No tax reduction for voluntary advance payments for craftsmen’s services: Current legal situation and impact on taxpayers
On September 20, 2023, the Düsseldorf Tax Court clarified with its decision of 14 K 1966/23 E that voluntary advance payments for craftsmen’s services not yet rendered do not trigger a tax benefit under § 35a EStG. This decision specifies the previous requirements for the tax consideration of household-related services and craftsmen’s work and emphasizes the restrictive interpretation of the legal prerequisites in cases where tax savings are intended through advance payments.
Legal background of § 35a EStG
With § 35a EStG, the legislator has provided taxpayers the opportunity to deduct expenses for household-related services and craftsmen’s work up to a certain maximum amount directly from their income tax. The prerequisites are that the service is actually performed in the taxpayer’s household and that non-cash payment can be proven.
Scope of application and elements of the offense
Central to this is that the deduction according to § 35a EStG requires that both payment and completion of the qualifying craftsmen’s service take place within the relevant assessment period. The regulation aims to combat undeclared work and promote the legal awarding of work in the private sector. However, it is not intended to privilege mere advance payments for services not yet performed for tax purposes.
Decision of the Düsseldorf Tax Court: Distinction from advance payment
The Düsseldorf Tax Court had to decide on a case in which the plaintiff had commissioned craftsmen’s services and made a full advance payment for them in the previous year—at a time when work had not yet begun. However, the tax recognition of this payment was denied by the tax authority and subsequently by the court.
Key points of the ruling
The judges emphasized that payment alone cannot result in tax relief if the material and contemporaneous performance of the craftsmen’s work cannot be evidenced. The elements of § 35a EStG require that the service is actually provided in the relevant year. Advance payments made solely to benefit from the tax advantage, without immediate performance in return, are therefore not eligible.
Distinction from progress and partial payments
The tax court also differentiates between permissible progress or partial payments as part of ongoing work and the voluntary advance payments at issue in this case for services to be performed only in the following year. While progress payments may be admissible if work continues and there is timely evidence of performance, a stand-alone advance payment lacks the legally required actual receipt of service.
Tax planning options – Practical guidance
Especially for more extensive renovation or refurbishment projects, it is advisable to precisely document the timing of both service performance and payment. The tax benefit under § 35a EStG can only be claimed if payment and execution of the work coincide in the same year, or at least a close temporal connection exists. An early payment alone, on the other hand, does not trigger any tax reduction.
Relevance for planning and contract drafting
Taxpayers should ensure, when commissioning craftsmen’s services, that the services are performed promptly in order to actually realize the tax benefit. Arrangements for progress payments are permissible as long as they reflect the actual progress of the project.
Conclusion and outlook
The decision of the Düsseldorf Tax Court makes it clear that targeted tax planning in relation to craftsmen’s services requires precise coordination of payment and service delivery dates. Simply bringing payments forward does not provide a basis for a tax reduction under § 35a EStG. Taxpayers are therefore well advised to maintain clear and comprehensible documentation for planned modernizations and to coordinate the timing of payment with the actual completion of the craftsmen’s services.
Contact options for legal advice
For further questions regarding the tax treatment of craftsmen’s services and the optimal structuring of contracts, the lawyers at MTR Legal are pleased to assist in developing tailored solutions for your specific situation and ensuring legal certainty.
Source: Finanzgericht Düsseldorf, 14 K 1966/23 E; Status: 20.09.2023 (case final)
