When to deduct input VAT if the supplier applies the cash accounting scheme – when the supply takes place or at the time of payment?


Unlike the standard method of accounting for VAT, in which a supplier has to pay the authorities VAT regardless of whether the customer has paid the invoice, the cash accounting scheme allows VAT to be paid only upon collection from the customer. Several EU Member States have implemented this option in their local legislation; Croatia is one of them.

Until recently, the Croatian Tax Authority’s official position was that the customer could exercise its right to deduct input VAT when the supply was made, regardless of whether the supplier applies the standard method or the cash accounting scheme. Only customers who applied the cash accounting scheme themselves had to postpone their right to deduct input VAT until they had paid their suppliers.

Change in the Tax Authority’s position from 1 December 2022

The Croatian Tax Authority changed its position due to the judgment of the Court of Justice of the European Union (“CJEU”) in case C-9/20 Grundstücksgemeinschaft Kollaustraße 136, which deals with the interpretation of Article 167 of the EU VAT Directive (timing of the right of VAT deduction). It follows from the case that, in a scenario in which a taxable person is supplied by a supplier applying the cash accounting scheme, input VAT deduction is delayed until the VAT becomes chargeable. Since under the cash accounting scheme VAT becomes chargeable when the supplier receives the payment, the right of deduction for the customer arises when the invoice is paid.

Following the abovementioned judgment, the Croatian authorities asked the EU VAT Committee to provide its analysis of the case. The VAT Committee agreed with the CJEU’s interpretation of Article 167 of the EU VAT Directive (Working paper No 1050 from the 121st meeting of the EU VAT Committee).

As a result, a few days ago the Croatian Tax Authority issued guidance about the change in its practice. It advised that taxable persons receiving supplies from suppliers applying the cash accounting scheme must delay input VAT deduction until they have paid the respective invoice. Consequently, taxable persons need to differentiate invoices received from suppliers applying the cash accounting scheme from those received from suppliers not applying it.

As the guidance should only be followed for supplies made on or after 1 December 2022, adjusting VAT returns for earlier periods is not required.

We expect that the VAT Bylaw will soon be amended to reflect this change.