Challenges Posed by the Reduction of VAT in 2020

In two days of negotiations, the governing coalition has put together a comprehensive package to deal with the economic consequences of the Corona crisis. As part of its economic and crisis management package, the governing coalition surprisingly announced on June 3, 2020 that it would reduce the normal / full VAT rate from 19% to 16% and reduced from 7% to 5% from July 2020 to December 2020. At first glance this appears to be positive for the economy by reducing the prices for the end customer. However, this approach raises questions in many areas and makes comprehensive and timely advice necessary.

Challenges_2020_reduction_of_VAT_to_boost_economy_during_corona_crisis.jpg

Practical tip: Services to Recipients not entitled to Input Tax Deduction

As far as services are performed to entrepreneurs entitled to deduct input tax, it does not matter whether the services are performed before or after the respective tax rate changes. In these cases, it is only important to ensure that invoices are issued correctly.

In the event, services or sales are performed for recipients not entitled to deduct input tax, the service should be, if somehow possible, be performed in the period between July and December of this year.

Rules for Applying the VAT Reduction

The standard tax rate (§12 I UStG) of 19% applies to all transactions (sales and services) carried out up to June 2020; the interim standard tax rate of 16% applies to all services and sales carried out in the period from July 2020 to December 2020. Starting January 2021, the (normal) standard tax rate of 19% is then to be applied again.

The same goes for the reduced tax rate.

Execution of Sales or Service

The performance of the sale resp. service determines the applicable tax – either normal or interim rate. In this regard it is irrelevant whether you are taxed according to the payments received (actual taxation) or according to agreed payments (target taxation). Down payments or prepayments or advance are also irrelevant for the final accrual of VAT (§27 I UStG). Particular problems arise with long-term contracts that are executed beyond the date of the change in tax rate.

Customer K orders a new electric vehicle on 20.7.2020 for EUR 30,000 plus VAT. The agreed delivery date is December 2020. K already makes an advance payment of (EUR 30,000 plus 16% VAT =) EUR 34,800 in July 2020. Due to delivery bottlenecks in the battery systems, the vehicle cannot be delivered until 12 January 2021. Insofar as the reduction in the standard tax rate is not extended beyond December 2020, the service is not completed until January 2021. This means the normal standard tax rate of 19% is to be applied.

Hint:

The completion of a sale is the delivery of the sold product.

Examples for Performance of Services

In principle, the above rules apply to the execution of a service. Services (including work services) are performed at the time of their completion. In the case of continuous services of limited duration, the service is performed at the end of the service section if there are no partial services.

Intra-Community Acquisitions

VAT for an intra-Community acquisition is incurred when the invoice is issued, at the latest at the end of the month following the acquisition.

Partial Performance

A completed partial service also leads to the final accrual of a sales tax. In order for a partial performance to exist, the legal understanding of a partial performance has to exist:

  • It must be an economically reasonable distinguishable service
    and
  • there must be an agreement on the execution of the service as partial steps; the partial service must be accepted and invoiced separately

Advances

When collecting advances and / or down payments, be especially careful. In the assumption that the VAT rates will be back to normal in January, the following rules apply:

Provision of services

Advance paid

Service / Sale Completed

Tax Result

until June 2020

until June 2020

As normal: 19% resp. 7%

Paid after June but inside 2020

Inside 2020

Reduced rate: 16% resp. 5%

Paid after June but inside 2020

Inside 2021

Normal rate

Paid in 2021

Inside 2021 or later

Normal rate – as of now

 

Advance payments can be taxed at 16% or 5%. It is best to use the reduced tax rate only when you are positive to complete your service / sale inside this year. This is the only approach to keep things easy. If completion happens next year, then subsequently invoice with additional 3% or 2%.

These regulations are just as much applicable to an entrepreneur having the business as they are to the recipient's input tax deductions.

Important: Correction of the Settlements for Continuous Services

Particularly in the case of continuous services that are carried out as part of partial services (e.g. rental agreements, leasing contracts), you have to adjust and correct the accounts (contracts, continuous invoices, etc.). If no correction is made here, the overstated value added tax is owed (§14c I UStG).

Annual tickets (season tickets, subscriptions, etc.) are generally considered advance payments for a uniform service. If payment is made at the beginning of the performance period, the service is only provided at the end of the term. Therefore, the applicable value-added tax is thus incurred pursuant to the rules applicable at the end of the respective performance period.

Consider, based on your setup, how the surplus can be refunded. The easiest will be when you can give credit to other services – especially when collecting via direct debit.

Hint: Annual Tickets for Public Transport

This also applies to annual season tickets for local public transport (unless a monthly invoice is available here as a partial service) or for other transport providers (e.g. BahnCard 100 from DB AG). Such services, too, are finally subject to the tax rate applicable at the time of conclusion of the service period.

However, subject to the unlikely possibility of the tax authorities not raising objections, a credit can only be granted if a settlement document either does not show VAT separately or a settlement has been corrected.

Hint: No Agreements on Partial Services

If a contract does not contain any agreements on partial payments, the tax authorities did not object to earlier changes in tax rates if a corresponding agreement had been reached by the time the change in tax rates came into effect. At least if the tax rate is then raised again to 19% as of January 2021, agreements should be made for partial payments for services not yet completed for the economically determinable services performed up to that point.

If uniform construction work is carried out in the period from July 2020 to December 2020 (as a rule, acceptance by the client is decisive here), the entire work is subject to the standard tax rate of 16%, regardless of the extent to which advance payments (taxed at 19%) had already been made. Correspondingly, the service is then again subject to the standard tax rate of 19% if the service is performed after December 2020.

If services are performed for a recipient not entitled to input tax deduction, the financial statements should, if necessary, be drawn up for the period between 1 July 2020 and 31 December 2020 - without misrepresentation.

Further Special Regulations

In other special cases, too, special features of VAT law must be taken into account, on which the tax authorities had commented in previous tax rate changes:

Refund of deposit amounts:

The return of empties represents a reduction in charges. In principle, the refund would have to be allocated to the original turnover (practically impossible). For reasons of simplification, the tax authorities had previously allowed the VAT to be corrected at the "old" tax rate when refunding deposit amounts within a period of 3 months after the tax rate change came into force.

Changes in remuneration due to annual bonuses or similar:

annual refunds, annual bonuses, etc. are to be allocated to the period and thus to the tax rate applicable to the underlying turnover. In the past, the tax authorities have not objected to the fact that the reduction in remuneration for multi-year remuneration is divided in proportion to the taxable turnover of the individual annual periods.

Utility Supplies:

If the meter-reading period ends after the respective cut-off date, it has not been objected to date by the tax authorities if the service is divided into a service performed before and a service performed after the respective cut-off date, provided that the terms of delivery and contract do not contradict this.

VAT in Restaurant Services:

For reasons of simplification, in the case of previous tax rate changes, all sales from wining and dining could be taxed at the "old" tax rate on the night of the tax rate change. However, this did not apply to accommodation services; here, the service is only completed after the overnight stay. In the case of restaurant and catering services, it should also be noted that the reduction to the reduced tax rate will then expire on January 1, 2021.

Incorrectly Invoiced Sales Tax

A problem arises in particular with the reduction of tax rates as of July 2020. If an entrepreneur still issues an invoice at the old tax rate of 19% or 7%, but provides the service between July and December 2020, he has separately shown too much VAT. This overstated VAT amount is owed by the issuer of the invoice (§14c I UStG). However, this overstated tax amount cannot be deducted as input tax by a recipient of services.

Important: Tax rate in Small Amount Invoices

Also the indication of the tax rate in a so-called small amount calculation (up to a total amount of EUR 250) leads to an incorrect tax statement if tax rate is shown that is too high.

Coronavirus_reduced_VAT_in_2020_to_boost_economy.jpg

Price Tags

Usually, the entrepreneur is supposed to tag the articles with the end price (§4 PAngV) The politicians simply overlooked this minor unimportant detail. After the first professionals and journalists complained in the press, this provision was set out of force – temporarily – for the rest of this year. The Ministry of Economics said that the implementation for trade and service providers should be as unbureaucratic as possible. They could take advantage of an exemption and grant the discount as a lump sum at the cash desk. Customers are familiar with this procedure from sales. They also stressed that it is the decision of the individual company to pass on the VAT reduction to consumers. The right to free price formation had not been abolished.

Remark

The politicians clearly have the good intention to boost the economy but at what price? Will there really be a benefit, when the end customer gets a reduction of 2 – 3%? This again shows how far away politicians are from real (business) life.

Related Articles:

Coronavirus: State Compensation for Quarantine

Force Majeure Stipulations in Contracts

Coronavirus: Effects in Contractual Relationships