Unregistered activity from A to Z

More and more migrants are considering starting their own business. However, not all of them are sure that their business idea will be successful or they don’t want to deal with bureaucracy and taxes when setting up a business. In such cases they often decide to start unregistered activity. On behalf of the Foundation Ukraine tax advisor, Jan Pietrzak, will explain what is it, who and how can you set it up and what earnings can be expected by choosing this option of running a business. We invite you to read the article.

Unregistered activity appeared in the Polish legal system in April 2018. Pursuant to the provisions of the Entrepreneurs’ Law, activities performed by a natural person whose income from this activity does not exceed 50% of the minimum wage in any month do not constitute business activity and on the minimum remuneration for work and who has not performed any business activity in the last 60 months. Therefore, in 2021, the income that a natural person may obtain from unregistered activity may not exceed PLN 1,400 per month.

It should be noted that it is about income due in the month, and therefore not necessarily actually received in the month. The Act of Personal Income Tax – hereinafter referred to as the PIT Act – provides for specific regulations regarding the notion of income in relation to business income. According to Art. 14 sec. 1 of the PIT Act, income from economic activity is considered to be the amounts due, even if they were not actually received, after excluding the value of the returned goods and discounts.

Since unregistered activity is not a business activity, then the entity performing it is not an entrepreneur within the meaning of the Entrepreneurs’ Law. If the conditions indicated in the regulations are met, a natural person who conducts an activity that does not constitute economic activity in accordance with the provisions of the Entrepreneurs’ Law, is not required to submit an application for entry in the Central Register and Information on Economic Activity.

Obligations of a person conducting unregistered activity

Since unregistered activity is not a business activity, it does not constitute an entitlement to social security and health insurance. A natural person who performs unregistered activity is not required to:

– register for social insurance and health insurance,

– register as a payer of social and health insurance contributions.

Pursuant to the provisions of the Entrepreneurs’ Law, activities that require a license, permit or entry in the register of regulated activities cannot be unregistered activity.

A person performing an unregistered activity in the case that the income from this activity:

1) has not exceeded 50% of the minimum wage in any month – has the right to submit an application for entry in register,

2) exceeded 50% of the minimum wage in a given month – is required to submit an application for entry in register within 7 days from the date on which the excess occurred.

Conducting an unregistered activity is not an obligation, but a right of a natural person, if only the income due for this activity does not exceed 50% of the minimum wage in a month. If the limit set in the regulations is exceeded, an obligation to register arises.

These activities are deemed to be economic activities from the date on which the exceedance occurs.

Pursuant to Art. 17 sec. 2 The rights of entrepreneurs to enter into the register of entrepreneurs will be determined by the provisions of the Act on the Central Registration and Information on Economic Activity and the Information Point for Entrepreneurs.

Taxation of unregistered activities

Revenues from unregistered activities remain taxed according to general rules. They cannot be settled with a lump sum or with a tax card, as is the case with business activity.

As a result, unregistered activity:

– if it would be the only source of taxpayer’s income, then with the maximum allowable income and even in the absence of any tax-deductible costs – it may generate a maximum of PLN 16,800 of income in 2021 – which of course will not exceed the second tax threshold, so such a person will certainly pay the tax at the rate of 17 %,

– if it is an additional source of income – it will affect the total value of taxable income according to the tax scale. Therefore, it may happen that when conducting unregistered activity in addition to an employment contract or a mandate contract, the total income of the taxpayer will exceed PLN 85,500 and such a person will be obliged to pay tax at the rate of 32% on the surplus of this amount.

In the case of unregistered activity, income is taxed (although no specific catalog of costs related to the activity of qualified activity reducing the taxpayer’s income has been indicated), and therefore it is possible to demonstrate the incurred tax deductible costs. They should be documented. Documents should include the name, surname and address of the buyer. PESEL is not a mandatory element of such a document. There is no strictly defined, uniform list of tax deductible costs. One should follow the principle that the income may reduce the justified costs, directly or indirectly related to obtaining, maintaining or securing the source of income.

Income and costs from unregistered activity are shown in the PIT-36 form as a separate source of income. This declaration should be submitted to the tax office by the end of April of the next tax year.

It is worth discussing the issue of the definition of economic activity under the Value Added Tax Act (hereinafter: the VAT Act), as it covers a broader spectrum of any activity in conducting business, namely:

– all activities of service providers, traders, producers,

– activities carried out by the liberal professions,

– activities that use intangible things and assets,

– activities of entities acquiring natural resources,

– agricultural activity.

In addition, the VAT Act does not impose any revenue conditions for the existence of an activity, nor does it exclude from the definition an activity from which a natural person obtains low income or conducts it on a small scale. Therefore, unregistered activity is not excluded from being subject to VAT.

Therefore, under the VAT Act, persons conducting unregistered activity may, in certain situations, become fully-fledged VAT taxpayers, including all rights and obligations to which these taxpayers are subject.

Due to the low limit of revenues that may be obtained from conducting unregistered activities, it will be subject to subject exemption from VAT up to the amount of PLN 200,000 per year.

Despite using the subject exemption from VAT, taxpayers whose sales are exempt from VAT are required to keep records of sales for a given day, but not later than before the sale on the next day. Thus, persons conducting unregistered activity are obliged to keep records for the purpose of establishing the limit of VAT exemption in a given activity. Such records should contain at least the ordinal number of transactions, date of sale, sale amount and total sale sum on each page. In practice, the same records may be used to determine the income limit for unregistered activity.

Invoicing of unregistered activities

A person running an unregistered business exempt from VAT is generally not required to issue an invoice. However, if the buyer requests it to be issued within 3 months from the end of the month in which the goods were delivered or the service was performed or the whole or part of the payment was received, then an invoice should be issued. Therefore, in practice, if the recipient is a company, it is better to issue invoices on an ongoing basis, and if a private customer is found, then on request.

As a rule, a person conducting unregistered activity will not have to purchase a cash register, as they will not reach the limit of PLN 20,000 of annual turnover, which obliges them to apply it.

It should be remembered that some types of activity have been obligatorily excluded by the legislator from VAT exemption. For example, a person providing advisory services wishing to conduct unregistered activities will be required to register for this tax and fulfill other obligations provided for the VAT Act.

As indicated in the above article, unregistered activity brings many benefits that may speak for this form of business, especially at the beginning. These include: no obligation to register, no obligatory social security contributions, no obligation to keep accounting, and no obligation to pay advances for income tax – tax is paid only together with the annual settlement.

Unregistered activity is certainly a great solution for people who would like to try their hand at business, but are not entirely sure if they can handle it.