Formal Invoicing Requirements and the Right to Deduct Input VAT – How Strict Are the Tax Courts Really?

The right to deduct input VAT is one of the core elements of the VAT system. At the same time, it is one of the most frequent sources of disputes in tax audits and tax court proceedings. In practice, many conflicts do not arise from the material entitlement to deduct input VAT, but from formal defects in invoices. This raises the question: How strict are the tax courts today – and where is the current boundary between formal compliance and the material neutrality of VAT?

1. Statutory Framework: Form over Substance?

Under section 15(1) no. 1 of the German VAT Act (UStG), the deduction of input VAT requires that the entrepreneur holds a proper invoice within the meaning of sections 14 and 14a UStG. Mandatory invoice details include, in particular:

1. full name and address of the supplier and the recipient,
2. tax number or VAT identification number,
3. date of issue and a sequential invoice number,
4. quantity and nature of the goods supplied or the nature and scope of the services rendered,
5. quantity and nature of the goods supplied or the nature and scope of the services rendered,

If one of these elements is missing or incorrect, the tax authorities regularly deny the deduction of input VAT – at least initially. For a long time, a formalistic approach prevailed: without a proper invoice, no deduction.

2. Change through the Case Law of the ECJ and the BFH

This strict approach has been significantly softened by the case law of the Court of Justice of the European Union and the German Federal Fiscal Court (Bundesfinanzhof – BFH). The starting point is the principle of VAT neutrality: an entrepreneur should not be permanently denied input VAT solely because of formal errors, provided that the material requirements are fulfilled.

The BFH has consistently held that:

1. Material requirements prevail over formal requirements.
2. If a taxable supply, VAT liability and entrepreneurial status are established, the right to deduct may not be definitively denied solely due to formal defects.
3. A defective invoice is, in principle, capable of correction.

Thus, the focus has shifted from the question “Is the invoice formally perfect?” to the question “Are the material requirements demonstrably fulfilled?”

3. Invoice Correction and Retroactive Effect

Of central importance is the possibility of retroactive invoice correction. According to BFH case law, a correction relates back to the time of the original invoice if that invoice already contained certain minimum elements:

1. the issuer of the invoice,
2. the recipient,
3. a description of the supply,
4. the consideration,
5. and separately stated VAT.

If these core elements are entirely missing, there is no invoice capable of correction. In that case, the right to deduct arises only at the time a new, proper invoice is issued.

For practice, this means: even significant formal defects can be cured – but only if a “core invoice” exists.

4. Limits of Leniency: Where the Courts Remain Strict

Despite this more flexible approach, case law is far from permissive. Clear limits remain:

1. Sham invoices or invoices without any actual supply definitively exclude the deduction of input VAT.
2. Vague or incorrect descriptions of the supply may prevent proof of the material requirements.
3. Where the taxable person is involved in VAT fraud or acts with gross negligence, no protection of legitimate expectations applies.

Moreover, the BFH still requires that the invoice makes the taxable supply at least identifiable. Purely generic or blanket descriptions are often insufficient.

5. Practical Consequences for Businesses and Advisers

Several practical guidelines can be derived:

1. Formal compliance remains essential.
   Even though corrections are possible, every defective invoice entails audit risks, interest charges and liquidity disadvantages.
2. Initiate corrections at an early stage.
   Once defects are identified, a corrected invoice should be obtained without delay in order to secure retroactive effect.
3. Document the material requirements.
   Contracts, delivery notes and performance records gain importance where the invoice is formally vulnerable.
4. No complacency in cases of serious defects. Where supply and invoice do not match, even benevolent courts will not help.

6. Conclusion

Today, the tax courts are less formalistic than administrative practice often suggests. The clear trend is towards a substance-over-form approach guided by the principle of VAT neutrality. Nevertheless, the proper invoice remains the central gateway to the right to deduct input VAT. Anyone who relies on subsequent correction exposes themselves unnecessarily to significant VAT risks.