use a flat tax as a form of taxation of the conducted activity.
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Loss of the right to tax the activity with a flat tax and re-selection of this form of taxation

Taxpayers who in the tax year, however, provided the same work as under the employment relationship for the former, current employer as part of the business, resulting in the loss of the right to tax the business with a flat tax, will be required to convert their income from the beginning of the year of loss of this right according to the rules general, i.e. using a tax scale with rates of 18% and 32%. Unfortunately, it may turn out that after the conversion, the taxpayer will receive income tax advances and he will also be obliged to pay interest for late advances. However, the advances paid so far will be counted towards the advances determined according to the tax scale.

Re-election of flat taxation after the loss of the right

A taxpayer who, for example, will lose the right to tax his activity with a flat tax in 2017, and in 2018 again has the right to apply this form, only has to submit a declaration or update the CEIDG-1 form by January 20, 2018 choosing a flat tax as a form of taxation of business activity.