Temporary reduction of German VAT in 2020 and its implications on businesses: time to act quickly

The German Federal Government agreed on June 3, 2020, to stimulate the German economy by reducing VAT rates from 19% to 16% (standard rate) and from 7% to 5% (reduced rate) in the period from July 1 to December 31, 2020 (see also our blog article).

While this measure is likely beneficial for the economy, it raises a number of questions and need for consultation.

We note that the temporary reduction of VAT in 2020 is yet to pass legislative procedures; however, given that time until temporary VAT reduction becomes effective is short, potential actions of businesses should already be considered and started where necessary.

Timeline for upcoming changes in VAT

• Standard VAT rate (§12 (1) German VAT Code): The standard VAT rate of 19% applies to all sales executed until June 30, 2020. A standard VAT rate of 16% applies to all services carried out from July 1, 2020 to December 31, 2020 and from January 1, 2021 the (old) standard VAT rate of 19% should apply again.
• Reduced VAT rate (§12 (2) German VAT Code): The reduced VAT rate of 7% applies to all sales executed until June 30, 2020 listed in §12 (2) German VAT Code; a reduced tax rate of 5% applies to all services carried out between July 1, 2020 and December 31, 2020 and from January 1, 2021 the (old) reduced VAT rate of 7% should apply again.

For changes to VAT specific to restaurant and catering service businesses, click [sg_popup id=”1782″ event=”inherit”]here[/sg_popup].

Realization of sales

The application of the correct VAT rate depends on when the goods are delivered (change of ownership) or in case of services, when services are carried out. The application of the relevant VAT rate is irrespective of whether a business taxes his sales based on received payments (actual taxation, “Ist-Versteuerung”) or on agreed payments (target taxation; “Soll-Versteuerung”); it is only important when the corresponding service is carried out in accordance with VAT regulations. The receipt of down payments or advance payments is also irrelevant for the final amount of VAT.

In order to correctly determine VAT, it must always be determined when goods are delivered or services are carried out. There are particular issues with long-term contracts that are carried out after the change in VAT rate.

VAT only arises at completion of services or partial services; therefore advance payments do not secure VAT.

Examples of potential implications from changes in VAT rate

Prepayments

Delivery of goods or services carried out…

• until June 30, 2020: VAT 19% (standard) or 7% (reduced), regardless of timing of prepayments
• between July 1 and December 31, 2020, prepayments made on or after July 1, 2020: VAT 16% (standard) or 5% (reduced)
• between July 1 and December 31, 2020, prepayments partially or fully made until June 30, 2020: VAT 16% (standard) or 5% (reduced) and correction of VAT on prepayments made until June 30, 2020
• on or after January 1, 2021,  no prepayments made until December 2020: VAT 19% (standard) or 7% (reduced)
• on or after January 1, 2021, prepayments made between July 1 and December 31, 2020: VAT 19% (standard) or 7% (reduced) and correction of VAT on prepayments made between July 1 and December 31, 2020

Construction work

A particular problem arises with construction work. In practice, the prerequisites for partial performance are not usually met for construction work. Although economically definable services are often performed, there is mostly no agreement on partial services and the corresponding tax-effective acceptance of such partial services. Depending on the situation, this can now be an advantage or disadvantage for the beneficiaries.

If no agreements on partial services were made in a contract, the tax authorities do not object to previous tax rate changes if an agreement was made before the tax rate change came into force. At least when the tax rate is raised to 19% by January 1, 2021, agreements should be made for partial services in the case of services that have not yet been fully performed for the economically definable services that have been performed up to that point.

If uniform construction work is carried out from July 1, 2020 to December 31, 2020 (usually the acceptance by the client is decisive here), the entire service is subject to the standard tax rate of 16%, regardless of the extent to which down payments subject to 19% VAT were made before July 1, 2020. Accordingly, the service must be subject to the standard VAT rate of 19% if the service is carried out after December 31, 2020.

To benefit from temporary reduced German VAT, services to customers who cannot claim input VAT should be carried out between July 1, 2020 and December 31, 2020, if possible.

Adjustments to long-term contracts

If the VAT rate changes, it is always necessary to determine which of the contracting parties is to bear the effects when examining the economic effects. In addition, the right to deduct input VAT is very important, since if the beneficiary is entitled for full input VAT deduction, it should not be a problem to pass the VAT on to the beneficiary.

If the recipient of the service is not entitled to deduct input VAT, it must be checked which of the contracting parties is to bear the VAT. There are special features in long-term contracts (concluded more than 4 months before the change in law). This can compensate for a higher or lower burden by the contracting parties.

Example: compensation for lower VAT burden

Business A signed a contract on January 20, 2020 (alternatively: March 10, 2020) for the installation of toilets at a price of EUR 50,000 (no fixed price agreement). A contractual agreement on VAT was not made. The installation of the toilets was completed on July 19, 2020 and subject to standard VAT of 16%. In the basic case, the customer (with no right to claim input VAT) can request compensation for the lower VAT burden, since the contract was concluded more than 4 months before the change occurred. In the alternative, no compensation can be requested.

Potential issues from incorrect invoicing of VAT

A particular problem arises when the VAT rates are lowered on July 1, 2020: if a business still incorrectly issues an invoice at the old VAT rate of 19% (or 7%), and goods are delivered or service rendered between July 1 and December 31, 2020, the VAT amount is owed by the business. However, the amount of VAT exceeding the applicable VAT rate cannot be deducted as input VAT by a beneficiary who is generally entitled to deduct input VAT.

Summary

While the temporary reduction in VAT rate sounds at first sight easy to implement for businesses, if looking at the details, a number of issues arise, not to mention its technical implementation in existing ERP-systems. The time for businesses to act quickly on the implementation is short. Please contact us if you want to learn more and/or need support.

Businesses need to act quickly on the implementation of the temporary reduction in German VAT to avoid costly consequences and compliance issues.

Status of information: June 7, 2020

Sources: Economic stimulus package announced on June 3, 2020, Corona-Steuerhilfegesetz (June 5, 2020), Haufe

Photos: You X Ventures, Shawn Ang, Scott Blake, Unsplash

Disclaimer: We assume no liability for the accuracy of the information. The information listed here does not constitute recommendations for action.