006. VAT: Invoicing Before Performance - Illicit Invoices, Advance Invoices

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In situations not involving payments on account (advance payments, down payments), the supplying entrepreneur generally must report and remit VAT at the end of the reporting period (usually the calendar month) in which the services are performed or the goods are delivered (time of performance). Normally, this is also the time at which the entrepreneur issues an invoice.

If an invoice with separately stated VAT is issued with respect to goods or services which have not yet been supplied, the issuer of the invoice is immediately required to remit the VAT amount stated in the invoice unless it qualifies as an "advance invoice" as explained below. Such an invoice (if not an advance invoice) is illicit and technically not an invoice at all, but rather a mere "invoice-like document" which does not entitle its recipient to a refund of input VAT. In practice, however, input VAT may be refunded to the recipient if he is an entrepreneur and claims the input VAT on his monthly pre-return. Because the risk of improper refund of input VAT has been created by the issuer of the illicit invoice, the law imposes liability without fault on him. It makes no difference whether the recipient actually makes an improper claim for input VAT or actually receives a refund. Furthermore, the law contains no provisions for correcting or withdrawing illicit invoices.

The above rules, however, do not apply to pre-invoices or advance invoices clearly identifiable as such from which it is apparent that the underlying supply of goods or services has not yet taken place (see VAT Guidelines - A. 190 par. 2 no. 2 UStR). It is advisable to mark such invoices conspicuously as an "advance invoice" or "pre-invoice" (in German: "Vorausrechnung") and to state in the invoice the anticipated date of performance. Decisions by the Federal Tax Court suggest that an invoice can qualify as an advance invoice without meeting these strict requirements as long as the issuer was, at the time of issue, willing, able, and contractually obligated to perform the supply in question in the near future.

Advance invoices have no VAT consequences until performance actually occurs (or payment is received). In other words, until performance occurs the issuer is not required to remit any VAT and the recipient is not entitled to a VAT refund. If the contract is cancelled, no VAT consequences arise at all.

A recent decision by the Brandenburg Tax Court (3 Aug. 1994 - EFG 1994, 1022) provides additional guidance. The plaintiff in the proceeding (seller) had issued an invoice for a machine not yet delivered. The invoice was not marked as an advance invoice nor did it indicate that delivery had not yet taken place. Delivery was delayed because the buyer could not arrange financing. The seller agreed with the buyer that both would regard the invoice as invalid. After the buyer had arranged financing, the machine was delivered and a new invoice issued which apparently made no reference to the first invoice. The buyer (improperly) claimed and received refund of the input VAT on both invoices. The Court held that the seller was required to remit VAT with respect to both invoices as well.

The Court stated that perhaps the seller might have been permitted to withdraw the first invoice on equitable grounds if he had secured immediate return of the original invoice before it could be used to claim an input VAT refund. However, the seller had not done so. More importantly, the Court said that the first invoice could not be treated as an advance invoice after the seller had issued a new invoice. Upon issuance of the second invoice, the first one became an illicit invoice even if it had not been illicit from the start.

The decision indicates that replacement invoices should not be issued for advance invoices. When performance occurs (but not until then), the advance invoice automatically becomes a regular invoice. It is unclear whether this also applies when the advance invoice is clearly marked as such because normally no input VAT refund is obtainable using such invoices.

No appeal was taken from the Court's decision.

Invoices issued before performance which do not qualify as advance invoices are only one example of illicit invoices under section 14 par. 3 UStG (VAT Act).

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