Payment for work done in stages and the generation of income
Taxpayers engaged in production activities often provide their contractors with various additional services apart from production. The production of industrial machinery is often divided into several stages. Machine manufacturers, apart from designing and making it, must also run it in the production cycle. After the assembly, the manufacturer must also train the contractor's employees. Thus, the production of complex machines consists of several stages (works). Is the tax revenue paid for work done in stages?
Pursuant to Art. 14 sec. 1 of the Act of July 26, 1991 on personal income tax (Journal of Laws of 2016, item 2032, as amended), hereinafter referred to as the "PIT Act", for income from the activities referred to in art. 10 sec. 1 point 3, the amounts due, even if they were not actually received, excluding the value of the returned goods, granted discounts and discounts. In the case of taxpayers selling goods and services with the tax on goods and services, the revenue from this sale is considered to be revenue less the due tax on goods and services.
Due revenues are all types of revenues for which the taxpayer is entitled to pursue them, i.e. those resulting from a specific legal relationship. "Receivable" refers both to the possibility of claiming a specific benefit and the obligation to pay it. This means that the emergence of due revenues is related to the emergence of the debt. As debt is a term derived from civil law, due revenues are revenues due under civil law, i.e. revenues that can be legally enforced.
However, pursuant to Art. 14 sec. 1c above. of the Act, for the date on which the revenue referred to in para. 1, it shall be considered, subject to the provisions of paragraph 2. 1e, 1h-1j and 1n-1p, the date of delivery of the item, sale of property rights or performance of a service or partial performance of the service, no later than the day:
issuing an invoice or
payment of receivables.
Payment for work done in stages - division of work
We will use an example to present the problem.
The taxpayer signed a contract for the manufacture of a machine for the production of canned goods for a large processing company. It is to be made to order. The taxpayer first designs the machine for the recipient. After accepting the design, the manufacturer produces it. Then it is to be transported and commissioned at the ordering party's factory. Finally, the taxpayer is to train the company's employees. Pursuant to the provisions of the agreement, the taxpayer will receive payments in a certain amount for each of the 4 stages of work. Thus, the taxpayer will receive 4 payments, which will be made as follows;
the first payment will concern the preparation of a specialist machine design, it will be made within 10 days from the date of signing the contract (before performing the activities in question);
second payment for the production of the machine without commissioning, made after the manufacture of the machine;
the third payment for starting the machine in the production cycle will be made immediately after performing the activity in question;
the fourth payment will concern the final commissioning and training of the contractor's employees. Payment will be made after this is done.
According to the agreement, the finished product will be the subject of technical acceptance (the acceptance activities will be confirmed in the form of a written protocol). The agreement does not provide for the possibility of reimbursement of payments made.
At this point, it is necessary to ask whether the taxpayer should recognize the tax revenue four times or only once after completing all the work?
Recognition of tax income
Based on Article. 14 sec. 3 point 1 of the PIT Act, they are not tax income of advance payments. It should be emphasized, however, that the earlier receipt of the payment (before the final completion of the works) does not always mean an advance or prepayment. Thus, not every prepayment does not generate income from non-agricultural economic activity. The nature of the payment is decisive for the classification of the payment received as income or as a prepayment (advance payment). The contribution considered as tax revenue must be final. In the light of the above, in the analyzed case, the prepayments are definitive and the contract does not provide for their return.
This means that in our example, revenue will arise as soon as we receive each of the four payments of a certain amount. Revenue will arise on the date each of the receivables is settled (after the completion of individual stages of the implementation of a specialized machine).