Remission of interest in the event of monthly deferral – BFH ruling (V R 30/20)

There are many different reasons why turnover is reported too late, and such a delay may result in interest charges. Under certain circumstances, however, this interest can be remitted if respectively insofar as the taxpayer has not gained any liquidity advantage from the delay. The BFH (German Federal Fiscal Court) is quite generous in this regard.

The facts

For many years, an entrepreneur had declared about 90% of his turnover one month too late in the preliminary VAT return because the required data from subcontractors was not available in time. When this came to light during a tax audit, the tax office allocated 90 % of the turnover reported in January to December of the respective previous year. If the newly calculated amount owed for the respective year exceeded the amount that had actually been paid, it charged interest on the arrears in accordance with § 233a AO (General Fiscal Code). The authorities determined the duration of the interest period by applying the wording of § 233a AO literally so that the interest period began when the 15-month waiting period expired and ended with the new tax assessment. This resulted in interest being charged for periods of up to 56 months.

The entrepreneur applied for a remission of the interest for reasons of equity as per § 227 AO, arguing that a liquidity advantage, if any, always existed for only one month because the missing payment of one month was always made in the following month. In addition, the “deficit” of one month was always compensated for in the following month by a corresponding "surplus".

The tax office disagreed: The immediate compensation in the following month does not really exist, because it is always cancelled out by the fact that the taxation of newly performed supplies is omitted.

The entrepreneur's action before the financial court was successful, but the tax office appealed to the BFH.

BFH: The legislator is not satisfied with reaping the interest benefits of only one month

The BFH began by clarifying that a measure of equity could only be considered if assessing interest was contrary to the law’s intentions and it could be assumed that the legislator would have decided the case in the applicant's favour if it had recognised that it needed to be regulated. In principle, assessing interest was legitimate if the debtor of the tax claim had had a liquidity advantage.

In the present case, the liquidity advantage had only existed for one month, and according to § 233a (1) sentence 2 AO, the legislator did not intend to reap only monthly interest advantages ("This does not apply to the assessment of preliminary payments and tax deductions"). The decisive factor was whether there was a liquidity advantage due to annual taxation after the expiry of the 15-month waiting period, which was not the case here. The fact that the entrepreneur in this case had, in fact, made use of a permanent extension of the filing deadline without having applied for it and having made the corresponding special prepayments was irrelevant.

Since a remission is at the discretion of the tax office and there is more than one possible discretionary decision here, the BFH could not make the decision instead of the tax office. In its view, the tax office has the choice of two possible discretionary options: either the complete remission of interest or interest on a one-month basis.

Practical implications:

The decisive question in this case is whether to take a monthly or rather an overall view: If, for example, an entrepreneur has been in business for 10 years, owes € 100 in VAT every month and always pays one month late, it could certainly be argued that he has had a liquidity advantage of € 100 for 10 years, which should also be subject to interest for 10 years (minus the grace period). In this case, the BFH chose a monthly approach rather than this overall approach. Those in a similar situation should therefore file an objection against interest assessments. However, because the BFH does not necessarily require the tax office to waive the interest completely, one should not hope for such a complete waiver. Anyone who has problems reporting their turnover on time is definitely better advised to apply for a permanent extension of the filing deadline from the outset. Keep in mind that late reporting also has a criminal law aspect ("temporary tax evasion").

Dated: 01 August 2023