As new flat-rate taxpayers, you will know that one of the scheme’s main advantages is not having to file a tax return or insurance statements. But what about the tax return for last year?
First, let us recap which income would normally belong in the 2020 return.
Income = invoices actually paid or cash receipts.
A very typical example is a self-employed person issuing one invoice after the end of each month, which the customer pays the following month. An invoice for December 2020, issued on 31 December 2020 and paid in January 2021, therefore does not belong in the 2020 return. It is an unpaid receivable as at 31 December 2020.
Like all self-employment income, the income from this invoice paid only in January of the following year must also be taxed. But which year does it then belong to: the year with lump-sum expense deductions or the year with flat-rate tax? This is where things become complicated. When moving from lump-sum expense deductions to flat-rate tax, the business owner must bring unpaid receivables into taxation, including this unpaid invoice. There are two possible approaches.
Switching from lump-sum expense deductions
The entirely correct procedure is to include only what belongs in the 2020 tax return – income for 2020. In spring 2022, once you know you remained in the flat-rate scheme and did not become obliged to file a 2021 return, you take the unpaid receivables from 2020 and submit amended tax returns and insurance statements for 2020.
The advantage of this ministry-recommended approach arises if you leave the flat-rate tax scheme during the year—for example, because you become employed, register for VAT, or receive more than CZK 15,000 in non-business income. You then have to file a tax return and insurance statements for 2021. You correctly include the unpaid receivables from 2020 because they are actually income of 2021. Everything is then as it should be!
However, if you are absolutely certain that you will remain in the flat-rate tax scheme all year, it may be simpler to include these unpaid receivables directly in 2020 income, i.e. in the 2020 tax return and insurance statements. In 2021 you will be under flat-rate tax, so you file nothing and do not have to worry about amended returns and statements. An inspector will not object to earlier inclusion of income, since you are effectively increasing your tax and contributions in advance.
Switching from tax records (income and actual expenses)
The situation is the same here, but it also concerns unpaid liabilities – purchase invoices issued in 2020 but paid only in 2021. These must also be reflected in the 2020 return as a reduction of the tax base, either through amended returns and statements or directly.
Here, however, I would prefer to make the amendment in 2022, because including expenses actually reduces the tax base. The tax office might not like you reducing it immediately rather than a year later. 🙂 It is also important to point out that, if only liabilities are involved, you have the option, not an obligation, to amend the tax return and statements. Why would they force you if you pay more tax and contributions than necessary?
Watch out for earlier years too
Naturally, this situation also concerns invoices issued in earlier years that customers have not yet paid, or that fall due in 2021. You therefore need to review earlier tax returns and apply your chosen approach to them too.
Which option do we recommend?
Most business owners already know in December that they will join the flat-rate tax scheme the following January. The simplest option is therefore to agree with customers that all outstanding invoices will be paid by December at the latest. This avoids the complications described above with bringing unpaid receivables into taxation. For business owners switching from lump-sum expense deductions, another major advantage is a substantial saving on taxes and contributions. They cannot apply a lump-sum expense deduction in the return against the income from these outstanding receivables when bringing it into taxation. In other words, when bringing a receivable into taxation, they pay tax and insurance contributions on 100% of it. That really is not worthwhile.
Unsure how to handle your situation? Write to me!