In the past, tax audits repeatedly caused trouble when invoices were challenged due to formal defects: The auditors generated additional results for the audit period, and substantial late-payment interest (still 6% per year) was frequently imposed.
While it was possible to correct the invoices and thus remedy the formal defect, this had no retroactive effect. As a result, input VAT amounts for the audit period were reclaimed (plus 6% interest) and only recognised again at the time the invoice was corrected. Because this rule allowed auditors to generate considerable additional results, invoices were always scrutinised in this respect. The reason: although the input VAT deduction could ultimately be claimed again after correction of the invoices, the 6% annual interest still had to be paid. A waiver was also not granted, since the input VAT deduction could be claimed at the time of correction.
In its judgment of 15 September 2016 (C-518/14), the European Court of Justice (ECJ) ruled that a subsequently corrected invoice also entitles the recipient to deduct input VAT as of the date the original invoice was issued, and further that it is not permissible under European law to levy flat-rate interest of 6%, as this rate is far too high in any event.
Until then, the ECJ had not decided by what point in time the correction had to be made in order to claim the input VAT deduction retroactively. In its judgment of 20 October 2016 (V R 26/16), the BFH ruled in favour of taxpayers that the input VAT deduction can be preserved even where the corrected invoices are submitted by the end of the final oral hearing before the fiscal court.
Nonetheless, we recommend correcting invoices identified as defective during a tax audit without delay, in order to avoid unnecessary discussions and the additional effort and trouble often associated with them.
Frequently asked questions
Frequently asked questions
Does an invoice correction have retroactive effect on the input VAT deduction?
Yes. According to the ECJ ruling of 15 September 2016 (C-518/14), a subsequently corrected invoice entitles the recipient to input VAT deduction already at the time the original invoice was issued. This eliminates the previously common input VAT reclaims for the audit period, provided that the formal defects of the invoice are subsequently remedied.
Until when can an incorrect invoice be corrected in order to preserve the input VAT deduction?
In its ruling of 20 October 2016 (V R 26/16), the BFH held that corrected invoices may be submitted up until the close of the final oral hearing before the fiscal court. Up to that point, the retroactive input VAT deduction can therefore still be secured.
What were the tax consequences of incorrect invoices in tax audits in the past?
Input VAT was reclaimed for the audit period and only recognized again at the time of the invoice correction. Interest of 6% per year accrued on the interim additional payment amount and was not waived even after the correction was made.
Are flat-rate late-payment interest charges of 6% per year still compatible with EU law?
In its ruling C-518/14, the ECJ expressly held that the flat-rate interest of 6% is excessive and not compatible with EU law. This finding supports arguments against corresponding interest assessments in connection with input VAT corrections.
Should disputed invoices be corrected promptly despite the option of retroactive correction?
Yes. Even though input VAT deduction can be preserved retroactively, invoices objected to during a tax audit should be corrected without delay. This helps businesses avoid lengthy disputes with the tax office, additional administrative effort, and potential follow-up conflicts.