In order to strengthen the economy and to mitigate the economic consequences of COVID-19, the German government decided on Wednesday evening, 3 June to reduce the VAT rates applicable from 1 January 2007 for goods and services supplied after 30 June 2020 and before the end of 31 December 2020 (hereinafter: change period). The standard tax rate is to be reduced from 19% to 16% and the reduced tax rate from 7% to 5%. The corresponding implementation is pending and can be expected. It is unclear whether those responsible for this measure were aware of the very considerable amount of additional work this will trigger in the companies. It remains to be seen whether this will actually stimulate the economy or whether it will burden it further. What does the measure mean for you as an entrepreneur? First of all, we assume that in the short term a letter from the German Federal Ministry of Finance will be issued on the subject, which will clarify individual questions, – as has been the process in the past – whereby the facts of a tax rate reduction are singular; up to now the tax authorities have only had to deal with tax rate increases. The following therefore attempts to anticipate the implementation of the reduction and to provide an initial overview of which levels of the VAT assessment may be affected. The general rule is:
- The time of the agreement of a contract/the order/the offer or a concretely agreed service/delivery date are irrelevant; therefore, the tax rate cannot be "shifted" by this. To determine the tax point for VAT purposes, it’s decisive, when the supply actually gets carried out.
- The invoice date is also irrelevant. By means of simplification, invoices often state that the invoice date is also the date of delivery/service. However, if this is actually not true, the wrong tax rate may be shown and the wrong amount of VAT calculated; apart from the fact that the deduction of input tax from such an invoice is at risk if the date of delivery/service is incorrect.
- This means anyone wishing to benefit from the reduced tax rates; for example, because there is no right to deduct input tax (public bodies outside the business sector; entrepreneurs who carry out transactions for which the right to deduct input tax is excluded, such as doctors/banks/hospitals) should check whether it is possible to postpone the actual receipt of supplies/services until the change period, if necessary, in order to reduce the amount of non-deductible input tax.
- It will become even more attractive for online trading to opt for the "German" tax rate, because the tax rate difference to most EU-member states will increase.
- It is currently unclear if, for example, it will be possible to use the final invoice in the change period to retroactively reduce the tax rate on advance invoices that have already been invoiced (and possibly paid) and thus trigger a refund from the tax authorities.
We would like to point out the following points separately: VAT – tax point VAT (on agreed payment) arises with the supply of the delivery or service. If this point in time lies within the above-mentioned change period, the reduced tax rates are to be applied. If the deliveries/services are provided before 1 July 2020 or after 31 December 2020, the "old" tax rates (19% or 7%) are still or again to be applied. Please note: If you do not take the reduction into account and continue to invoice at the previous tax rates, you will also owe the excessive VAT amounts until an invoice correction and the refund of overcharged VAT has been made (§ 14c UStG – German VAT Act) – regardless of the amount actually paid by your customer. VAT (on received payments) arises upon receipt of the payment for the supplies/services rendered. If this point in time lies within the change period, the reduced tax rates are to be applied. If the remuneration is received outside the change period, the conventional tax rates are applied. Input tax deduction If you receive incoming invoices that were invoiced for deliveries/services provided in the change period, please note that only the tax owed by law may be claimed as input tax. Even if your contract partner ignores the reduced tax rates, this means that "only" the correct input tax can be claimed (i.e. 16% or 5%). When paying the invoice, please make sure that you only pay the correct gross amount and ask your contract partner to correct the invoice. Make sure that discounts are calculated correctly. Reverse charge/tax liability of the service recipient If you make (outgoing) sales for which the tax liability is shifted to your contractual partner, nothing changes for you; the billing of net invoices with the corresponding invoice note remains. If, however, you are the recipient of the service, the tax liability in the case of a service/delivery supplied in the change period must be calculated according to the reduced tax rates and only an input tax deduction of the corresponding amount must be claimed. Intra-EU acquisitions The same applies to intra-EU acquisitions, i.e. the purchase of goods from other EU-member states. These are also subject to the reduced tax rates if they are purchased during the change period; in particular when claiming input tax deduction. We are hoping for detailed regulations for the specific implementation in the areas of partial services/partial payments/down payments/preliminary invoicing/services such as rental, leasing, maintenance etc. Furthermore, special features arise in the case of vouchers issued.Click here to learn more.