Deductibility of expenditure on work clothing

On 18 October 2018 The Director of National Tax Information issued an interpretation of individual tax law, which is important for many Polish companies, concerning corporate income tax in case of purchase of service clothes for employees of the company[1] . It is crucial to assess whether the expenditure incurred for this purchase can be considered as the cost of obtaining revenue, whether it is related to advertising or representation, and how the company's business outfit and logo are exposed.

Introduction

The individual interpretation was issued at the request of 26 July 2018, supplemented by an additional explanatory letter with 18 September 2018 The applicant was an authorised car dealer – a joint stock company, an active VAT taxpayer.

It deals with the wholesale and retail trade of cars[2] , the sale of luxury cars and premium brands, including limited and difficult-to-access series, and repair of motor vehicles.

The company indicated in its application that its sales and marketing strategy is based on the creation of long-term relationships with very demanding customers in which the visual side of its activities is important. Therefore, among others, she rebuilt the prestigious car dealership.

The employees meet with customers daily and it became necessary for the company to purchase appropriate business outfits for the staff. The applicant clarified that not only the employee talking to the client must look professional, this also applies to other traders who hold positions in the living room next to him.

This builds the right image of the company.

In accordance with the adopted visual strategy, the company plans to purchase appropriate personnel clothing – including suits, shirts, ties and free of charge handing them over to the staff, for proper presentation in meetings with customers.

Therefore, each employee will take part in a training where he will be familiar with the rules and guidelines on dress code in a particular workplace and in a specific position. The appropriate dress affects the professional image of the employee and, following this, the whole company.

The company informed in the justification of the request for interpretation that business outfits would be performed by a specialized, reputable company providing such services. Importantly, these clothes will be sewn into permanent markings indicating this company and staff members will only use them for their professional activities. This will therefore be the employee's duty under the dress code rules.

The company also clarified in addition to the application with 18 September 2018, that the above-mentioned marking will be on the inner side of the dress (mock) when it comes to suits and shirts, and in the case of polo shirts and softshell jackets – on the left side of the chest where it will be visible. She also answered the question of what groups of employees would receive a business outfit and indicated: board, directors, managers, sales advisers, service advisers, logistics staff, reception staff.

Purchased business clothes will be owned by the company and will be transferred to the personnel for use. On the other hand, if an employee would resign himself in less time than 12 months from the date of receipt of the service outfit, it would be obliged to return its equivalent.

The applicant pointed out that maintaining a competitive premium car sales market is not easy and that from 2003 car dealer market disappears on average every year 20 entities.

That is why it is so important in creating a professional image of the company, in addition to the knowledge and competence of the employees, also their proper appearance – especially in positions where they have direct contact with customers, contractors and partners.

The applicant stated explicitly – the customer will not buy a luxury car unless the staff is elegantly dressed. Therefore, its appearance affects the company's commercial performance.

The company also indicated in its conclusion that the business outfit would secure its revenue sources and contribute indirectly to the acquisition of new customers and the increase in sales of cars.

The request for an individual interpretation asks, among other things, the question: in the presented event the future applicant will be entitled to include the costs of purchasing the above mentioned service clothes in the cost of obtaining income? In the company’s view, the answer to this question should be yes.

Conditions for crediting expenditure to revenue costs

In its statement of reasons, the applicant indicated that according to Article 15(1) Act on 15 February 1992 on corporate income tax[3] (Next the Corporate Income Tax Act) the cost of obtaining revenue is the costs incurred to obtain revenue from the source of revenue or to preserve or hedge the source of revenue, except for the costs listed above under Article 16(14) . Costs incurred in foreign currency shall be converted into gold at the average rate announced by the National Bank of Poland on the last working day preceding the day of the cost.

The Corporate Income Tax Act there is no list of expenditure that would prejudge their inclusion in the cost of obtaining revenue, and therefore it is assumed that these are all reasonably justified expenditures related to the activities carried out with the aim of achieving, securing and preserving the source of revenue, so that this source also generates revenue in the future. These costs will be expenditure having a direct and indirect link with the revenue obtained and the taxpayer should apply the basic principle of causality between the cost incurred and the possibility of obtaining revenue from it.

Certain requirements should therefore be met for the expenditure to be regarded as a cost of obtaining income, namely: it must be borne by the taxable person; the value of the expenditure in question has not been reimbursed in any way; the expenditure is linked to the economic activity of the taxable person; it has been incurred in order to obtain, preserve or safeguard revenue or may affect the amount of revenue achieved; it has been properly documented; it is not included in the expenditure included under Article 16(1) the Corporate Income Tax Act

Selected positions of case law and tax authorities

The applicant also noted that the Corporate Income Tax Act there is no definition of “representation” and therefore there are doubts about the costs of representation. It is important to distinguish “representation” from “reclamation” as advertising expenditure may constitute revenue costs.

The individual interpretation of the Director of the Tax Chamber in Katowice was therefore cited from 15 December 2016[5] , in which it stated that ‘By assessing the scope of the concept of “representation” and “reclamation”, it should therefore be argued that the representation concerns activities aimed at disseminating the image of the taxpayer as an economic operator, while advertising concerns activities aimed at shaping, disseminating the image of not the taxpayer itself but of its products (goods and services)’.

The applicant has indicated in the explanatory memorandum that advertising means the activities of an economic operator that shape the demand for the goods, services or brands concerned, by broadening their knowledge of them, which aims to encourage as many potential customers as possible to purchase the goods or services of that entity, and can be achieved by various means of expression.

As regards representation, he pointed out that it refers to the good representation of the company – the whole of all activities aimed at creating and establishing the most favourable image of the company outside, in relations with contractors, guests and potential clients, creating the expected image, the position of the taxpayer as a business operator, and creating favourable conditions to establish new or maintain (extended) existing contacts.

In turn, the right image is ‘the one that can make the “trader’ image shaped by representation translate into the acquisition of its products or services. Therefore, the conscious development of the right image by the entrepreneur aims to create such an idea of it, which will cause the positive perception of this entrepreneur by external persons, which in turn will encourage conversation, cooperation, purchase of its products or services."

Loss of personal clothing by wearing a uniform

The applicant also indicated that, in order to consider the expenses incurred for the purchase of service clothes as the cost of obtaining the income of the business activity, this garment must lose the character of personal clothing, which will happen when the company's identification logo is sewn into permanent service clothes.

To confirm this position, they were recalled two individual interpretations.

In the first of them, with 8 April 2016[6] , The Director of the Tax Chamber in Katowice stated that: “With regard to the above and the description of the future event presented in the proposal, it must be stated that the expenditure which the company intends to incur for the purchase of service clothes, marked with the company's logo, can be considered advertising expenditure.

These clothes are associated with the company by marking their company logo; this outfit distinguishes both employees and the company's CEO from other people. Thus, these expenditures will be allowed to be as quoted. Article 15(1) the Corporate Income Tax Act included in the costs of obtaining the revenues of the Company".

It is also worth quoting a passage second interpretation of the Director of National Tax Information from 18 September 2017[7] : „Therefore, in view of the presented future event and the applicable legislation, it should be concluded that expenditure on the purchase of a business outfit with a permanent designation of the company of the applicant fulfils the advertising function, as it aims to increase the company's recognition on the market, which may result in an increase in revenues, and thus remains due to the cause and effect of the revenues achieved, including to preserve or safeguard the functioning of the source of revenue" (for comparison of the individual interpretation of the Director of the Tax Chamber in Poznań with 18 July 2013, reference no. ILPB1/415-457/13-3/IM).

The company also pointed out the position of the case law that expenditure on the purchase of clothing in business could constitute the cost of obtaining revenues from advertising expenditure, provided that it was shown that this clothing "lost the nature of personal clothing due to the fact that it was given the characteristics of the company, e.g. logo, cut, colour".

In this regard, the applicant indicated the following judgments: 31 July 2013, reference no. III SA/Wa 659/13, WSA in Łódź 19 April 2011, reference no. I SA/Łed 30/11, WSA in Warsaw with 5 September 2008, reference no. III SA/Wa 623/08; WSA in Łódź 19 April 2011, reference no. I SA/Łed 30/11; WSA in Łódź 13 September 2011, reference no.

I SA/Łed 423/11; WSA in Opole with 28 November 2007, reference no. I SA/Op 313/07, publ. CBOSA; NSA from 26 March 1998, reference no. I SA/Po 1254/97, The biul. 1999, No 3, p. 15; NSA from 17 October 2003, reference no. SA/Rz 2341/01, Lex 90312; WSA in Warsaw with 27 September 2004, reference no.

III SA 3430/03, Lex 257071; NSA from 25 June 2003, reference no. I SA/Ka 1328/02, Lex 183228; NSA from 15 September 1999, reference no. I SA 1261/98; NSA from 10 September 1999, reference no. I SA/Lu 742/98 or WSA inGdansk with 3 July 2007, reference no. I SA/Gd 74/07.

Director of National Tax Information (hereinafter KIS Director) in the individual tax ruling discussed here[8] considers that, in the light of the legal situation in force, the applicant’s position on the legal assessment of the future event presented is partly considered correct and partly incorrect.

Staff costs and advertising and representation

In the opinion of the Director of KIS, the key to answering the taxpayer's question is whether the expenditure on a service outfit with a permanent designation is related to advertising or representation. This depends on the possibility of including these expenses in the cost of obtaining revenue. Tax law does not define the terms ‘representation’ and ‘advertisement’, which does not mean that the meaning of those terms can be defined in any way.

Director KIS pointed out that administrative courts have repeatedly tried to define the concept of “representation” and cited the NSA judgment of 17 June 2013[9] , In which he stated that: “The purpose of representative costs is to create a certain image of the taxpayer, to create a good picture of his company, of his activities, etc., to create positive relations with the counterparties.

When assessing whether the costs are representative, it is necessary to look at them through the objective. If the sole or dominant objective of the costs incurred is to create such a picture of the taxpayer, these costs are representative.

The mention, as an example of representative costs, of expenses for catering services, the purchase of food and beverages, including alcoholic beverages, does not mean that these expenses must always be excluded from the cost of obtaining revenue. They are not costs only when they are representative.

The eligibility of each case should be distinct, subject to its circumstances.’

The Director of KIS also indicated another relevant passage of that judgment concerning the origin of the word “representation”: “To this end, reference should be made to the etymology of that term. The word “representation” is derived from the Latin “repraesentatio” meaning the image.

The passage of time did not change its meaning and form. This means that ‘representation’ within the meaning of Article 16(1)(28) the Corporate Income Tax Act is an action to create and establish a positive image of the taxpayer towards other entities.

In the given sense, representation is primarily any action aimed at existing or potential counterparties of the taxpayer or person third in order to create the expected image of the taxpayer in order to facilitate the conclusion of the contract or create favourable conditions for its conclusion.

In such a situation, the expenses on representation are the costs incurred by the taxpayer in order to create its positive image, to emphasize its wealth, professionalism. With such a defined “representation” date, the issue of sleekness, showmanship or superiority has no meaning.

It should be reiterated that, in order to assess whether a particular activity constitutes representation or any other activity, it is necessary to analyse the entire facts of a particular case.’

The Director of KIS also referred to the dynamic functional interpretation referred to in that judgment: ‘When assessing the eligibility of expenditure in the circumstances of a particular case, the opinion of the Chief Administrative Court should also use a dynamic functional interpretation caused by the changing economic reality (lack of a statutory definition and conclusions of an analysis of the change of views on a case-by-case basis).

What could have been considered a representation in the past will not now be included in this category due to changing business realities, good practices and customs. This concerns accepted and widely used behaviour without which it is impossible to conduct business – obtaining taxable income.

For obvious reasons, as already explained, each such expenditure must undergo a test with Article 15(1) the Corporate Income Tax Act Otherwise, consideration of the further qualification of a specific expenditure becomes unnecessary due to additional criteria introduced under Article 16(1) (in this case due to point 28)”.

As the Director of KIS explains, advertising is an activity of an economic entity that shapes demand for certain goods, services or brands, by broadening its knowledge of them, to encourage as many potential customers as possible to purchase the goods or services of that entity, and cited the meaning of that term in accordance with the “Polish language dictionary”[10]: advertising is “the dissemination of information about goods, their advantages, values, places and possibilities of acquiring, the praise of someone, the recommendation of something by the press, radio, television, means (e.g. posters, subtitles, advertisements, etc.) for this purpose”

Director of KIS also pointed out that guidance on the meaning of advertising can be sought in the case law of administrative courts – for example in the judgment of the WSA in Gliwice from 1 February 2012[11], According to which ‘the concept of ‘reclams’ should be understood in a functional way, i.e. as any intentional action by a taxable person to disseminate the knowledge of the products or services offered by him, activities aimed at shaping demand, by broadening the knowledge of future purchasers of goods or services, their characteristics and purposes, in order to encourage the acquisition of goods or services from that same rather than another economic operator’.

The position of Director of KIS also points out that the advertising of the company or its services “may also be carried out by presenting the logo of the trader in question.

A trademark of a graphic character used by the company to identify the brand of its product or services offered and distinguish them from others should be considered as a logo[12]. The logo may cover both the name of the trader, its abbreviation and the name of the specific product or service.

Each of these forms, if used under specific circumstances, shall perform advertising functions. It is identified with the company concerned and the goods or services it offers, increasing their recognition and indirectly encouraging them to be acquired.”[13].

The Director of KIS stated, taking into account the above explanations and the applicant's description of the future event, that expenditure on the purchase of clothing marked with the company's logo in a place visible to customers, contractors or partners of the company with whom the employees will have contact in business clothes (polo shirts, softshell jackets – marked with the company's logo visible on the outside), used by them whether it is passed on to them for use at the company's premises or used outside working hours (e.g.

on the way to work) can be classified as expenditure of an advertising nature, and thus as revenue costs.

In the assessment of the tax authority, the company's logo outfits are clearly associated with it and distinguishes employees from others, with the purchased clothing, thus designated, being devoid of any personal value and not suitable for use elsewhere than in the applicant's company, and is an additional tool for obtaining future income and safeguarding the income currently achieved.

Clothes with a visible logo are not advertising

The Director of KIS, on the other hand, considered that in the case of expenditure on the purchase of clothing with a mark on the inside of the garment (e.g. on the label), which is invisible outside and cannot be seen by other persons, the recipients, cannot be regarded as an act aimed at obtaining income, preserving or securing its source.

In cases where the company's logo is not placed in the purchased clothing in a visible way, the expenditure on the service outfit is not advertising and therefore cannot be included in the cost of obtaining revenue.

The director of KIS pointed out that in order for the dress to have an advertising character, it must clearly indicate that it originates from the company and that advertising should always be directed to customers (potential customers).

According to the judgment of the WSA in Warsaw with 31 July 2013[14] it cannot be considered that the dress bearing the company logo only on the label, which is originally small and invisible, is advertising.

The tax authority interpreted that ‘the employees of the company dressed in such outfits will in fact not be different from other persons, including customers and potential customers.

Therefore, regardless of where these clothes are to be worn, whether on the premises of the company or outside the company during the performance of their duties or on their way to work, they cannot affect the company's revenues because they cannot be associated with it because of their characteristics."

As regards the individual interpretations and examples of the caselaw cited by the applicant, The Director of KIS stated that they relate to specific, individual cases of taxpayers in a particular factual state (future event) and are not binding on the tax authority.

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