Staged payments

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Staged payments
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Staged payments are extending the payment period by spreading it into smaller parts. Staged payments can be made in two ways[1]:

  • in the first case, we use an installment paid regularly at a specified time,
  • in the second case, the payment is made in parts, after the completion of the subsequent stages of the work included in the contract.

If work stages have been defined and calculated in the contract between the client and the contractor, they can be treated as separate transactions. The division of payments into stages provides security for both parties. The contractor is certain that after completion of the work he will not be left without money. On the other hand, the customer can spread the costs over a longer period, thus maintaining financial liquidity.

Application of stage payments

Staged payments are often used when buying shares. The seller may accept payments for sold shares even for several years. Usually, the extension of the repayment period requires you to pay interest. This means that the buyer buys shares at a fixed price. He is obliged to pay part of the price when buying and paying the rest of the liability over time. The rules for repayment of the liability are included in the bill of exchange. It includes the amount of interest and the due date. The seller may receive a repayment guarantee. If the buyer fails to meet the terms, the seller may demand a return of the shares in whole or in part[2].

Staged payments are often used in biotechnology and pharmaceutical projects. It allows the investor to maintain financial liquidity and to have greater control over the course and direction of research. As in the case of purchase of shares, money can be paid in installments under a contract within a specified period or subsequent tranches can be paid at subsequent stages of the study. If the general partner dies or wants to leave, payment may not be necessary. The company may go into liquidation, while the interest will be transferred to a special limited partner[3].

Staged payments in tax

Companies have the right to deduct input tax on purchases and are required to include sales tax.When a company sells its assets, but the receipt of the consideration is deferred, the law allows for the seller to defer the recognition of tax gain along with it. The basic installment method requires that a gross profit percentage be determined for the asset being sold, using the total sale price less the seller's basis in the assets sold. Them, as payments are received, the payments are multiplied by the gross profit percentage to arrive at the recognized gain for that year[4]

References

Footnotes

  1. Graham N. (2014)
  2. Bollefer S. (ed.)(2009)
  3. Bartlett J. (1995)
  4. Marks K. (ed.)(2012)

Author: Izabela Szmalec