25.02.2014Federal Fiscal Court ruled about VAT liability for security retentions in the building industry
Security retentions can be considered as temporary fee reduction so that full VAT liability only arises once they are released by the customer.
As a common procedure in the building sector, customers hold back a specific percentage of the remuneration as a security deposit to cover damage claims and potential costs of construction defects detected later.
So far this security retention was considered by the German tax authorities as a part of the remuneration, where the resulting VAT is due already at the tax point for the supply regardless when the full payment has been received.
With its decision dated October 24, 2013 (published February 5, 2014) the BFH now held that in cases were a supplier is not able to realize its claim for remuneration in full within a period of two to five years due to a contractual agreed security retention, the outstanding amount could be considered as bad debt in the moment of the supply and should be considered as reducing the taxable base for the supply at that time.
Thus the supplier is allowed to reduce the taxable base for the period the supply took place and is only liable for the remaining VAT on the security retention once the security retention is finally released by the customer.
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