Expenditure on behalf of contractors and cost of revenue

2017-03-29 Expenditure on behalf of contractors and cost of revenue

In order to make expenditure on behalf of contractors cost-effective, they must have a close connection with their business. In addition, they should be properly documented.
Expenditures on behalf of contractors are often excluded from the company's costs due to qualifying them for representation costs. Especially when they concern the cost of food, beverages (including alcoholic beverages), as well as catering services. Although such expenses affect the income of the taxpayer, they can not be included in the costs of obtaining it. That is why it is extremely important to determine precisely whether they are the cost of a mere business operation or the cost of representation.

These two concepts differ in purpose:
- The costs of a normal business operation are expenses for the current needs of the company, such as advertising (for example disseminating information about a given product to attract attention and encourage purchase).
- Expenses for representation are related to creating a positive image, maintaining the good name of the company, and facilitating contact with contractors. Representation means "excellence, excellence, position or social position".
In the case of representation - even if it has a close connection with revenue, we do not pay it for the costs. On the other hand, advertising expenses can be tax deductible without limit. All expenses incurred by the company in connection with its advertising activities will therefore be cost, as far as revenue is concerned.
Problems will arise in the classification of costs for advertising and representation expenses. Unfortunately, the legislature still did not clarify the definition of these terms for tax purposes.

Expenditure on behalf of contractors - gifts

1. are the costs of obtaining revenue - giving out small gifts of negligible value to business partners (for example unrepresented audience) bearing the logo of the advertising company. These can be calendars, pens, lanyards, wallets, albums, etc. These activities increase the company's recognition of the market, which almost always translates into increasing its revenue. Gifts of such small value do not have the task of representing the company and building its image, but only to increase potential partners of its existence in the market. Therefore, they are classified as advertising costs.
You can give your contractor a basket of your own products. Such behavior without any difficulty is considered to be marketing activities advertising the product itself. Tax authorities generally do not question the inclusion of expenses for the purchase of a gift to the cost of revenue, for example, such gifts will include prominent company signs, trademarks, logos. Expenditure on such materials can then be treated as advertising expenditure.
2. They are not revenue-generating costumes - meaningful gifts given to contractors to build a company's image and relationships with them because they are representative. Baskets with branded sweets and alcohols are also recognized as representative costs.

Expenditures on behalf of contractors - refreshments

Business meetings often combine with the preparation of refreshments. Expenses such as dinner in a restaurant with a contractor are not explicitly interpreted.
1. are the cost of earning revenue - simple snacks or drinks. If, during a meal at a restaurant, the contractor presents the offer of our company, negotiates or business talks with him or discusses the details of the contract in the near future, then the expense is at the expense of revenue. The financial resources that the taxpayer has incurred are intended to achieve revenue or preserve or secure their source. You must have strong evidence in the form of a signed contract or offer to defend this expense if the office checks the costs of the business.
2. It is not at the expense of revenue - a dinner designed to create a certain image of the taxpayer or create a positive relationship with the contractor.
Expenditures for contractors - training
1. are the costs of obtaining revenue - if the most important purpose of training organized by entrepreneurs for contractors is to provide some piece of knowledge, information or simply advertising goods or services. They are not representative costs, although they may affect the perception of the company. Then the expenses incurred in renting the room, the provision of drinks and snacks, the salary for the trainer, training materials, are the tax costs of the organizer. For training, courses or conferences, the catering service is part of a wider order.
2. are not revenue-generating costs if the training is organized to build relationships with them and generate a good impression, and the expenses are representative.
An important issue in this context is training accompanying events such as trips, dance parties, sports competitions. They are undoubtedly entertaining and not integral and necessary part of the training, so they should be counted as representative costs. Consequently, they can not be taxed company costs.

Expenditure on behalf of contractors - occasional parties

There are no costs to earn revenue. This is not a valid reason for adoption - even if it is in some way related to the functioning of the company (for example, the next anniversary of its establishment).
Adverts can not be considered advertising, even if company emblems are presented at the reception, and posters, banners or other items are affixed to the company logo. Such events are clearly representative, so they do not constitute the cost of doing business (Article 23 (1) (23) of the PIT Act).