Customary designation in invoices - BMF circular letter dated 1 December 2021

In its letter dated 1 December 2021, the Federal Ministry of Finance (Bundesministerium für Finanzen, BMF) adopts the case-law of the Federal Fiscal Court (Bundesfinanzhof, BFH) on the customary designation of the supply in the invoice in the VAT Application Decree (Umsatzsteueranwendungerlass, UStAE). Accordingly, designations that are customary under the circumstances of the individual case, e.g., at the relevant trade level and in the relevant price segment, may be sufficient for deducting the input VAT. However, proving that a designation is customary is difficult and can cause conflicts in discussions with the tax offices.

Transposition of the case-law:  "customary designation" is a relief, not a stricter requirement

To be entitled to an input VAT deduction, an invoice must contain "the quantity and type (customary description) of the goods supplied or the scope and type of the service" in accordance with § 14 para. 4 sentence 1 no. 5 of the German VAT Code.

For VAT purposes, assigning a designation to the supply helps ensure that the supply is not billed twice and that the VAT is treated correctly. This is the purpose of the "indication of the nature" required by Section 14 (4) sentence 1 no. 5 of the German VAT Code. In its ruling of July 10, 2019 (XI R 28/18), the Federal Fiscal Court decided that the added text "customary designation" must be interpreted in a restrictive manner in accordance with EU law in such a way that it does not constitute an additional, stricter requirement for the deduction of input VAT. On the contrary, depending on the individual case, designations that do not meet the "indication of the nature" requirements may still be sufficient for deducting the input VAT if they are customary in the trade.

According to the Federal Ministry of Finance, a designation is considered to be customary in the trade if it meets the requirements of merchants within the meaning of the German Commercial Code (HGB), taking into account the level of trade, type, and content of the supplies, and is generally (i.e., not only occasionally) used by companies in the relevant business segments.

In the case of services, an alternative customary designation is not possible, as the wording of the law does not provide for this.  The designation must be precise, but not exhaustive.

The BMF is adapting the UStAE accordingly. The new regulations are to be applied in all open cases.

Effects on practice

In principle, the BFH ruling was already a relief. Unfortunately, however, as the BMF also states, the case-law does not permit any generally valid statements as to what is considered customary in the trade in individual cases. In case of doubt, the entrepreneur seeking the input VAT deduction must prove that it is customary in the trade unless their case has already been decided by a court. Mere generic descriptions such as "T-shirt" or "blouse" remain problematic and are likely to be sufficient at most in the low-price segment - whereby the term "low-price segment" is also subject to interpretation. As before, it is important to have an informative description as proving that the designation is “customary in the trade” will always be difficult.

In the case of services, it remains the case that general descriptions such as "consulting services" and similar terms are not acceptable. The BMF doesn’t provide the entrepreneur with much help regarding whether a description is precise enough, leaving it for the entrepreneur to decide.

This new orientation in the description of supplies also affects the question of when an incorrect invoice can be corrected retroactively. According to BFH case-law, this is possible if the original invoice contains five essential features (including a description of the supply) that are not so deficient that they are equivalent to missing information. This should lower the hurdle for possibly correcting an invoice retroactively with regard to the description of the supply. However, as the criterion of “customary in the trade” is so vague, it is difficult for entrepreneurs to decide whether an invoice is "still" in order, thereby entitling them to deduct input VAT, for example, in the period in which it was originally issued.