Method of VAT settlements - accrual and cash-based

General principles — Accrual method

As a VAT payer you need to settle the tax on a monthly or quarterly basis.  The main principle is that all invoices issued in a given tax period should be demonstrated in the tax return drawn up for that period.  The sum of output VAT on the issued invoices constitutes your tax due. 

One of the disadvantages of being an entrepreneur is obligation of accrual-based accounting recognition of tax liabilities.  This means that the facts are not examined (actual receipts), but fictitious state, resulting from documents issued by you.

For example, if in a given month you issue invoices for a total amount of PLN 10,000 + PLN 2300 VAT, regardless of whether your contractors pay you, the amount of VAT due is PLN 2300.  This is the amount (after the deduction of input VAT - VAT from purchasing invoices) which shall be paid to the account of the tax office. 

If you do not receive payment from your customers, you must still pay the VAT due (out of your own resources).  This arrangement is very burdensome for companies that do not receive liabilities within the time limit, or issue invoices on large amounts for the first time.

This can be done differently — cash accounting

At the beginning you must know that the cash basis method of  VAT settlement is more time consuming than accrual basis method.  You also need to know that not every entrepreneur may use it. 

The conditions for the selection

The choice of the cash method must be notified to the Head of the tax office by the end of the month preceding the period in which you start to settle  (on VAT-R form to the Head of the tax office). 

You must keep in mind that cash method may be only choose by small taxable persons (sales per year for an amount of no more than EUR 1,2 million) and those who are registered as active VAT taxable persons for over 12 months.  One of the fundamental differences in the tax settlement in relation to the accrual accounting are compulsory quarterly tax periods. 

Remember that you can change a method of VAT settlement after the expiry of 12 months. 

As a VAT payer using cash accounting, you must also mark your  invoices suitably.  They must have annotation ‘cash accounting'.  It is also due to the fact that rules on input tax deduction from such invoices by your business partner are different than in case of normal invoices. 

It is also an indication for you — VAT charged on the invoice with the annotation ‘cash accounting' can be deducted only after payment for goods/service.

Method of tax settlement

For you, as the issuer of the invoice on a cash basis, the main advantage is the obligation to pay VAT only in the period during which you receive payment.  This means that if the counterparty does not pay you on time, you will not have to pay VAT on the invoice.  If the counterparty pays only part of the of the amount due, you settle VAT in part (in case of partial payments, one invoice issued by you can be demonstrated in a number of tax periods). 

It follows from the above that in order to correctly account for VAT for a given quarter, you have to trace the history of all contributions from business partners during the relevant period and to allocate them to the corresponding invoices.  If you have a lot of accounting documents and  counterparties who make partial payments - it is time-consuming.  If you entrust the external company to keep KPiR, or you need to generate the data by yourself, or you have to make an insight into your business account available to this entity. 

 

Date of chargeability

Depending on who you make transactions with,  the date of the chargeable event is specified differently. 

You must account for VAT in the period in which: 

  • you will receive the whole or part of the payment — if your counterparty is another VAT taxable person,
  • you will receive the whole or part of the payment, and if this was not the case then within 180 days from the delivery of goods or the provision of services if your counterparty is an entrepreneur who is not an active taxable person for VAT or a natural person (consumer). 

You can read more about tax obligation in the publication of the Ministry of Finance.

When you cannot use the cash accounting scheme

 You may not apply the cash accounting scheme in the case of: 

  •  sale through vending machines,
  • provision of telecommunications services by means of telephone cards and tokens
  • grants, subsidies and similar aids,
  • intra-Community supplies of goods
  • import of services. 

When the accrual basis is cost effective

 Everything depends on the specific conditions in which you conduct your business, so you have to take a final decision.  Below you have guidelines that will help with the choice. 

 The cash accounting scheme is a mandatory quarterly VAT settlement.  Please note that you must have an adequate stock of financial resources to pay for a given quarter (as a rule, three times more than in case of monthly accounts).  If you fail to make financial reserve - you may have problem with cash flow. 

 If you issue invoices with long term of payment - method is beneficial , since you pay tax only upon receipt of the salary.  You minimize the risk that you will not be able to pay VAT. 

 If your contractors do not pay within deadline, this method also makes economic sense.  The non-deductibility of VAT until payment of your invoices may have a real leverage effect on  your debtor. 

 If you issue a lot of invoices, you will have plenty of obligations relating to the records of payments and assigning them to specific invoices. 

 Some counterparties are reluctant to sign agreements with entrepreneurs who settle VAT on a cash basis (mainly due to the non-deductibility of VAT before payment). 

 Additional information

 If you want to learn more about the methods of VAT settlement, check the guide of the Ministry of Finance.

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