CASH ACCOUNTING OR ACCRUAL ACCOUNTING?

There are two main accounting systems:

• The accrual accounting system: income and expenditure are entered in the accounts as soon as they are certain in principle and determined in amount, even if they have not yet been paid;

• The cash accounting system: income is recorded when it is received and expenditure is recorded when expenses are paid.

The system used may be different depending on the nature of the tax to be determined. Thus:

• In terms of direct tax, the nature of the activity determines the accounting method to be used:

- accrual accounting for a craft, industrial, commercial¹ or liberal²  activity;

- cash accounting for a real estate, agricultural or forestry activity³.

Traders, craftsmen or liberal professions whose annual turnover is less than €100,000 can nevertheless implement simplified accounting⁴ and to determine a tax result under the principle of cash taxation⁵. The same applies to agricultural and forestry professions.

• In terms of VAT, It is only the amounts involved which will allow the taxpayer to opt for one system or another.

In fact, whatever the activity, a taxpayer whose annual turnover before tax is less than €500,000 can opt for the revenue-based tax system⁶. The tax on the supply of goods and services is therefore due at the time of collection of the full or partial payment (in the case of partial collection, the tax is only due in the amount of the actual payment). The taxpayer may, however, revert to taxation on the basis of sales if they so wish, but after a period of at least 5 consecutive years and after having informed the administration of their decision. This applies unless they no longer qualify for taxation on the basis of revenue.

Case study:

A limited liability company, operating in the IT sector sold during financial year N €165,000 excluding tax (i.e. €193,050 including tax) of IT equipment and €110,000 excluding VAT (i.e. €128,700 including VAT) of services related to installations at its customers' premises. The customers are exclusively established in the Grand Duchy and paid it €220,000 ex VAT (€257,400 including tax) in settlement of invoices.

With regard to VAT, if the company has opted for the income tax system (receipts), it will be able to deduct its input VAT on €37,400 (€220,000 * 17%) and not €46,750 (€275,000* 17%) of output VAT.

(1) Article 18 LIR

(2) Article 93 LIR

(3) Article 64bis LIR

(4) Article 13 of the Commercial Code

(5) Paragraph 161 (1) 1 of the amended General Taxation Act of 22 May 1931

(6) Article 25 LTVA