Input VAT deduction from advance payment invoices

Facts

The claimant participated in an investment scheme under which she was to purchase a photovoltaic system (PV system) and then lease it to C. In December 2010, she received two invoices for the purchase of the PV system. Invoice No. 255 bore the note “The invoice date corresponds to the month of supply”. It also included the note “payment in advance”. The claimant paid this invoice on 12 January 2011. According to the delivery note dated 19 January 2011, the PV system was to have been handed over directly to C. The reference to payment in advance was not included in invoice no. 256. The claimant paid it on an unspecified date in December 2011.

The invoices did not specify the number of modules, but this could be calculated from the stated total output.

In July 2011, the claimant claimed input VAT deduction in the VAT return for January 2011 on the basis of the two invoices.

It later transpired that the claimant had fallen victim to fraud and that the PV systems had in fact never been installed. 

BFH ruling

The Federal Fiscal Court (BFH) explained that, for input VAT deduction from an advance payment invoice, the supply to be provided must first be determined. This was the case here, even though the number of modules had not been specified; among other reasons, because the number could be calculated from the stated total output. The second condition for input VAT deduction is that the recipient of the supply did not know, nor should have known, that the supply would not be provided. At the time of her payment on 12 January 2011, the claimant could still have expected the PV system to be delivered. Accordingly, she is entitled to the input VAT deduction from invoice 255.

The input VAT deduction from invoice 256 is not precluded merely because there was no reference to payment in advance. This information is not a statutory requirement and, from the perspective of EU law (Article 226 of the VAT Directive), cannot be demanded. The fact that an invoice relates to a supply yet to be provided may also be apparent from other circumstances. The Finance Court must examine in the second instance exactly when the claimant paid this invoice and whether, at that time, she was still sufficiently certain that the supply would take place. Otherwise, the granting of the input VAT deduction would not be considered even from the perspective of the protection of legitimate expectations. Even if the claimant had assumed at the time of payment that she was paying for a supply that had already taken place, input VAT deduction would be ruled out. This is supported by the fact that she claimed the input VAT deduction in July 2011, before making the payment in December 2011.

Analysis

This judgment is particularly relevant for businesses where advance payments are part of day-to-day operations, e.g. in the construction industry. In cases where everything goes according to plan, nothing changes; in other words, input VAT deduction can still be claimed on invoices for advance payments. The BFH’s clarification that an explicit reference to advance payment is not required is to be welcomed. However, things become interesting if one becomes involved in a case of fraud. As soon as one knows or ought to have known that no supply will be provided, input VAT deduction is no longer possible. But even without fraud, this ruling may cause difficulties, as the BFH attaches a highly subjective element to the input VAT deduction: if, as a taxable person, one believes that the supply has already been provided at the time of payment, the BFH takes the view that the input VAT deduction from an advance payment invoice must also be denied. However, this scenario is likely to be limited to specific individual cases.

Author: Nadia Schulte