Value-added tax (commonly abbreviated VAT) is a consumption tax on supplies of goods and other services that entrepreneurs supply domestically for consideration. It is levied according to the rules of the Value Added Tax Act (UStG) and is remitted by the entrepreneur to the tax office, while the recipient of the service initially pays the tax. For freelancers and small businesses VAT is a pass-through item that you must correctly charge on invoices, record in the accounts and report in the VAT return and the annual tax return.
What does VAT cover and which tax rates apply?
Under §1 UStG most supplies of goods and services in Germany are subject to VAT. There are two standard rates:
- Standard rate 19% – applies to most supplies of goods and services.
- Reduced rate 7% – applies, for example, to food, books and certain cultural services (listed in the UStG).
Some transactions are VAT-exempt or subject to special rules (e.g. intra-Community supplies, export deliveries, certain financial and insurance services). Relevant sections include §4 UStG (tax-exempt supplies) and §6 UStG (place of other supplies).
Invoicing and input tax deduction
The correct invoice is central to the input tax deduction and the remittance of VAT. Invoices must contain certain mandatory details pursuant to §14 UStG so that your customer can claim input VAT.
Mandatory details on invoices
- Name and address of supplier and recipient
- Tax number or VAT identification number (USt-IdNr.) of the invoicer
- Issue date and a consecutive invoice number
- Quantity and type of goods supplied or description of the service
- Net amount, applied tax rate and tax amount
- Note if the small business scheme or the reverse-charge procedure is applied
Small business scheme (§19 UStG)
If your turnover in the previous year did not exceed €22,000 and is expected not to exceed €50,000 in the current year, you can opt for the small business scheme. You then do not show VAT and are not entitled to claim input VAT. Your invoice must include a note, e.g. “According to §19 UStG, no VAT is charged.”
Accounting treatment — practical examples
In daily bookkeeping it is important to remember: VAT is not revenue, input VAT is not an expense. Both items are recorded separately and only the difference is paid to or refunded by the tax office.
Example 1: Sales invoice (service to a customer)
You invoice a service for €1,000.00 net at 19% VAT. Total amount €1,190.00.
| Entry | Debit | Credit |
|---|---|---|
| Sales entry | Accounts receivable €1,190.00 | Revenue €1,000.00 / VAT €190.00 |
Example 2: Purchase invoice (purchase)
You buy office supplies for €500.00 net at 19% VAT. Invoice €595.00.
| Entry | Debit | Credit |
|---|---|---|
| Purchase entry | Expense/Office supplies €500.00 / Input VAT €95.00 | Accounts payable €595.00 |
In the VAT advance return you deduct the input VAT paid (€95.00) from the VAT collected (€190.00). Result: VAT payable €95.00 to the tax office.
Special rules and obligations
VAT advance return and annual return
The VAT advance return (ELSTER) must be submitted periodically: monthly, quarterly or annually depending on the amount of VAT payable in the previous year. In general: high liabilities usually require monthly filing, medium liabilities quarterly, and very low liabilities may allow annual filing. The final VAT liability is determined in the annual return.
Reverse-charge and intra-Community supplies
For cross-border services within the EU or certain services the reverse-charge procedure (§13b UStG) applies: the recipient of the service is liable for the VAT. In most cases intra-Community supplies are VAT-exempt if the buyer’s VAT ID is provided and the required filings (recapitulative statement / EC Sales List) are made.
Practical tips for freelancers and small businesses
- Keep separate accounts/subaccounts for VAT payable and input VAT to keep remittances and refunds clear.
- Use ELSTER for electronic submission and payment.
- Keep invoices and receipts carefully (observe retention periods).
- Apply for and verify VAT ID numbers early for cross-border transactions.
Correct handling of VAT protects you from additional assessments and fines. If in doubt, consult a tax advisor or chamber, especially for complex cross-border matters or when choosing the small business scheme.