When is VAT due on an invoice?
When is VAT due on an invoice? Simple question, difficult answer!
Businesses act as tax collectors on behalf of the government: they must collect VAT from their customers and then pay it to the Treasury.
VAT is normally due at the time the supply of goods or services takes place.
However, the exact moment when a transaction is carried out is not always easy to determine, especially when it takes place over a long period of time (e.g. a construction site) or on a recurrent and continuous basis (e.g. internet subscription, gas supply, etc.). Therefore, when the transaction gives rise to successive breakdowns or payments, the Directive shifts the moment when VAT becomes chargeable to the end of the periods to which these breakdowns or payments relate.
Let's take an example
A business carries out a construction project for a sum of € 10,000,000. The project will last two years. The company draws up a breakdown each quarter, taking into account the progress of the work, and claims payment of part of the price from its customer. In this situation, VAT is not payable at the end of the project (when the project is completed) but as successive breakdowns and/or payments are made.
What about when a service is fully completed but the parties contractually agree that the remuneration will be paid in instalments? What is the due date rule in this case?
The case brought before the Court of Justice
A broker receives a commission of €1,000,000 for its intermediation service in the sale of a building. It contractually agrees with its client that its fees may be paid in instalments of €200,000 for 5 years.
In the first year she issues an invoice for € 200,000 plus VAT to her client. The German tax authorities did not agree and demanded that VAT be paid on the entire fee since the service had been fully completed. The company considers this administrative position to be unfair, as it results in VAT being paid to the Treasury on an amount that it has not yet received from its client.
The dispute is brought before the Court of Justice, which must decide: Is the VAT due at the time the service is completed or as the customer makes successive payments?
The Court of Justice's response
The Court of Justice agrees with the German tax authorities.
The taxable amount can only be reduced in specific cases (e.g. when the sale is cancelled or refused or when the customer goes bankrupt) as defined in the VAT Directive. An agreement to pay in instalments is not covered and cannot result in a reduction of the taxable amount.
The Directive does, however, lay down two general rules on the chargeability of VAT:
- A rule for one-off transactions: VAT is due when the transaction is completed, i.e. when it is actually carried out. In other words, the taxable person must pay VAT on the entire price even if he is forced to pre-finance the VAT himself. The fact that he has agreed with his partner to pay in instalments is irrelevant.
- A general rule for recurrent or continuous operations: in this case one cannot wait for the completion of the operation: the VAT is due as and when successive statements or payments are made.
It is not legally possible to "mix" the two rules in a contract: as the intermediation service is fully completed, VAT is due on the full price. The fact that the parties have agreed to pay in instalments does not prevent this. Only the Member States (and not the taxable persons) can modulate the rules of chargeability differently from what is laid down in the Directive.
The Expert's eye
When is VAT due? Simple question, difficult answer!
The case before the Court is a good illustration of the problem of when VAT is due and the taxable amount on which it should be calculated.
In the context of completed services, the fact that a contract is concluded allowing for payment of the price in instalments does not affect the time at which the tax is due. It is not up to the parties to decide when VAT is payable: the VAT Directive and, where applicable, the country in question, lay down the rules on when VAT is payable!