Is VAT due for advance payments before the Company is VAT registered?

payment-novacon.bulgariaValue Added Tax Act (VATA) treats advance payments received before VAT registration of the Company as a specific case for VAT accrual.

Under VATA, if a non-VAT registered entity receives advance payment for a VAT-taxable deal and actually finalizes the deal after the VAT registration date, the received advance payment includes VAT but the accrual occurs as of the date when the VAT accrual obligation occurs for the very purchase. Thus, no tax effects will occur for the non-VAT registered entity as of the date of the receipt of the advance payment. Despite the assumption that the advance payment includes VAT, tax effects will not occur as of the date of VAT registration either, but only as of the date of performing (closing) the deal if after the VAT registration date, and only then VAT accrual obligation will arise.

An example:

Company “X” signed a contract for purchase of goods for total BGN 10 000, as it was agreed that if “X” gets VAT registered, then additional 20% VAT will be charged on top. Company “X” receives BGN 3000 in advance payment as of 03.04.2014 and as of this moment the company was not VAT registered. As of 10.04.2014, Company X gets VAT registered, but the ownership of the goods has not been transferred yet and the VAT registration does not create any obligations related to the received advance payment. As of 22.04.2014, company “X” completes the sale and issues an invoice, which should as follows:

Goods                                                   10 000

Advance payment deduction           -3 000

Value excluding VAT                          7 000

Tax basis                                             10 000

VAT                                                        2 000

Total cost                                              9 000

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