Accrual-based VAT: the supply, the partial supply and the advance payment decide the period of the tax

A joinery in Kassel installs a fitted kitchen at the end of March for 23,800 € gross. The invoice goes out on 4 April and the customer pays in June. The owner reports the 3,800 € of VAT in her June pre-return, because only then is there money in the account. The tax office sees the tax as having arisen at the end of March. A business taxed on agreed consideration asks neither about the invoice nor about the payment, but about the supply.

The principle: what counts is when the supply is made

Section 16(1) sentence 1 UStG sets the default: tax is calculated on agreed consideration unless section 20 allows otherwise. In practice this is called Soll-Versteuerung, accrual taxation. It applies to every business that has not applied for, and been granted, the tax office's permission to use the exception.

The timing is governed by section 13(1) no. 1 letter a UStG. On agreed consideration, the tax arises at the end of the pre-return period in which the supply was carried out. The provision therefore links two quantities: the day on which the supply is made, and the period into which that day falls.

The day of supply thus becomes a cut-off date at the end of a period. A business that delivers on the first day of a quarter and one that delivers on its last day owe the tax at the same moment. Within a period, the exact day does not matter. Across the boundary between two periods, however, it decides everything.

Which period applies follows from section 18(2) UStG: as a rule the calendar quarter, the calendar month where the previous year's tax exceeded 9,000 euros, and likewise the month in the year of formation and the year after. Details and exemptions are covered in the course on the VAT pre-return. What matters here is that this period sets the cut-off.

Section 18(1) sets the deadline for filing the pre-return at ten days after the period closes, and the prepayment is due that same day. Without an extension, a quarterly filer therefore reports a supply of 30 September by 10 October, but a supply of 1 October only by 10 January.

The annual tax is built on the same quantity. Section 16(1) sentence 3 starts from the transactions for which the tax arose within the taxation period, and the taxation period is the calendar year. When the tax arises therefore decides not only the pre-return but also which annual return a transaction belongs to.

The invoice date and the payment move nothing

The most frequent error is assigning VAT to the invoice month. Yet section 13(1) no. 1 letter a does not mention the invoice at all. A business that performs at the end of March and invoices at the beginning of April has made the tax arise in the March period, even if the books record the revenue in April.

Nor does accrual taxation depend on the receipt of payment. The tax arises although the customer has not yet paid, and it must be paid over although the money is still outstanding. With payment terms of thirty or sixty days, the business therefore advances the VAT to the tax office for several weeks.

The invoice is not irrelevant for all that. For supplies to other businesses, to legal persons and for certain supplies connected with land, section 14(2) requires it within six months of the supply. Under section 14(4) no. 6 it must state the time of the supply, and that very time is what triggers the tax.

The date of supply on the invoice is therefore no formality. If only the issue date appears, it is hard to prove later when the tax arose. A business performing at month end and invoicing at the start of the next should state the date of supply expressly, even where its software does not ask for it.

Payment only matters in two special situations. If it fails for good, the tax is corrected under section 17, as the second module shows. If it arrives before the supply, the advance-payment rule further down applies. In the normal case, supply first and money afterwards, it has no influence on when the tax arises.

Only a business that, on application under section 20 UStG, is taxed on consideration received has the tax arise under section 13(1) no. 1 letter b at the end of the period in which the money comes in; who may make that application is shown in the course on the VAT pre-return.

When a supply is carried out

For supplies of goods, section 3(1) UStG provides the yardstick. A supply of goods enables the recipient to dispose of an item in their own name; the law calls this the transfer of the power of disposal. The supply is therefore carried out as soon as the customer can dispose of the goods in this way, usually on handover.

Section 3(9) defines other services only negatively: they are all supplies that are not supplies of goods, including refraining from an act or tolerating it. The law sets no separate moment for them. For a consultation, a repair or a talk it is nevertheless usually easy to find, because the service is completed on an identifiable day.

Things get harder with services that stretch over months: a construction project, a software project, a maintenance contract over several years. If the basic rule stood alone, the tax on a two-year project would arise only in its last period. Two further sentences of the same provision close this gap: the partial supply and the advance payment.

Partial supplies: when stages carry their own price

The law treats partial supplies like whole supplies but demands two things at once. The supply must be economically divisible, meaning it can sensibly be broken down into stages. And the consideration for the individual stage must be agreed separately. If either condition is missing, there remains a single supply with a single moment at which the tax arises.

The clearest example is a continuing service at a monthly price. A business that maintains a machine for a monthly flat fee, or provides storage space for a monthly charge, makes a partial supply every month. The tax then arises month by month, whether the contract runs for one year or five.

For construction work, the contract decides. If the parties agree a separate price each for the shell, the roof and the interior finishing, and each stage is completed on its own, there are partial supplies. A lump sum for the finished building with a payment schedule by construction progress, by contrast, does not yet turn the stages into partial supplies.

The difference has consequences. A payment schedule only governs when money flows, not what a price has been separately agreed for. Such instalments are advance payments on the single supply, and the rule in the next section applies to them. Treating instalments as partial supplies may lead to reporting the tax in the wrong period.

For projects it therefore pays to look at VAT when drafting the contract. Agreeing milestones with their own price spreads the tax over the term. Agreeing a fixed price for the whole work concentrates it in the period of completion, unless advance payments come in before then.

Advance payments: the tax follows the money

Sentence 4 of letter a deals with money that arrives before the supply. If all or part of the consideration is received before the supply or partial supply has been carried out, the tax arises to that extent already at the end of the period in which the money comes in. Here, exceptionally, payment matters even under accrual taxation.

The words to that extent limit the rule to the amount paid. Only what has actually been received is taxed. The tax is contained in the amount paid and is extracted from it: at a standard rate of 19 percent that is 19/119 of the advance payment, at 7 percent correspondingly 7/107.

An invoice for an advance payment does not trigger the tax on its own. As long as the customer does not transfer the money, nothing has been received, and under sentence 4 nothing arises. The same applies to interim invoices by construction progress: what counts is when the money arrives, not when the interim invoice was sent.

If the tax rate changes between the advance payment and the supply, the advance payment is first taxed at the old rate and adjusted in the period of the supply. That transitional rule is explained in the course on VAT rates. For when the tax arises, it is enough to note that each advance payment has its own period.

The advance invoice and the final invoice

Section 14(5) sentence 1 UStG extends the invoicing rules to consideration received before the supply. An invoice for an advance payment needs the same mandatory details as any other invoice, including consideration and tax amount. Under subsection 4 no. 6, the time of receipt replaces the time of supply, provided it is known and differs from the issue date.

For the customer, this invoice matters. Section 15(1) sentence 1 no. 1 sentence 3 allows input tax to be deducted on a payment made before the supply once the customer holds the invoice and has made the payment. Both conditions belong together: an invoice without payment is not enough, nor is a payment without an invoice.

Once the supply is made, the closing invoice follows, usually called the final invoice. Section 14(5) sentence 2 requires it to deduct the part-payments received earlier and the tax amounts attributable to them, where invoices were issued for them. The final invoice thus states the total price and subtracts the invoiced advance payments together with their tax.

A business that forgets this deduction and shows tax on the full price in the final invoice, although part of it already appeared on advance invoices, shows tax twice. Under section 14c(1) it owes the excess shown until it corrects the invoice vis-à-vis the customer. That costs liquidity although no additional revenue lies behind it.

In the period of the supply, only the tax on the remainder then arises. What was already taxed with the advance payments does not arise a second time. The pre-return for that period therefore shows only the difference between the tax on the total consideration and the tax already reported on the advance payments.

In practice a simple order helps. Each advance invoice gets its own number, each receipt is matched to the order with its date, and the final invoice lists all advance payments with number, consideration and tax. That way pre-returns, invoices and the customer's input tax deduction agree at the end.