What is legal and what is not? Employment or KATA? What is NAV watching? How to comply with the law? Here are some answers from Legisly.
Nowadays you hear a lot about the itemized tax for small businesses, ie KATA. KATA was introduced a few years ago and aims to make taxation easier for small businesses and ease the tax burden, thus increasing the entrepreneurial spirit!
- First of all, let’s see what it means to be itemized taxation? Itemized taxation means that, unlike most tax types, you don’t have to tax a certain percentage on your business income, but pay a fixed amount each month. As a general rule, this amount is HUF 50,000 per month, but for the sake of a higher pension fund, you can choose between HUF 75,000 per month or, in some cases, HUF 25,000 per month, for example if you work as a part-time worker.
- What counts as a small business for KATA? First of all, KATA aims to improve the entrepreneurial spirit, and the simplest form of entrepreneurship is sole proprietorship. You can redeem an individual entrepreneurial license within a day by registering with a customer gatekeeper. As soon as the tax number arrives, you can start your economic activity! The good news is that you don’t even have to open a separate entrepreneurial bank account, as you can even use your own private account as a sole proprietor. Some forms of corporate entrepreneurship are also considered to be small businesses, so itemized taxation is available to the Public Limited Liability Companies and Btk (Limited Liability Companies). Itemized taxation is also open to law firms and so-called sole proprietorships. However, it is important to know that if Ltd. you founded, it can be a one-person Ltd. also, unfortunately you cannot choose the KATA tax type.
- What does KATA trigger? KATA replaces virtually all corporate and payable taxes and contributions, ie corporate income tax, personal income tax and all kinds of contributions. However, it does not cover a tax: the local business tax.
- If KATA taxation is so great, why not everyone as a sole proprietor or say Bt. Does KATA work and choose taxation? Because itemized taxation is specifically targeted at small businesses, you can no longer opt for KATA taxation above a certain sales revenue. This is currently HUF 12 million per year, which means an average monthly income of HUF 1 million.
- When should I choose KATA taxation? KATA taxation is very tempting as you have to deal with a relatively small itemized tax burden. However, the downside is that there is no cost accounting in the case of KATA, and the annual limit of HUF 12 million does not apply to profits, but to sales! That’s a big difference! So, for example, if you buy and sell goods worth, say, HUF 20 million a year, which you resell for a total of HUF 25 million, then even if your profit is only HUF 5 million, you will be excluded from the KATA system, as your profit is not HUF 5 million, but your annual sales are authoritative and the amount of 20 million is well above the 12 million limit. As a result, you may want to opt for KATA taxation if you are primarily engaged in a service activity, as there are far fewer expenses involved in providing the service than if you are engaged in a commercial activity. It can be ideal for hairdressers, artificial nails, programmers, taxi drivers, various consultants or even lawyers.
- What about VAT in case of KATA taxation? As a KATA entrepreneur, you can apply for a personal VAT exemption, at which the maximum permissible turnover is also HUF 12 million per year. You should definitely apply for a VAT exemption, because this way you can issue an invoice to private individuals as well. Here I am thinking that although your corporate customers who are subject to VAT can account for VAT, private individuals cannot, so if your account includes VAT, you will ultimately be 27% more expensive to serve your individual customers – of course if you give them an invoice for the service at all … It is important to note here that the other purpose of KATA is to whiten the economy, and it is clear that thanks to the subject VAT exemption, it is no longer in your interest not to give an invoice. Not to mention that if there is no VAT, there is no VAT return, which can further simplify your administration and reduce your accounting costs.
- KATA taxation vs. employment Many people choose KATÁ taxation “instead of” employment. More specifically, in the case of an employment relationship, both the employee and the employer consider the coercion of the person into a company to be more favorable, given that the burden is lower and, in the end, more money may remain with the employee in the event of a CATCH. However, on the one hand, this is illegal and, on the other hand, it deprives the person of the labor protection code and many other protections arising from the employment relationship. The tax authority, of course, gives priority to checking suspicious relationships. The rest of our video reveals what to look for if someone wants to avoid problems.
- When cannot the legal relationship between the two parties be classified as an employment relationship? If you are a KATÁS, you will have to prove that it is not really an employment relationship, but an entrepreneurial one. If two of the following are true, the employment relationship does not qualify as an employment relationship:
- As a self-employed person, you did not or could only carry out the activity in person.
- You earned at least 50 percent of your annual income from non-HUF 1 million income.
- The person from whom you earned more than HUF 1 million could not give instructions on how to work.
- The place where you carry out the activity is in your possession.
- The tools and materials necessary for the performance of the activity were not provided to you by the client from whom your income exceeding HUF 1 million came.
- The order in which the activity is carried out is determined by you.
- None of the small taxpayers in your katas business are full-time taxpayers (throughout the calendar year). In addition, at least 50% of their income comes from a principal who did not have a full-time employment relationship within the calendar year. Or non-ancillary social entrepreneurs.
The problem can also arise in the case of KATA taxation if you issue an invoice to only a few partners and exceed the HUF 1 million limit for one of the clients. From which partner you earned more than HUF 1 million in the calendar year, you must report it in the kata return . If you expect the principal to exceed the HUF 1 million limit, it is important that you have a full contract. This will show that the work was not done in an employment relationship. Prove that you used your own tools to do the job. In addition, the principal could not specify in detail, as in the case of an employee, how he would perform the activity.
It is also important that you always keep proper revenue records as KATÁS. You can find downloadable resources for this on the Legisly website.
9. A lot has been heard that KATA taxation will be tightened this year. What do you know about that? Indeed. Unfortunately, the favorable form of taxation was abused by many, and employers instead of permanent employment contracts were concluded with their former employees, from whom they receive KATA invoices on a monthly basis. NAV first tried to filter this out with thorough inspections by the tax authorities, but they soon realized that it was too big, so it was prescribed by law that if a customer is billed more than HUF 3 million a year, the excess over HUF 3 million is still subject to 40% special tax. The same is true for domestic affiliates, and an additional tax is levied on income earned through foreign affiliates. However, it is important to know that income over HUF 3 million from individuals is not subject to a special tax. More importantly, from 2021, everyone can only be a taxpayer in a single legal relationship. So you can’t be a self-employed person and, say, an outside member of a limited partnership, so to speak, twice, as this would circumvent the goal of tax exemption set by the legislature.