Definition: The Sollversteuerung is the VAT accounting method under which VAT becomes due at the time the service is performed or the invoice is issued – regardless of whether the customer has already paid the invoice. It determines the point in time when VAT must be remitted to the tax office.
Basic principle and legal framework
The Sollversteuerung follows the performance- or invoice-based principle: tax arises when the service is provided or the invoice is issued. The relevant law is the German Value Added Tax Act (UStG). The Sollversteuerung is the normal assessment method for businesses; a deviating cash accounting method (Istversteuerung / payment-receipt principle) is only possible under certain conditions. The small business rule (Kleinunternehmerregelung, § 19 UStG) is to be distinguished from this – it results in VAT not being shown on invoices.
Practical effects in accounting
For freelancers and small businesses the Sollversteuerung mainly means one thing: VAT must already be remitted when the invoice is issued. This has direct effects on liquidity, reporting and receivables management.
- Liquidity planning: VAT is due before possible payment receipts. Business owners must pre-finance the tax from their own funds between issuing the invoice and receiving payment.
- Accounting entries: When the invoice is issued the receivable including VAT is recorded; the VAT appears as a liability to the tax office.
- VAT advance return: The VAT arising from invoices must be reported in the advance return and in the annual return. The filing frequency (monthly, quarterly) depends on the amount of tax payable.
Example journal entry when issuing an invoice
Freelancer issues an invoice for 10,000 EUR net at 19% VAT:
| Entry | Debit | Credit |
|---|---|---|
| Invoice issuance | Accounts receivable 11,900 EUR | Sales revenue 10,000 EUR VAT 1,900 EUR |
| Payment receipt | Bank 11,900 EUR | Accounts receivable 11,900 EUR |
Advantages and disadvantages for small businesses
The Sollversteuerung is easy to understand and corresponds to the performance-oriented tax principle. Nevertheless, business owners should weigh the pros and cons:
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Advantages:
- Clear point in time when tax arises (when the service is performed / invoice issued).
- No dependence on receipt of payment; fewer opportunities to manipulate the timing of taxation.
- Standard procedure: no separate application required unless an exception applies.
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Disadvantages:
- Liquidity burden with long payment terms or delinquent customers.
- Increased risk with bad debts: VAT may still be payable to the tax office even if payment is not received.
When is the Sollversteuerung appropriate — and what are the alternatives?
The Sollversteuerung is the standard method for many businesses. It is appropriate when payments are generally received promptly or when the risk of non-payment is low. For businesses with long payment terms, large volumes of receivables or high default risk, the cash accounting method (Istversteuerung / payment principle) can be advantageous, provided the legal requirements are met.
Key points to consider when deciding:
- Review your average receivables turnover and default risks.
- Take into account liquidity planning and buffers for VAT payments.
- Consider cash accounting (Istversteuerung) as a liquidity relief if you meet the requirements.
- Do not confuse the small business rule (§ 19 UStG) with cash/accrual VAT accounting.
Practical tips and legal steps
Recommendations for practice:
- Document invoice data thoroughly so that the point in time when tax arises is always traceable.
- Maintain effective receivables management (dunning procedures, payment terms) to avoid liquidity bottlenecks.
- For large outstanding receivables, review with your tax advisor the possibility of cash accounting or other instruments (adjusting payment terms, factoring).
- Clarification with the tax office: changes in the taxation method or questions about the applicability of exceptions should always be coordinated with your tax advisor and, if necessary, the tax office.
The Sollversteuerung is a central rule in VAT law and directly affects your liquidity and accounting. A deliberate choice of taxation method and appropriate planning are therefore essential for freelancers and small businesses in Germany.