If a VAT-registered business invoices (part of) the consideration for a supply of goods or services to be made in advance, VAT is already payable on the consideration received in advance. That VAT is, of course, subject to the same rules as those applicable to the final supply of goods or services.
VAT deduction
If the conditions for VAT deduction are met, the trader who pays the fee in advance must deduct the VAT included therein. The key condition is that VAT is deductible if and to the extent that the goods or services purchased are used for VAT-taxable transactions. These may also be intended transactions. You must then demonstrate that you intend to use the goods or services purchased for VAT-taxable transactions. See our article Evidence of intention to charge VAT on supplies.
Not delivered
But what if the goods or services are not supplied? Is the VAT still deductible in that case? This was the issue in a German case in which the Court of Justice (CJEU) on 31 May ruling has done.
The case concerns business owners who ordered a block heating system. The supplier sent an advance payment invoice for this, which was duly paid. Before the systems were delivered, the supplier went into liquidation. As a result, the systems were not delivered. The German tax authorities subsequently refused to allow the deduction of the VAT paid on the advance payment invoice.
The Court of Justice has ruled that the right to deduct VAT cannot be denied where, at the time of the advance payment, it could be assumed that the purchaser was aware of all the details of the future supply, such that the supply of the goods appeared certain. However, if objective evidence shows that, at the time of the advance payment, the purchaser knew or ought reasonably to have known that the goods would not be supplied, the VAT is not deductible.