Accounting of consulting services
Russian law does not provide an unambiguous definition of consulting services. However, art. 148 of the Russian Tax Code provides a list of such intangible services along with its description. It also includes legal consultation.
The concept of “intangible services” implies works that are not related to the goods in its material form. Thus, professional consultations are classified in this category and involve providing the client with a final information that has already passed through the stages of collection, systematization, generalization and analysis. In the end client receives ready useful information that he needs to carry out activities.
Art. 779 of the Russian Civil Code classifies consultations and the provision of specialized information as non-gratuitous services. This means that a contract has been concluded between the client and the contractor. After fulfilling the obligations under such contract, it is necessary to make a settlement between the parties and, based on this calculation, draw up an act in any form. The law does not provide for this document in a strictly regulated form however, it shall clearly state the parties to the contract, nature of services and their price.
Consulting services: Accounting and Taxation
For accounting, consulting services should go through the account “Organization expenses”. The registration of expenses for consultations and information support must comply with the requirements that apply to the documentation of all other expenses accordingly.
According to current regulations, such costs refers to costs of ordinary activities. These costs are accumulated in debit to various accounts, including 26, but they can also be performed through 20 and others. Which one of the accounts to choose for documenting a legal consultation depends on the nature of the services, as well as on the purposes for which the consultation was requested from specialists. Please note that the formal expenses are drawn up for the period when the services were provided. It is not necessary to link the operation to the payment date in documents, although the law does not directly prohibit this.
In tax accounting, unlike accounting, consulting services are not explicitly provided. According to the letter of the Ministry of Finance, such costs can be set off when determining the size of tax base for income tax. Also, experts recommend referring the costs of all kinds of intangible services to other costs associated with production and sales. The date of costs is tied to the time of settlement or receipt of settlement documentation. It is also possible to be guided by the last day of the reporting period – it is provided for in Art. 272 Tax Code.
However, legislative acts specify: the cost of such services can be referred to costs only if the entrepreneur can prove that the expenses were justified. This fact shall be documented, without which the regulatory authorities and the court do not recognize costs as justified.
The tax authorities verify the fact of provision of services by studying validness of the deal. The inspection provides that the authorities will be interested in the location of the consulting organization, as well as its contacts, the conformity of signatures in contracts and acts. In order for primary documentation on business transactions to be recognized as justifiable, it must be executed strictly in accordance with legislative norms. In other words, the form should contain a complete list of details, and content of the document should match the nature of service.
It is also very important to describe the services provided in detail in contracts and acts. General descriptions such as “legal services” shall not be used, because from such a record it is impossible to understand exactly why the company or individual entrepreneur sought advice. Tax inspectors have the right to consider such documents invalid, since they do not actually confirm the expenses claimed by accounting department.
The court may also consider the contract invalid in the following cases:
• the inability to determine the issues on which experts were consulting organization;
• lack of a clearly defined time for the provision of services;
• the absence of factors to assess the purpose of contacting consultants.
If the services are not described in detail in the contract, a special application and report must be attached to the documents. They can be compiled in an optional form and detail nature of the services. In this case, the documents can act as supporting along with invoices and consultation protocols.
Taxation for accounting consulting services
In order to deduct VAT, it is necessary to issue an invoice in accordance with the requirements of the Tax Code. As a basis for requesting certain services, consider their impact on the company: do you need consultation for the proper company’s activity? Tax authorities will also pay attention to the income that company received after turning to outside specialists for help. Thus, regulatory authorities can assess the validity or unreasonableness of costs.
There may also be misunderstanding with tax authorities if third-party consultants provide services that full-time employees can provide. But this does not mean that if company has its own legal department or legal adviser, it is prohibited to turn to outside specialists for support. However, in order the costs are not considered unreasonable, the nature of consultation should be highly specialized and not provided for by the qualifications of regular employees. For example, this may relate to a company entering the international market. But try to avoid duplication of duties in order not to attract attention of regulatory authorities.
If the tax authorities still challenge the justification of the costs, this does not mean that the court will take their side. According to the judicial precedents, the position of the authorities regarding the reasonableness of company expenses can be challenged, since only the business owner himself can objectively assess the need and effectiveness of spent resources.
The reason for including spending in expenditure base is not only the actual increase in income. The intention to derive additional benefits or eliminate the likelihood of losses in the future can also be used.
Intangible services under the simplified tax system “income minus expenses”
For entrepreneurs who use the simplified taxation system there is an exhaustive list of costs, on the amount of which they have the right to reduce tax base. You can find this list in the art. 346 of the Tax Code. Consulting services are not mentioned there. Therefore, generally consultations cannot be deducted from the tax base. However, there are several exceptions to this rule:
1. The company specializes in consulting, and the provision of information services is the main field of its business activity. In this case, the costs relate to other material costs.
2. Consultations on audit, accounting and legal issues. In respect to audit support, paragraph 2 of art. 1 of the Law on Auditing can be applied. It determines that audit services also include related work and advice, not just audit itself.
VALEN specialists have many years of experience in the field of accounting and taxation of consulting services. We provide legal support to small and large businesses, individual entrepreneurs and individuals. Our company cooperates with Russian enterprises and foreign organizations that conduct business in Russia.
To get a consultation, please leave an inquiry on our website or dial: +7 (495) 7-888-096. We are also waiting for you at our office in Moscow.