Advance payments under VATA
Advance payments play an important role in process of taxation under the Value Added Tax Act (VATA), as they are directly related to the obligation to charge value added tax (VAT) and to the right to deduct tax credit. This article will provide a general overview of advance payments, the relationship between them and the issuance of invoices, the right to deduct tax credit for this type of payment, deposits as advance payments, as well as some special cases.
The general rule for charging VAT on advance payments can be found in Art. 25(7) VAT. According to this provision, where an advance payment in full or in part is effected on a supply before the occurrence of a chargeable event, the tax becomes chargeable upon receipt of the payment (for the payment amount).
On the date of the chargeable event, the tax becomes chargeable for the taxable supplies and the registered person becomes liable to charge the said tax, grounds also arise for exemption from charging the exempt supplies.
On the date the advance payment no chargeable event occurs, but by virtue of Art. 25 (6) of the Act, tax becomes chargeable.
One of the special cases is related to intra-European Union supplies and intra-European Union acquisitions where the advance payment is not a prerequisite for chargeability of the tax. For intra-European Union supplies under Art. 51 (3) VATA, the tax becomes chargeable on the 15th day of the month following the month during which the chargeable event occurs or the date of invoice, if it has been issued before the 15th day of the month following the month during which the chargeable event occurs, except where the invoice in connection with the payment received is issued prior to the date of the chargeable event. The provisions of Art. 63 VATA regarding intra-European Union acquisitions are analogous.
Another special case are advance payments received before registration under VATA. Art. 25 (4) VATA stipulates that for supplies effected periodically, by stages or continuously (with the exception of the actual handing over of goods, pursuant to a lease contract which provides for the passing of the right of ownership of the said goods under a suspensive condition), each period or stage for which payment has been agreed shall be considered to be a separate supply and the chargeable event for it shall occur on the date on which the payment became executable. In this context Art. 12 (4) of the Regulations for the Application of VATA (RAVATA) expressly states that in such cases, the tax shall become chargeable upon receipt of the payment. These provisions also apply to actual delivery of goods under a lease contract, where the requirements under Art. 6 (2), item 3 of the Act are not fulfilled.
Form of advance payments
The usual form of payment is monetary. Payment can also be expressed in money substitutes as means of payment, such as receipts for purchases, vouchers or purchase coupons, tokens and others. Eligible are also offsetting assignments and assumption of debt.
The basis of taxation of each supply at the date of occurrence of the chargeable event according to Art. 26 (7) VATA, where the consideration is expressed wholly or partly in goods or services (the payment is effected wholly or partly in goods or services), the taxable amount of each supply shall be the open market value of the goods or services provided, calculated at the date of occurrence of the chargeable event for it. Where the tax base can not be determined in this way, then it is considered at market price.
Relationship between advance payments and the issuance of invoices
The fact that an invoice has been issued does not necessarily mean that a chargeable event for the purposes of VATA has occurred. On the contrary - the existence of the chargeable event is crucial to the issuance of the tax document to be drawn up within 5 days from the date of the chargeable event. In this regard, it is not advisable to issue a tax document before the supply has occurred as a chargeable event.
It should be pointed out that under VATA, advance payments do not give rise to a chargeable event. At the same time, in accordance with Art. 25 (7) VATA, the tax for advance payments becomes chargeable on the date of receipt thereof. That is, upon receiving an advance payment, pursuant to Art. 113 (1) VATA, an invoice must be issued within 5 days of receipt of the amount. Upon performing the supply, an invoice must be issued for the entire cost of the supply, indicating the amount of advance payment received. The declaration must also state the entire cost of the supply.
Advance payments and the right to deduct tax credit
Art. 68 VATA defines the tax credit as the amount of tax which a registered person has the right to deduct from the tax liabilities thereof under VATA in respect of goods or services received thereby in a taxable supply and a payment effected thereby prior to the occurrence of the chargeable event for a taxable supply. The right to deduct arises when the deductible tax becomes chargeable. Tax documents issued based on advance payments are a condition to exercise the right of deduction. It is important to note that there is no requirement in VATA to have charged the tax to invoke the right to deduct tax credit.
The right to tax credit is not exerciseable based on issued tax receipts for advance payments in intra-European Union trade.
Deposits as advance payments
According to Art. 93 of the Obligations and Contracts Act (OCA), the deposit serves as proof of a contract between two parties and ensures its implementation. Beyond these contractual and legal functions, the deposit in a legal tax context is usually deemed as a partial advance payment. This deposit determines the chargeability of tax in the event that the supply in respect of which it is paid is taxable.
In the event that payment of the amount cannot be determined as consideration to the particular taxable supply, the same cannot be treated as an advance payment and is therefore not subject to VAT taxation for amount of payment.
If a taxable person is not registered under VATA a deposit has been paid thereunder or any other prepayment that should be treated as an advance payment on the taxable supply, whose place of transaction is the territory of the country, and the amount of taxable supplies carried out by the person for 12 consecutive months prior to the current month, together with the received deposit amount to or exceed BGN 50,000, the said person will be subject to compulsory registration under VATA.
Advance payments received prior to registration under VATA
The advance payments are important, as far as the realisation of taxable turnover up to a certain amount triggers an obligation for persons to register under VATA. This is also the special case, regulated by Art. 25 (8) VATA, according to which, when a person unregistered under VATA receives an advance payment on the supply, but the actual realisation thereof occurs after the person has already been registered under VATA, it is considered that the advance payment shall include the tax which becomes chargeable on the date on which the tax becomes chargeable on the supply.
This provision seeks to eliminate the possibility of a person who is in the process of registering under VATA to avoid the charging of tax on future supplies due shortly after the date of their registration.
In this particular case within 5 days after receipt of the advance payment the person is obliged to issue an invoice without charging tax. The next step is applying for registration under VATA by the 14th day of the month following the month of receipt of the advance payment. Upon occurrence of the chargeable event, the person must issue an invoice for the supply charged with VAT. The invoice must state the total basis of taxation with the date and advance payment amount written on a separate line therein. The tax amount also needs to be indicated.