The rules for settling the advance payment in VAT

by Bryn Fest

Many taxpayers are familiar with the general rules for taxing advance payments and retainers. However, in certain situations involving the return of an advance payment or deposit or the retention of an advance payment, the tax treatment may be different from the typical. Read our text and you will learn what are the rules of accounting for advance payment in VAT.

Many taxpayers are familiar with the general rules for taxing advance payments and retainers. However, in certain situations involving the return of an advance payment or deposit or the retention of an advance payment, the tax treatment may be different from the typical. Read our text and you will learn what are the rules of accounting for advance payment in VAT.

Many taxpayers are familiar with the general rules for taxing advance payments and retainers. However, in certain situations involving the return of an advance payment or deposit or the retention of an advance payment, the tax treatment may be different from the typical. Read our text and you will learn what are the rules of accounting for advance payment in VAT.

What is an advance payment and deposit?

An advance payment is a sum of money paid by a purchaser in order to purchase a future service, product or commodity. It may constitute part or all of the value of the future service, product or good in case the transaction is completed.

A deposit, on the other hand, is the amount of money that the buyer pays towards the purchase of a future service, product or good. The deposit as well as advance payment will be a part of the value of future service, product or goods if the transaction is successful. Remember, however, that an advance payment cannot constitute the entire consideration for the future product, good or service.

Advance payment and deposit in VAT

According to Polish VAT law Art. 19a section 8 of VAT Act, if before delivery of goods or performance of service, the whole or part of the payment is received, in particular: advance payment, down payment, deposit, installment, building or housing contribution before establishing a cooperative right to housing or premises of other use, the tax obligation arises at the moment of its receipt in relation to the received amount. Payment of an advance or deposit, on the other hand, shall not affect the VAT obligation in the month of its receipt in the case of:

  • the supply of electricity, heating or cooling energy and line gas,
  • provision of services:
  • telecommunications,
  • lease, rental, leasing or services of similar nature,
  • protection of persons and services of protection, surveillance and storage of property,
  • permanent legal and office services,
  • distribution of electricity, heat or refrigeration, and natural gas
  • water treatment and supply
  • sewage treatment and disposal
  • waste services,
  • garbage sweeping and snow removal, and other sanitary services,

Apart from the above mentioned services, the payment of an advance or deposit creates an obligation to pay VAT to the seller in the month of its receipt. This payment also applies to advance payment for import, export of services, import or export of goods, intra-Community acquisition of goods or advance payment for services subject to reverse charge.

It is also worth mentioning that in an exceptional case an advance payment towards an intra-Community supply of goods does not trigger the obligation of taxing it with VAT.

Non-performance of a contract by the buyer and revenue for the seller

In case when after making an advance payment the customer resigns from the ordered service or goods, the seller is obliged to return the advance payment. The seller is obliged to issue a correction invoice to the previously issued advance invoice, and then return the received advance. However if the same situation would occur in relation to the advance payment, the seller keeps the paid advance.

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