The popularity of simplified, or “small” business taxes (KATA, KIVA) grows unabated, with thousands of engineers, computer programmers, hairdressers and lawyers opting for one or other of these schemes. Meanwhile, few are fully aware of the risks that these types of tax can entail. The potential consequences are measurable in hard tax forints and penalties, both for payers of these forms of tax and for the businesses that provide their income.
A growing number of professionals are opting to pay tax under the ‘KATA’ scheme in Hungary. Based on the recently published NAV yearbook, in 2017 almost 240,000 taxpayers chose this form of tax. And this is hardly surprising, given that a taxpayer who is eligible for KATA status can discharge virtually all his or her tax obligations with a monthly tax payment of HUF 50,000. The popularity of ‘KIVA’, meanwhile, is also soaring among small and medium-sized enterprises: over 15,000 businesses now pay tax under the KIVA scheme, mainly those who have high payroll costs due to increased level of employees. In this light it’s no wonder that tax receipts from small business taxes increased significantly in 2017: the state coffers received some HUF 100 billion from KATA and HUF 20 billion from KIVA, which represents an increase of approximately 45% compared to the previous year.
It seems that both the taxpayers and the tax authority are getting a good deal with the small taxes. On the other hand, taxpayers who choose this form of taxation need to be cautious.
When KATA becomes an employment relationship
The KATA regulations conceal a trap. If a taxpayer with KATA status realises an annual net revenue of more than HUF 1 million from a single customer, then the law assumes the customer to be the employer of the taxpayer. This default assumption can be refuted, but the onus is on the payer of the simplified tax to prove that at least two of the conditions relating to the circumstances of the relationship listed in the KATA Act, are met. And most of these circumstances – for example, whether the customer can give orders to the taxpayer or not, whether the taxpayer is free to determine the procedure for performing his or her activity, whether the tools and materials for the given activity were provided by the taxpayer, etc. – are often difficult to pin down or prove.
If the taxpayer is unable to prove that the conditions (or at least two of them) are met, then the income received from the customer will be taxable as income from an employment relationship. And the implications of this can be serious, not only for the taxpayer, but for the client too, who could be found to have a shortfall in social contribution tax and vocational training contributions and required also to pay a tax penalty and a late payment penalty (and possibly also a default penalty). For this reason, it is in the best interests of the person engaging such taxpayers to monitor whether the conditions set in the law (or at least two of them) are met if annual payments totalling more than HUF 1 million are made and not to dismiss the matter as a risk that affects the taxpayer only.
KIVA – beware of the family!
Eligibility to pay tax under the KIVA scheme is subject to restrictions on revenue and employee numbers. Specifically, taxation under the KIVA scheme can only be chosen by a company whose revenue does not exceed HUF 500 million and that has no more than 50 employees. Based on a seemingly innocuous detail in the wording of the law, however, these figures need to be calculated in aggregate for related parties.
The subsidiary of a KIVA taxable entity is obviously a related party. And a related party is also created if the owner of a KIVA taxable entity establishes another entity. These cases are relatively transparent and easy to control. It needs to be kept in mind, however, that two businesses are also classified as related parties if their owners happen to be close relatives of each other. So the fact that a company or group owned by a given individual meets the requirements for KIVA status by itself could count for nothing if that person’s father, son or possibly a sibling is also a company owner. In this case, the revenues or employee numbers of these companies need to be added together, and it could easily be the case that the total exceeds the threshold for KIVA eligibility. This is especially problematic for families whose members are not privy to each other’s business affairs, or where relationships between the family members are not particularly close anyway.
“Small” taxes: big caution
Choosing one of the small business taxes might seem like an easy option, free of unnecessary administration and hassles – and this is certainly the case when it comes to calculating the amount of payable tax or administrating tax payments. However, closer attention is needed to ensure that the taxpayer continuously fulfils the requirements for choosing these forms of tax. For this reason, it does no harm to set aside some time for this conversation during coffee with your KATA contractors, or perhaps during a Sunday lunch with the rest of the family.