Definition: Value-added tax (in practice usually referred to as VAT or, in Germany, Umsatzsteuer) is a consumption tax charged on the sale of goods and services. Businesses remit collected VAT to the tax office but may offset the input VAT they have paid on supplier invoices. The legal basis is the German Value Added Tax Act (Umsatzsteuergesetz, UStG).
Basics and Legal Framework
VAT in Germany currently has two standard rates: the standard rate of 19% and the reduced rate of 7% for certain goods and services (e.g. food, books, newspapers). The main legal sources are the Umsatzsteuergesetz (UStG) together with implementing regulations and administrative guidance.
Important provisions include:
- §19 UStG – Small business regulation (exemption from VAT for certain turnovers; observe threshold limits).
- §14 UStG – Invoice requirements (mandatory particulars for claiming input VAT).
- §20 UStG – Option for cash accounting or accrual accounting for VAT (taxation based on receipt of payment or performance).
Practical Accounting
For ongoing bookkeeping, VAT is central: it creates an accounting liability to the tax office (output VAT) and an asset claim for the business for input VAT paid. The balance determines whether you must make a payment or will receive a refund.
Buchungssätze und Beispiel
Typical accounting entries for a sale:
- Sales revenue (net) to Accounts receivable (or Bank) – amount excluding VAT
- VAT payable to Accounts receivable (or Bank) – VAT amount
Example: You sell a service for EUR 1,000.00 net at 19% VAT. The invoice reads EUR 1,000.00 net + EUR 190.00 VAT = EUR 1,190.00 gross. In the accounts you record EUR 190.00 as a VAT liability.
On a purchase of EUR 500.00 net at 19% VAT you pay EUR 95.00 input VAT. In the VAT advance return the input VAT is offset against the output VAT: EUR 190.00 (output) − EUR 95.00 (input) = EUR 95.00 VAT payable to the tax office.
Umsatzsteuer-Voranmeldung und Fristen
Entrepreneurs must generally submit a VAT advance return (USt-VA) monthly or quarterly. The frequency depends on the amount of VAT payable; new businesses are usually required to file monthly in the first two years. The advance return must normally be submitted electronically via ELSTER by the 10th day of the following month. Later extensions may apply when arranged through a tax advisor.
At year-end an annual VAT return must also be filed summarising the advance returns and including any necessary corrections.
Special Cases
In practice you will encounter several special cases with specific VAT rules:
- Small business regulation (§19 UStG): If you meet the requirements, you do not have to show or remit VAT, but you cannot claim input VAT. Check the current turnover thresholds (previous year and expected turnover).
- Reverse charge procedure: For certain services (e.g. construction services, cross-border services) the recipient of the service is liable for the tax. Invoices must be annotated accordingly.
- Intra-Community supplies and exports: Supplies within the EU can be zero-rated under conditions (with proof of VAT ID). Exports outside the EU are generally VAT-exempt but must be documented.
- Tax-exempt supplies: e.g. medical treatments by physicians or certain insurance services – ensure correct classification, as no input VAT deduction is possible.
Practical Tips for Freelancers and Small Businesses
For day-to-day handling of VAT the following measures are recommended:
- Use proper invoicing in accordance with §14 UStG: full address, consecutive invoice number, date of supply, net and tax amounts, and the tax rate or a note of tax exemption.
- Document supplier invoices carefully to protect the right to input VAT deduction (retain original invoices, keep electronic invoices).
- Consider the small business regulation in advance: it can reduce administrative work but affects pricing and the right to claim input VAT.
- Maintain separate VAT accounting (sales and purchase VAT accounts) and plan liquidity for VAT liabilities.
- Consult a tax advisor early for cross-border transactions, reverse charge situations, or complex cases.
Correct handling of VAT reduces audit risk and protects against additional assessments. If in doubt, consult your tax advisor or the competent tax office.