Businesses in Germany typically issue invoices to their customers after they’ve rendered the complete service. But it is also possible to bill first and do the work later—using an advance invoice, for example.

This article explains what an advance invoice is, the legal requirements it must satisfy, and how to correctly post it to your accounts. We’ll also look at how to offset prepayments against final invoices, ways to handle special cases, and what auditing risks you need to be aware of.

What’s in this article?

• What is an advance invoice?
  
• Requirements for issuing an advance invoice
  
• Requirements for posting advance invoices
  
• How are prepayments offset on a final invoice?
  
• Special cases: Advance invoices and VAT
  
• Audit risks involved in advance invoicing
  

What is an advance invoice?

As the name suggests, an advance invoice is a bill businesses issue to receive prepayment for a future service or supply. Unlike a partial invoice, which covers work already performed, an advance invoice is generated before work begins.

In Germany, they are frequently used for large orders or projects to secure financing ahead of time, minimize the risk of nonpayment, and protect the supplier’s liquidity. The vendor applies these upfront funds to the final invoice upon completion of the service or supply.

Advance invoices and value-added tax

Just like any other transaction, these early payments are also subject to tax. That means advance invoices have to be issued inclusive of value-added tax (VAT). Under § 13 of the German VAT Act (UStG), VAT arises as soon as the vendor receives the prepaid transfer—that is, when the customer settles the advance invoice. The supplier must remit the VAT to the tax office regardless if the service or supply has not yet taken place in full. With prepayments, VAT is due as soon as funds clear, irrespective of if the company uses an accrual or cash basis for levy purposes.

Businesses eligible to deduct input tax can claim any of it as soon as they have made the payment. The upfront bill serves as the necessary evidence. Therefore, suppliers are obligated to issue an advance invoice to any commercial, taxable clients who qualify to deduct input tax. This does not extend to customers who don’t qualify.

Requirements for issuing an advance invoice

An advance invoice must meet specific requirements that don’t apply to standard bills. Firstly, it has to clearly state that it is an “advance invoice” so the recipient understands that prepayment is due. It must also indicate the expected performance period; if that timeframe is unknown, the bill has to include a corresponding note. Lastly, it’s important to describe the service or supply in as much detail as possible.

It also has to contain all other mandatory information required for a correct invoice according to § 14.4 of the UStG:

• Full name and address of seller
  
• Full name and address of buyer
  
• A sequential, unique invoice number
  
• Issue date of invoice
  
• The tax identifier issued to the seller by the fiscal authorities or the VAT identifier provided by the Federal Central Tax Office
  
• Net and gross amount
  
• The applicable tax rate and the corresponding levy sum or, in the case of a tax exemption, a reference to the exemption
  

Stripe helps ensure your invoicing is fully compliant. With Stripe Invoicing, you can generate, modify, and send professional bills in the blink of an eye. No matter if it’s a standard, partial, or advanced invoice, all required information is automatically added. Plus, Stripe automatically tracks invoice status, sends payment reminders, and processes refunds.

Requirements for posting advance invoices

Posting advance invoices to accounts requires a clear separation between upfront amounts paid and received. From an accounting perspective, advance invoices function as either receivables or payables, depending on whether it flows to or from you.

Paying an advance

When paying an advance to a vendor, you initially record it as a prepayment because the product or work has yet to start. It appears on the balance sheet as an asset, since the funds have already been withdrawn from your account while the service remains outstanding. Once delivery occurs, you reclassify the advance as an expense or continue to recognize it as an asset, depending on the nature of the service or supply.

There are multiple steps to recording an advance paid out:

• Post the advance: Post it to a prepayment account once the first payment is sent to the supplier.
  
• Post the final invoice: Once delivery occurs, post the supplier’s closing bill.
  
• Offset the advance: Deduct the amount paid out as an advance against the supplier’s total invoice.
  
• Post the final payment: Post the remainder as a final payment.
  

Receiving an advance

If you receive an advance, post it as soon as the funds arrive. It doesn’t matter if an upfront bill has been issued; the key point is that the customer’s payment reaches your business account.

VAT on the prepaid amount must be remitted in the preliminary reporting period in which the funds come through, meaning it is due prior to performance.

Recording an advance paid to you involves several steps:

• Post the advance: As soon as funds arrive, record it as a liability because performance is still open.
  
• Post the final invoice: Once the supply takes place in full, generate a closing bill and offset the advance against the overall sum.
  
• Clear the advance: Clear the liability for the advance received by reposting the amount to the final invoice.
  
• Post the final payment: Once the advance is deducted, post the remaining customer payment as a receivable.
  

How are prepayments offset on a final invoice?

You need to correctly offset advance payments on the final invoice you issue later. One reason this is important is to avoid accidentally charging the client a higher total than they actually owe. It also helps ensure VAT is charged solely on the remaining balance.

Offsetting the prepayment

On your final invoice, deduct the prepayment already made as an upfront amount from the overall total. Make certain the bill charges the customer for the remainder only. Otherwise, they’ll end up paying double.

Calculating VAT

Once you’ve deducted the early payment on the closing bill, VAT is due solely on the remaining amount. That means you apply tax only to what is left after you’ve deducted the advance, rather than the original total.

Example calculation

Let’s say you’re carrying out a construction project, and the overall cost of all vendors and services is €50,000. Your customer has already paid a €10,000 advance to allow you to prefinance some of your building materials. On the final invoice, calculate the net total less the advance, then add VAT to the remainder.

Net total for supplies and services: €50,000
Advance: €10,000
Outstanding net: €50,000 – €10,000 = €40,000

VAT (19%) on outstanding total:
€40,000 * 19% = €7,600

Final invoice total:
€40,000 + €7,600 = €47,600

Special cases: Advance invoices and VAT

There are special cases to keep in mind while issuing and offsetting advance invoices.

Advance invoices with cash discounts

If you and your customer agree on prepayment, you could offer a cash discount. In that case, ensure the final invoice reflects the amount paid after the discount. If you use the overall bill sum rather than the reduced total, the client will end up paying more than agreed.

Taxing advances on barter transactions

Remuneration for a service or supply could take the form of a barter transaction, rather than monetary consideration. Such transactions are still subject to VAT; it has to be collected on the exchange value received ahead of time. The levy applies to the commercial value of the nonmonetary consideration.

Let’s say you provide construction work in exchange for machines worth €10,000 net. If the exchange happens before the work begins, VAT needs to be collected on the commercial value of the machines. However, your partner in this exchange cannot claim an input tax deduction until they receive the service.

Audit risks involved in advance invoicing

For German businesses, properly handling advance invoices is key to avoiding legal and levy risks. Errors can result in arrears and fines, as well as company or tax audits by the authorities. Make sure to pay close attention to these audit liabilities.

Assigning VAT to the wrong tax period

Because VAT on advance invoices arises at the moment of prepayment, it’s quick to post the levy too early or too late. Assigning VAT to the wrong tax period can shift remittance into the incorrect preliminary reporting duration and lead to late or inaccurate returns. Collect and record VAT as soon as the transaction appears.

Recording revenue twice

Another audit risk involves recording revenue twice. Double-counting can occur if an advance you receive is not properly offset against the final invoice, resulting in revenue recognition on both the upfront amount and the closing bill. The result is an error on your preliminary VAT return, and you could end up overpaying tax, so make sure the correct sum of advance is deducted from the final invoice.

Missing documentation

Advance invoices need to be documented properly. Incorrect or missing documentation for bills issued or received, or for incoming and outgoing funds, can cause problems during audits. Plus, the financial authorities might not acknowledge your VAT remittance and input tax refunds. Make sure all the relevant documents—such as bank statements, payment confirmations, and receipts—are correctly archived, and can be traced at any time.