Advance Payments, Deposits, and Retainers: When VAT Becomes Due

VAT is a transaction tax, and the question of when VAT becomes chargeable is as important as how much. Article 62 of the EU VAT Directive draws a distinction between two concepts: the "chargeable event" (Article 62(1)) — the occurrence by virtue of which the legal conditions necessary for VAT to become chargeable are fulfilled — and "chargeability" (Article 62(2)) — the moment the tax authority becomes entitled to claim the tax from the person liable to pay. These are related but separate: the chargeable event is the trigger, while chargeability is when the tax authority can actually demand the tax.

Getting the timing wrong means either reporting VAT too early (reducing your cash flow unnecessarily) or too late (creating a compliance failure that can result in interest and penalties). For freelancers and consultants who routinely receive advance payments, milestone payments, or monthly retainers, understanding these rules is essential.

The core question is always the same: has the chargeable event occurred? If yes, VAT is due in the current period. If not, no VAT obligation exists yet — regardless of whether money has changed hands.

Article 63 of the VAT Directive sets the default: "The chargeable event shall occur and VAT shall become chargeable when the goods or services are supplied."

For most service businesses, this means VAT becomes chargeable when you complete the work. If you finish a consulting project on 15 March, VAT is chargeable on 15 March — regardless of when the client pays.

Article 64(1) adds an important nuance for ongoing services: "Where it gives rise to successive statements of account or successive payments, the supply of services shall be regarded as being completed on expiry of the periods to which such statements of account or payments relate."

This means that for services billed on a recurring basis (monthly retainers, quarterly consulting fees), each billing period is treated as a separate completed supply at the end of that period.

Article 65 creates an exception to the general rule: "Where a payment is to be made on account before the goods or services are supplied, VAT shall become chargeable on receipt of the payment and on the amount received."

This is the advance payment rule. When a client pays you before you perform the work, VAT becomes chargeable at the moment you receive the payment — not when you deliver the service. The VAT is calculated on the amount received, not on the full contract value.

If a client pays you €3,000 upfront for a €10,000 project, VAT is chargeable on the €3,000 when you receive it. The remaining €7,000 triggers VAT when either another advance payment is received or the service is completed.

Article 65 does not apply to every payment received before a service is performed. The CJEU established in BUPA Hospitals (C-419/02) that for an advance payment to trigger VAT under Article 65, all the relevant information concerning the future supply must already be known at the time of payment.

Specifically, the future goods or services must be precisely identified at the time the advance payment is made. If the payment is made in respect of goods or services that are only indicated in general terms, or if the payment covers a range of possible future services not yet specified, Article 65 does not apply and no VAT is chargeable on receipt.

This has significant practical implications. A vague prepayment for "future consulting services to be determined" may not trigger Article 65. A specific prepayment for "brand strategy workshop to be delivered in Q2" does.

Monthly retainers are one of the most common billing arrangements for freelancers and consultants. The VAT treatment depends on the nature of the retainer:

Retainer for ongoing services: If the retainer covers a defined scope of work for each month (e.g., "20 hours of consulting per month" or "ongoing marketing support"), Article 64(1) applies. Each month is a separate supply, completed at the end of the billing period. VAT is chargeable at the end of each month.

Retainer paid in advance: If the client pays the monthly retainer at the beginning of the month for services to be rendered during that month, this is an advance payment under Article 65. VAT is chargeable on receipt. Since the service is precisely identified (the monthly scope of work), the BUPA test is satisfied.

Availability retainer: Some retainers are paid for the right to call upon your services, regardless of whether the client uses them. This is itself a supply of services (an availability commitment), and VAT is chargeable according to the billing period under Article 64(1).

A common arrangement: you agree to a €15,000 website redesign, payable in three equal instalments — one third upfront, one third at midpoint, and one third on completion (€5,000 each). How does VAT work?

The CJEU addressed the distinction between successive supplies and staged payments in X-Beteiligungsgesellschaft (C-324/20). That case concerned a one-off mediation service where the supply was already fully completed before the first instalment was due, and the Court ruled that Article 64(1) does not apply to a one-off supply paid in stages — Article 64(1) applies only to supplies that are inherently successive in nature, giving rise to successive billing periods. A single project paid in instalments is not a successive supply; it is a single supply with staged payments.

From C-324/20, it follows that Article 65 applies only to payments made before the supply takes place. Instalments paid after the supply is completed are not advance payments — they fall under the general rule of Article 63, meaning VAT became chargeable at the time the supply was completed.

For a single supply paid in instalments:

The first instalment (€5,000 upfront) is an advance payment under Article 65. VAT is chargeable on receipt, provided the future supply is identified (the BUPA test is met because the specific project is defined).

The second instalment (€5,000 at midpoint), if paid before completion, is also an advance payment under Article 65 for the same reasons.

The final instalment (€5,000 on completion) is covered by the general rule in Article 63 — the supply is completed, and any remaining VAT becomes chargeable at that point.

Not every payment received before a supply is an advance payment. A refundable security deposit is fundamentally different from an advance payment, and the VAT treatment reflects this.

A security deposit is held as collateral against a future obligation (e.g., damages, non-performance). It is refundable if the conditions are met. Because it is not consideration for a supply — it is a guarantee mechanism — Article 65 does not apply. No VAT is chargeable on receipt of a refundable security deposit.

The key distinction: an advance payment will be applied against the price of a future supply. A security deposit may be returned to the customer if certain conditions are met. If the deposit is forfeited (e.g., due to cancellation) and retained as damages, it remains outside the scope of VAT — it is compensation, not consideration for a supply.

However, if a "security deposit" is applied against the price of the service (i.e., it was always going to be deducted from the final invoice), it is economically an advance payment and should be treated as such under Article 65.

When advance payments involve cross-border B2B services, there is an important interaction with the reverse charge mechanism. Under Article 196, the customer is liable for VAT on B2B services received from a supplier in another Member State.

Article 66 allows Member States to derogate from Articles 63, 64, and 65 in certain situations — however, Article 66 explicitly provides that these derogations do not apply to services for which VAT is payable by the customer under Article 196 (reverse charge).

This means that for cross-border B2B services subject to reverse charge, the timing rules in Articles 63–65 apply in their standard form. If your EU client makes an advance payment for a reverse charge service, the chargeable event occurs on receipt of the payment (Article 65), and the customer must self-assess VAT at that point.

From a supplier's perspective, you must issue an invoice for the advance payment, noting the "Reverse charge" treatment. Your client accounts for the VAT on the advance payment in their VAT return for the period in which they made the payment.

Article 220(1) of the VAT Directive requires invoices to be issued for advance payments. You must invoice when you receive a payment before the supply is complete. This is not optional — it is a mandatory invoicing obligation.

Article 226(7) specifies that the invoice must show either the date the supply was made or completed, or the date on which the payment on account was made, insofar as that date can be determined and differs from the date of issue of the invoice.

Note: Article 226(7a) already requires the mention "Cash accounting" on invoices where VAT becomes chargeable at the time of payment under Article 66(b). From 1 January 2027, the ViDA amendments update this cross-reference to "Article 66(1), point (b)" due to the restructuring of Article 66, but the invoicing requirement itself is not new.