Progress invoicing is an indispensable practice for many businesses. It’s also a common place to find invoicing errors. Businesses that provide services over long periods must correctly invoice their project progress while complying with legal and tax rules. This is true for construction projects, information technology (IT) rollouts, long-term service agreements, and more.

In this article, we discuss progress invoicing, when it’s permitted, and what businesses should consider to secure their liquidity and avoid audit risks.

What’s in this article?

• What is progress invoicing?
  
• When is progress invoicing permitted?
  
• Differences among deposit, progress, and final invoices
  
• Value-added tax (VAT) and revenue recognition on progress invoices
  
• What are the formal requirements for progress invoices?
  
• Common errors and audit risks with progress invoicing
  

What is progress invoicing?

A progress invoice—also frequently referred to as an “interim invoice”—is issued for part of the agreed order total before full completion of the order. It is used to secure liquidity and to invoice rendered services or progress made on a project before the final invoice.

A legal description of progress invoices is given in Section 632a of the German Civil Code (BGB). They are used for long-running, complex, or project-based performances of services where invoicing before final completion makes sense financially or organizationally.

When is progress invoicing typically used?

Progress invoicing is typically used in the following situations:

• Long-term projects: This is where performance of services stretches several months or years (e.g., construction projects, IT rollouts, consultancy assignments).
  
• Project-related services: With these, individual packages or phases of work can be clearly parceled out.
  
• High order volumes: This can limit the supplier’s financial investment and secure liquidity.
  
• Milestone contracts: These are paid when defined project targets are achieved.
  
• Construction and contracting sector: Progress invoicing is the industry standard and explicitly required by law.
  
• Standalone performance of services: These cannot be rendered on short notice or in a series.
  
• Contractual agreements: Partial invoices during performance of services are permitted or stipulated.
  

For these kinds of services, progress invoicing helps both contract parties remain secure about project planning. Contractors get paid promptly for services rendered so far, while clients receive transparency in terms of progress and budget.

When is progress invoicing permitted?

In principle, progress invoicing is permitted when services are rendered, a corresponding contract is concluded, and the parties have agreed on partial payments prior to the project’s completion. It is important that the partial payment amount is economically and legally justified and does not constitute prepayment without services being rendered.

Progress invoices can be issued subject to the following prerequisites:

• There is an effective contract in place between the parties that describes the nature, scope, and remuneration of the performance of services.
  
• The progress payment is stipulated—or at least, not excluded—by the contract, such as through payment plans, milestone agreements, or industry-standard practices.
  
• The partial performance of services for which the invoice is issued has already been rendered, or objectively measurable progress has been made on the project.
  
• The payment amount is appropriate and reasonable for the performance of services.
  
• The invoice does not exceed the total amount of remuneration. Progress invoices must be for partial amounts of the agreed total only.
  

Legally, anyone can issue progress invoices. However, these invoices must always be objectively justified and clearly documented. For individual contracts, it’s important to include an explicit provision on progress payments to avoid disputes over amounts and due dates in the future.

Progress invoices are not permitted before the performance of services has taken place. Legally, a deposit invoice would need to be issued in this case. These are handled differently than progress invoices, especially regarding VAT and linking a payment to a specific performance.

Distinctions between progress invoicing and unlawful prepayment

A common error is to use progress invoicing to secure liquidity without properly tying the invoice amount to a specific performance of services. This is a problem in the following cases:

• No specific partial performance of services can be identified.
  
• Progress cannot be verified.
  
• The amount of the progress invoice was set arbitrarily.
  

In these cases, the tax authorities might not accept the invoice, or the invoice could be categorized as an unlawful prepayment during a company audit.

Differences among deposit, progress, and final invoices

The terms “deposit invoice,” “progress invoice,” and “final invoice” are frequently confused in practice. However, there are significant differences among them regarding time, performance of services, taxation, and invoicing logic. Clearly separating these three types of invoices is important for bookkeeping, handling VAT, and achieving legal certainty during company audits.

Deposit invoices

A deposit invoice involves a customer prepaying before the performance of services begins. It is primarily used as a form of security for the contractor and is not proof of the performance of services. From a tax perspective, what matters is that the VAT—depending on the type of taxation—can become due as soon as the payment is received, even though the performance of services has not happened yet.

Progress invoices

A progress invoice includes partial performances of services already rendered or progress achieved on a project. It is standard practice during the execution of a project and requires that progress can be objectively verified. Progress invoices are indicated in full on the final invoice and offset against total remuneration.

Final invoices

The final invoice is used to fully settle the account. It is prepared once the performance of services has been rendered in full and contains the total remuneration due for the order. Progress invoices previously issued and advances received are listed and deducted from the invoice total. The aim is to determine the outstanding or credit balance.

Designating and using the right type of invoice is important for businesses. An incorrectly declared progress invoice can be deemed as an advance payment by the tax authorities. This can impact VAT, input tax deductions, and audit findings. For that reason, clear contract provisions and transparent invoicing logic are important.

Value-added tax (VAT) and revenue recognition on progress invoices

VAT errors are common on progress invoices. While invoicing is often based on project progress, VAT is subject to its own rules—especially regarding revenue recognition and tax deadlines.

VAT can be due as soon as the progress invoice is issued. It can also be due when payment is actually received or the final invoice is prepared. Certain features determine when VAT is due, such as the type of taxation (e.g., accrual-based or cash-based taxation) and the date of the performance of services. Making mistakes with VAT can lead to tax arrears, interest charges, or issues being flagged during company audits.

Indicating VAT

Similar to other tax invoices, progress invoices must indicate only the VAT due on the services being invoiced. Only the part of the performance of services being invoiced matters, not the total order value.

It’s important to note that VAT becomes due as soon as payment for the progress invoice is received or the partial performance of services being invoiced is rendered. It is not deferred until the final invoice. This means VAT usually has to be declared in the corresponding preliminary reporting period, whether or not the whole project is finished.

The following also apply:

• VAT must be charged proportionately and must not be indicated for the full order total.
  
• The final invoice must clearly indicate the VAT amounts contained in the progress invoices and correctly offset these amounts to avoid double taxation.
  
• If multiple progress invoices are issued, full documentation is required so the total VAT indicated aligns with the VAT applied to the total revenue.
  

An invoice could indicate incorrect VAT amounts because of an incorrect tax basis or unclear performance of service period. If this happens, the tax office could flag the invoice. It can also result in tax arrears or interest charges during a company audit.

When to recognize revenue

With accrual-based taxation, VAT generally becomes due on the date of the performance of services. This is provided that at least a proportion of the underlying performance has been rendered. What matters is when the performance is rendered or what performance period is being invoiced—not when payment is received. Therefore, businesses are required to remit VAT to the tax office before their customers actually settle their invoices.

On the other hand, with cash-based taxation—provided that it is permitted and has been agreed upon with the tax office—VAT does not become due until payment for the progress invoice has been received. This type of taxation can offer smaller companies and service providers a liquidity boost because they don’t become liable for tax until the progress invoice has been paid.

What are the formal requirements for progress invoices?

Formal errors are among the most common reasons tax offices and auditors flag progress invoices. Because progress invoices are often generated during ongoing projects, there is an increased risk that mandatory information will be unclear or overlooked.

In addition to the general statutory invoice information, progress invoices must also identify which partial performance of services is being invoiced, its time period, and how the progress payment is included in the final invoice. Clear invoicing is important from a tax perspective and for transparency with customers.

Progress invoices must contain the mandatory invoice information required by law, including the following:

• Full name and address of the recipient of the performance of services
  
• Tax ID number or VAT identification number (VAT ID)
  
• Invoice date and number
  
• Period of performance of services
  
• Description of the performance of services or the performance period
  
• Net total, VAT rate, and VAT amount
  
• Payment terms and deadline
  
• Clear indication that the document is a progress invoice
  

Automated milestone invoicing in practice

For ongoing projects with multiple milestone payments, it is particularly important to align invoicing, proof of the performance of services, and tax information. With Stripe Invoicing, you can link progress and milestone invoices directly to project progress. Invoicing can transfer defined milestones to invoices automatically, as soon as they are achieved.

Invoicing consistently factors in relevant mandatory information, such as the performance period and VAT. By integrating the tool into your payment and bookkeeping systems, you can monitor which performances have already been invoiced, the outstanding amount, and the amount being offset on the final invoice. At the same time, automation makes coordination with your customers easier and reduces manual errors.

For example, automated processes allow you to structure your progress invoicing workflows, while consistently complying with tax and legal requirements.

Common errors and audit risks with progress invoicing

Progress invoices are frequently reviewed during company audits. This is because they simultaneously affect contract law, proof of performance of services, VAT, and timing of revenue recognition. All of these features frequently contain formal and content errors.

Even minor inaccuracies—such as unclear descriptions of services, incorrect VAT amounts, or offsetting errors on the final invoice—can result in progress invoices being flagged by a tax professional. Common consequences of this include tax arrears, interest charges, or corrections across multiple taxable periods.

Below, we discuss common errors, inaccuracies auditors look for, and how businesses can design invoicing processes to minimize audit risks early.

Common errors on progress invoices include the following:

• No clear indication: The invoice is not clearly marked as a progress invoice.
  
• Incorrect VAT amount: VAT is indicated in relation to the final total instead of the progress payment.
  
• No description of the performance of services or time period: The partial performance of services being invoiced is not sufficiently transparent.
  
• Incorrect timing for revenue recognition: VAT is declared at the wrong time, especially if applying cash-based taxation.
  

Company audits often focus on the following:

• Unclear performance periods
  
• Incorrect or incomplete VAT information
  
• Insufficiently clear links between progress payments and performances of services
  
• Double reporting of VAT due to incorrect amounts indicated on progress and final invoices
  

Businesses should document their processes accordingly so that—during an audit—they can provide clear evidence of the performance of services rendered and milestones invoiced.