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“Lost” advance payment – Input tax deduction requires precise definition of the contractual item

Businesses are able to deduct the input tax from advance payments if they have been provided with a proper invoice for the advance payment where the VAT charged is shown separately and the payment has actually been made. Moreover, according to a ruling of the Federal Fiscal Court (Bundesfinanzhof, BFH) from 17.7.2019 (case reference: V R 9/19), for an input tax deduction to be possible the item that is to be subsequently supplied has to be precisely defined from the perspective of the business that is making the advance payment. Furthermore, from the viewpoint of this business, the supply has to appear to be sufficiently certain. The BFH took this requirement from ECJ case law. In the case in question, an investor had ordered a blocktype thermal power station from a GmbH (a German limited company) and had made an advance payment from which it deducted the input tax. However, the block-type thermal power station was not delivered subsequently because the GmbH went bankrupt. The advance payment made by the investor was completely lost.

In the case in question, the BFH first obtained a preliminary ruling from the ECJ and, on this basis, allowed the investor to deduct the input tax. The crucial point here was that when the advance payment was made the contractual item had been precisely defined and the investor was able to presume that it would also be supplied to him. By contrast, for the BFH it was unimportant that, from the outset, the GmbH had not at all wanted to provide the service.

Please note: The input tax deduction can be made for the VAT accounting period in which both requirements have been satisfied for the first time. In the opinion of the court, the investor likewise did not have to subsequently adjust his input tax deduction, as is necessary, e.g., where purchases have been cancelled or price reductions obtained. This is because, for this it would have been necessary for the supplier to refund the advance payment; however, this did not happen in the case in question.

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