The correct handling of down-payments is a typical “VAT trap”. This article summarizes the most relevant VAT rules for these constellations.
What is a down-payment?
A VAT relevant transaction generally requires the supply of a service or good of an entrepreneur for a consideration in return. In case of a down-payment, the recipient arranges the consideration in advance. It thus occurs before the entrepreneur performs his service. Down-payments can consist of money, monetary value or other goods and services.
Has a down payment to be considered in the VAT declaration?
The VAT relevant transaction already happens once the entrepreneur receives the payment. VAT is therefore chargeable upon receipt of the down payment. The tax base is the actual amount received (Article 65 VAT Directive). So – yes! The entrepreneur needs to report the receipt of a down-payment in his VAT filing. Relevant point in time is the period of the receipt of the payment. However, the general VAT rules also apply to down-payments. Thus, VAT only occurs
- if there is a consideration for a taxable benefit
- the down-payment is made for a clearly defined supply of goods or service
- the transaction is locally tax relevant in the supplier country. However, down-payments for B2B cross border services must nonetheless be reported in the supplier’s EC sales list.
- It is a taxable supply or other service. Pre-payments for a VAT free transaction therefore do not trigger VAT. However, a down-payment for a VAT free cross-border B2B supply of goods needs already to be reported in the supplier’s EC Sales list.
Are there special formal VAT requirements for the invoicing?
One distinguishes the invoice about the down-payment and the final invoice:
Down payment invoice
The entrepreneur in general has to issue a down-payment invoice to business customers. An exemption from this obligations applies to certain VAT free transactions. For other customers, invoicing is generally voluntary unless special regulations apply.
The down payment invoice is subject to the general rules for the mandatory minimum content of invoices. In addition, however, the document should indicate that it relates to down-payment payment. Therefore, the (business) customer can also issue a self-bill-invoice about the down-payment.
The supplier only needs to issue a final invoice if the pre-payment did not cover the entire agreed consideration. In this case the supplier has to adhere to certain formal requirements. This invoice must include a precise distinction between the down-payment received, the outstanding amount and the total amount. The invoice must show the net amount, the VAT and the gross amount for all three items Failure to provide this information may trigger an additional VAT liability of the entrepreneur.
Can the customer claim a VAT refund for a down-payment?
The claim of input VAT generally requires that the customer is entitled to deduct VAT and that down-payment invoice is formally correct. In this case, the customer can claim a respective VAT refund even before the performance of the service. However, this requires that the down-payment has been actually made.
…. if the customer does not pay on the down-payment?
Nothing. In the event of non-payment, there is no VAT-relevant event. Particularly, the entrepreneur is not liable in accordance with Article 203 VAT Directive (and the corresponding local rule) for the VAT included in the down-payment invoice.
… there is no supply of services or goods?
From the point of view of the entrepreneur
If the entrepreneur does not supply the agreed services or goods despite the down payment, no liability pursuant to Article 203 VAT Directive occurs. If he already reported the VAT received from the customer to his tax office and reimburses the down-payment to the customer, he can claim back this VAT from his tax office (according to Article 185 VAT Directive and the respective local rules respectively).
And what about the VAT refund of the customer?
If the customer receives back the down-payment, he must correspondingly correct an initially claimed VAT refund. The correction applies to the VAT filing period of the actual repayment (no retroactive effect).
But what happens if the provider becomes insolvent without paying back the down-payment? According to the European Court of Justice, the non-performance does not exclude the initial VAT refund (C-660/16 and C-661/16). Requirement is that the customer at the time of payment had all relevant information about the future supply. Furthermore, the supply of the goods or services must have appeared to be certain. In contrast, the VAT refund is excluded if objective circumstances show that the customer knew or should reasonably have known at the time of payment that the performance of that delivery was uncertain.
VAT handling of down-payments in SAP
This SAP blog article describes the VAT handling of down-payments in SAP: https://blogs.sap.com/2019/11/21/vat-on-down-payments/
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Picture: Notepad with prepayment on a wooden surface@designer491/stock.adobe.com