Small Entrepreneur's Rule might be Applicable Retroactively

Small start-ups have the choice to either waive billing with VAT or bill with VAT - the so-called small entrepreneur's rule (§19 III UStG). This choice is usually bound to the prognosis. The tax court Düsseldorf set up an exception to this otherwise strict rule on June 20, 2008 (re Az: 1 K 3124/07 U).

A businessman opened his shop in 2006 to sell and repair entertainment electronics. In the questionnaire for the record for taxation matters, he estimated the total turnover of his company to be € 45,000 and in 2007 € 50,000. These amounts were based on a business plan, which the businessman had drafted in order to obtain state subsidies for start-ups. However, reality did not come close to the plan. In 2006, the turnover only reached € 13,315. This young entrepreneur therefore applied retroactively to follow the small entrepreneur's rule and to be reimbursed with the paid VAT. The small entrepreneur's rule exempts you from billing with VAT when your turnover is within certain thresholds.

While the tax office refused, the tax judges in Düsseldorf thought differently. The tax office argued that he is bound to his projection. His argumentation is simple: The statute does not explicitly determine when the choice of billing with or without VAT is binding. Since these rules have the character of a tax exemption, he can latest decide when he submits with his tax return.

The judges considered that the entrepreneur relied on unrealistic projection; therefore he was permitted to exceptionally retroactively employ the small entrepreneur's rule. The consequences of a false prognosis have not been statutorily regulated. The court held that the binding effects of a turnover prognosis depend on a realistic assumption. An unrealistic assumption is to be retroactively determined as objective criteria. One argument for the objectively unrealistic prognosis is the evidently overoptimistic turnover expectation. Another clue to the dream prospective was the businessman's motive. He wanted to collect the grants from the labor agency in order to become self-employed and not remain unemployed and dependant on welfare.


Other circumstances that hinder retrieving like e.g. illnesses or similar, do not count as they are among the general risks of self-employment.