Advance payment at the seller - how to settle it?

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It is common practice for sellers to collect advances on future supplies of goods and services. The received advance payment should be accounted for, which, as practice shows, often causes problems for entrepreneurs. How should the advance payment be made to the seller?

Pursuant to Art. 9 sec. 1 of the PIT Act, all types of income are subject to income tax, except for those listed in Art. 21, 52, 52a and 52c and the income from which the tax collection was abandoned pursuant to the provisions of the tax ordinance.

Therefore, all income earned by the taxpayer is subject to taxation with personal income tax, with the exception of income that has been exhaustively listed by the legislator as tax-exempt or from which tax collection has been waived by way of an ordinance issued by the Minister of Finance.

The date on which the revenue arises is the date on which the item is delivered, the property right is sold, or the service is provided or the service is partially performed, no later than on:

  • issuing an invoice or

  • payment of receivables.

At the same time, revenues do not include collected payments or accrued receivables for the supply of goods and services, which will be performed in the following reporting periods, as well as received or returned loans (credits), except for capitalized interest on these loans (credits). The above means that not all received receivables are revenues within the meaning of the Income Tax Act, if they do not constitute a payment for the service provided, but only a prepayment or advance payment for future benefits. Property additions, classified as revenues, must be of a definitive nature.

As a consequence, revenue will only arise when the service is provided or the goods are delivered.

This position is confirmed by the tax authorities, an example of which is the letter of the Director of the Tax Chamber in Katowice of April 18, 2012, file ref. IBPBI / 1 / 415-65 / 12 / AB, where we can read:

(...) received payments (both partial and full) before the end of the course, as a rule, they constitute prepayments (advances) for services to be performed in the following reporting periods. Consequently, as a rule, their receipt, pursuant to Art. 14 sec. 3 point 1 of the Personal Income Tax Act, does not generate taxable income. As indicated in the application, the clause in the contract stating that the payments are final does not have legal effects because it has been included in the catalog of prohibited clauses by the Office of Competition and Consumer Protection. As a consequence, the revenue from the training services provided will arise on the date the service is provided, regardless of the year in which the course is completed (...).

At the same time, the position of the tax authorities can be found, according to which, in a situation where the parties have agreed the final price, even despite the failure to provide the service, income will be generated. This view was presented by the Director of the Tax Chamber in Łódź in the individual ruling of December 9, 2011, No.IPTPB1 / 415-160 / 11-4 / MD, where he indicated that:

(...) the received amount, confirmed by an invoice, does not constitute a prepayment or advance payment. Payment in advance for marketing services that will be provided over a period of 3 years constitutes tax income on the date of one of the events provided for in art. 14 sec. 1c - in the case at hand, on the date of issuing the invoice or settling the amount due, depending on which of these events occurred earlier. The amount received, in the amount of 100% of the remuneration, cannot be treated as a prepayment or advance payment for the performance of the service in the future. It is important not what the payment was called, but what its actual nature, i.e. whether it is really an advance payment, or is it permanent and will not be subject to subsequent settlement. Moreover, prepayments and advances according to the dictionary definition are part of the price, and not 100%, which is the case in the case at hand. (...).

Advance invoices at PKPiR

The collected advance payment will become tax revenue only after the delivery or service has been performed. Then a final invoice should be issued for the remaining amount due. On its basis, the total value of the obtained revenue should be entered in column 7 of the book, i.e. the net amount resulting from the advance invoice plus the net amount from the final invoice.

Example 1.

The value of the goods delivery transaction was PLN 1,000. In March, the taxpayer received an advance payment of PLN 500. In April, at the time of delivery, he received the remainder of the payment. This means that in April he should settle the entire transaction.

Advance payment at checkout and income

As of January 1, 2015, the legislator introduced new regulations that allow for the recognition of advance payments recorded in the cash register as income at the time of their receipt.

According to Art. 14 sec. 1j of the PIT Act, in the case of collecting payments for the supply of goods and services, which will be made in the next reporting periods, subject to registration using a cash register in accordance with the provisions of the Act on tax on goods and services, the date of receipt of the income is considered to be the date of revenue generation, if the taxpayers by 20 January of the tax year, and in the case of taxpayers who start recording turnover using a cash register - by the 20th day of the month following the month in which they started recording turnover using a cash register, will notify the competent head of the tax office about the choice of this the method of determining the date of the revenue arising.

Example 2.

The taxpayer collected an advance payment for the delivery of goods in the amount of PLN 1,000. He checked it in the cash register. Previously, he made 2.reporting to the tax office that the received advances, recorded in the cash register, are considered income at the time the payment is collected. In this case, the net amount of the advance constitutes income for the taxpayer on the date it is received. The advance will be settled in column 7 by PKPiR - based on the cash report.

Advance payment at the seller and VAT

According to the general rule contained in Art. 19a paragraph. 1 of the VAT Act, the tax obligation arises when the goods are delivered or the service is performed.

If, prior to the performance of the service / delivery of the goods, all or part of the payment has been received, in particular prepayment, advance payment, down payment or installment, the tax obligation arises upon its receipt, in relation to the amount received. The amount of VAT on the advance payment is calculated using the "in one hundred" method, which means that the received value should be treated as a gross amount.