What is VAT in simple terms

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Excursus: bookkeeping & sales tax

Before we get into the general fundamentals of bookkeeping, let's take a closer look at the different types of taxes. In the course of the bookkeeping, the tax bases are determined from very different types of tax. The focus is on profit. The profit (or the revenue surplus) forms the basis for ...

  • the Income tax natural persons (entrepreneurs, freelancers or partners in a partnership).
  • the Corporation tax (this is the income tax of legal entities such as GmbHs, stock corporations and other corporations). And:
  • the Business tax: Strictly speaking, this is due to the trade income, which in turn is based on the profit according to income tax.

So it's no wonder that the topic of bookkeeping is common with the Determination of profits is equated.

However, it is overlooked that it is the tax offices with the Determination of sales and usually take a much closer look at sales tax. The sales tax law contains considerably more and more precise regulations on receipts and storage requirements than the income or trade tax law! In addition, there is a need for action much earlier with sales tax than with income tax.

While the determination of profits is usually only on the agenda at the beginning of the following year, most self-employed and entrepreneurs have to submit monthly or quarterly advance VAT returns on an ongoing basis.

Reason enough to take a look at the VAT regulations beforehand. The reason for the special "vigilance" (not to say the mistrust) of the tax office is the so-called input tax deduction.

Value added tax? Value added tax? Input tax?

Background: The VAT collection in Germany is based on the VAT procedure:

  • Basically with every billing value added tax (= value added tax) added to the total value of the goods and services.
  • In return, the invoice issuer may deduct the VAT components from his sales tax income that he himself paid for his business purchases. The sales tax on the company's own operating expenses is referred to as "Input tax" designated.
  • The difference between sales tax received and input tax paid is called sales tax "Payload“.

The creation and settlement of sales tax should be illustrated using the example of a furniture purchase (19% sales tax each):

  • Furniture store sells table to consumers:
    Net goods value 500 euros + 95 euros VAT = gross invoice amount 595 euros
  • Furniture store buys table from manufacturer:
    Net goods value 300 euros + 57 euros VAT = gross invoice amount 357 euros
  • Furniture manufacturer buys wood from a wood dealer:
    Net value of goods 150 euros + 28.50 euros VAT = gross invoice amount 178.50 euros
  • Timber trader buys furniture wood from the forestry company:
    Net goods value 50 euros + 9.50 euros VAT = gross invoice amount 59.50 euros

The sales tax cash flows are therefore as follows:

In fact, sales tax is only levied on the net "added value" of the respective process:

Strictly speaking, the value chain is of course longer and more differentiated: For example, the forest enterprise also has operating expenses for which it pays input tax (for example, purchases of chainsaws, lubricants and fuels) and so on.

In practice, however, this does not matter because the sales and input tax shares do not have to be traced back to the individual product: Rather ...

  • the participants add up all sales revenues of a pre-registration period,
  • subtract the sum of all input tax expenditure in the relevant period and
  • transfer the difference (= "payment burden") to the tax office. The bottom line is that sales tax is actually a zero-sum game for the entrepreneurs involved.

Important: A pre-tax reimbursement claim also exists if less or no sales tax was received in the relevant pre-registration period! Instead of a payment burden, there is a "input tax surplus" that must be reimbursed by the tax office.

In other words: The VAT portion shown on incoming invoices represents cash, as it were, for self-employed persons and entrepreneurs who are entitled to deduct input tax. And in full: Unjustified or overestimated input tax portions flow 100% into the bill recipient's company coffers.

Rigid mandatory billing information

For a long time, tax evaders were able to abuse the principle of input tax reimbursement with high bills from specially founded bogus companies as a money printing machine. They also managed to cover up traces through often cross-border triangular deals. In doing so, they took advantage of the fact that an initial input tax surplus is by no means uncommon, even in reputable companies. On the contrary: Due to high initial investments and slow incomes, many honest start-ups initially pay more input tax than they collect sales tax.

The fraudulent sham and triangular deals were also the reason - but at least the reason - why the legislature ...

  • has required monthly VAT returns from founders for a number of years,
  • has introduced a completely new form of (unannounced) tax audit with the harmless sounding "sales tax review" and
  • makes more and more precise demands on the content of invoices.

Billing information

The complete list of all mandatory invoice components can be found in Section 14 (4) of the UStG. These include in particular:

  • Company, name and address of the invoice issuer,
  • Company, name and address of the invoice recipient,
  • the tax number or sales tax identification number of the invoice issuer,
  • the date of issue of the invoice,
  • the invoice number,
  • Information on the type and number of goods delivered or the type and duration of the service,
  • the date of delivery or service
  • the invoice amounts broken down according to sales tax rates,
  • the amount of sales tax included in the invoice and
  • Reasons for possible sales tax exemptions.

In addition, private individuals must be advised in rare exceptional cases that they must keep bills for two years. Since this obligation only applies to property and construction works, it is irrelevant for most of the self-employed and small businesses.

Reading tip: You can find detailed information and comments on the individual elements in the “Mandatory Invoice Components” chapter on our partner website “rechnungen.de”.

Types of sales: taxable, tax-exempt and taxable sales

Not all sales of a company are subject to sales tax:

  • First of all, it must be checked whether a business "controllable“Is. In other words: whether (German) sales tax is even eligible for a transaction. According to §1 UStG, (only) domestic deliveries and services that a company provides against payment are taxable. In addition, imports from abroad are subject to (import) sales tax. Deliveries and services abroad, on the other hand, are usually not taxable: no German sales tax is levied. Complicated special regulations apply to EU countries.
    Reading tip: You can find more detailed information in the “Foreign invoices” chapter on our partner website “rechnungen.de”.

  • According to § 4 UStG, however, some of the sales taxable per se are "tax free“: These include, for example, a lot of sales from renting and leasing, medical treatment, banking and insurance transactions or sales of certain cultural, educational and educational institutions. Most exports, insofar as they are taxable at all, are also exempt from sales tax.

  • Taxable sales that are not expressly exempt from sales tax are "taxable". According to § 12 UStG, taxable sales are normally subject to the standard tax rate of 19%. The reduced tax rate of 7% sales tax applies to some goods and services.

  • To make matters worse, there are finally also taxable sales where the sales tax "not raised" becomes. This is the case with the sales of small businesses within the meaning of § 19 UStG: Although their services are generally subject to VAT, small businesses do not need to show VAT on their outgoing invoices for reasons of simplicity.

Understandably, the tax office is particularly interested in taxable sales. When it comes to invoicing, what matters most is when the delivery or service is provided by whom to whom and whether the correct sales tax rate has been selected.

Tax rates

The standard tax rate for goods and services subject to VAT is included in accordance with Section 12 (1) of the UStG "19% of the assessment base". In paragraph 2 of the regulation there is a long list of exceptions to which the reduced sales tax rate of 7% applies. The goods and services expressly named there include:

  • Tickets for theater, concerts, museums and circus performances,
  • Tickets in public transport,
  • Overnight stays in hotels, guest houses, youth hostels and campsites,
  • Services of dental technicians or also
  • the exploitation of copyrights.
  • In addition, the text of the law refers to a page long "List of items subject to the reduced tax rate", which can be found in Appendix 2 of the Sales Tax Act. Agricultural products, certain foods or newspapers and books are particularly favored:

The in itself by no means coherent list of sales tax privileges is always a cause for criticism (and general amusement): For example, the full tax rate applies to apple juice, whereas the reduced tax rate applies to "lobster, lobster, oysters and snails". The current sales tax application decree (from page 381) deals with numerous questions of doubt about the application of tax rates on 35 pages. In addition, there are numerous BFH rulings and BMF letters on disputed individual aspects.

Please note: If you accidentally or out of ignorance use the wrong tax rate, you and / or the recipient of the invoice have bad cards:

  • 7% instead of 19%: If you wrongly invoice 7% sales tax, you still have to pay the full amount of sales tax to the tax office. Your business partner, on the other hand, may only claim the pre-tax amount that is too low!
  • 19% instead of 7%: Generally, simply adding the higher standard tax rate is not a solution either. This is especially true for invoices to business customers: If it later emerges that the reduced tax rate would have been correct, the tax office will reduce the input tax deduction for the invoice recipient. Regardless of this, you have to pay your excessive sales tax income to the tax office yourself.

So if you are in doubt which tax rate is correct for your deliveries or services, be sure to speak to your tax advisor before invoicing or ask the tax office directly!

Target taxation vs. actual taxation

In principle, the sales tax "arises" at the end of the pre-registration period in which the delivery or service was provided. The calculation “according to agreed fees” (so-called target taxation) is specified in Section 16 (1) of the UStG. In other words: The tax office requires companies to pay sales tax on services for which the customer has not yet paid!

The principle of debit taxation would easily bring self-employed and small businesses to the brink of insolvency. Therefore, according to § 20 UStG, the tax office is satisfied with the calculation "according to received fees" (= "actual taxation") under the following conditions:

  • Total sales of the previous year up to 500,000 euros and
  • no commercial accounting obligation (e.g. through entry in the commercial register).

The sales tax is then only due at the end of the pre-registration period in which the customer paid. By the way: Freelancers and similar self-employed can claim the actual taxation even if their turnover is in the millions!

Tax registrations and tax returns

Sales tax is ultimately borne by the end consumer. The self-employed and entrepreneurs "only" have to collect the tax and pay it to the tax authorities. An annual sales tax return is not enough to ensure that the tax office gets its money promptly. You inform the tax office of the amount of your sales, the sales tax received and the amount of the input taxes paid in the form of regular sales tax advance returns (UStVA).

In the first two years, traders are required to submit monthly interim statements. From the third financial year onwards, the frequency of pre-registrations depends on the VAT payable load of the previous year:

  • no pre-registrations: With a sales tax payable of up to 1,000 euros, the tax office is satisfied with an annual sales tax return. In that case, you can save yourself any pre-registrations.
  • quarterly advance sales tax returns: If the previous year's payload was between 1,000 and 7,500 euros, quarterly advance registrations are required. The deadlines for registration are April 10, July 10, October 10 and January 10.
  • monthly VAT returns: With an annual payment load of more than 7,500 euros, the monthly rhythm remains. In this case, the reference date is the 10th calendar day of the following month.

Please note: Since the time up to the 10th calendar day of the following month is very tight, you can request a Permanent extension apply for. Because the state gets its money a month later through the permanent extension, it demands one in return Special advance payment in the amount of 1/11 of the sales tax advance payments of the previous year. In the case of a start-up, an estimate of the payment burden is sufficient.

In addition to the advance VAT returns during the year, the tax authorities require an annual tax return by May 31 of the following year.VAT return.

Regardless of whether it is a pre-registration or a tax return: You have to submit your sales tax statements electronically and in "authenticated form" to the tax office. An electronic signature is required for this. With the ElsterBasis certificate, the financial administration provides you with a free signature.

Practical tip: You can either use the ElsterOnline web portal or the ElsterFormular software for data transmission. Commercial accounting and tax programs also have a built-in Elster interface with which the relevant data transfers are possible.

And another reading tip afterwards: You will find an illustrated step-by-step description of the various Elster data transfers in the VAT chapter on our partner website “kleingewerbe.de”.

Special status: The small business regulation

The small business regulation makes life easier for small (very) traders with very low annual sales: They do not need to worry about the intricacies of the complicated sales tax law. If you apply for the small business regulation, you are not a supplicant: after all, the administrative simplification also benefits the tax offices. In view of the comparatively low tax revenue, the regular administrative and auditing effort for taxpayers with low sales is disproportionately high.

Entrepreneurs and self-employed persons whose turnover is with goods and services subject to VAT ... are entitled to the small business status.

  • last year did not exceed 17,500 euros
  • and (!)
  • in the current year will probably not be more than 50,000 euros.

The highlighted "and“Means that both conditions must be met. The limits mentioned are also the sales and not about profit! The profit is usually significantly lower because the expenses are deducted from the income.

Important: The small business regulation is not a special regulation for small businesses. Rather, it is personal: When calculating the annual turnover, all turnover that an entrepreneur achieves is taken into account: Assuming that you, as a commercial Ebay dealer, have an annual turnover of 10,000 euros. In addition, you are self-employed as a freelance blogger and generate an additional 8,000 euros in income. Then you are subject to regular taxation, even though the two activities in themselves are below the annual turnover limit of 17,500 euros!

For founder The following applies: Since no previous year's figures are available at the start of business activity, the annual turnover for the first year can be estimated. You may only take advantage of the small business regulation if the annual turnover is expected to be less than 17,500 euros. If you don't start in January but later in the year, you have to extrapolate your planned sales over a whole year. Commenced months are fully taken into account.

Let's say you start on May 15th: In the first year, you will only be doing business in eight out of twelve months (May to December). The small business turnover limit in this case is only 11,667 euros (= 8/12 of 17,500 euros). If you are likely to be higher, you are no longer a small business owner, but are subject to regular taxation.

No tax exemption!

Small business owners for sales tax are strictly speaking not exempt from sales tax: the sales tax included in the sales prices is merely a matter of fact not raised.

  • You can save yourself the distinction between (net) invoice amount and sales tax.
  • As long as you take advantage of the small business special status, the different sales tax rates do not matter.
  • There is no need to determine the input tax share and the payment burden.
  • Sales tax returns and payment debit transfers are not required.
  • The only remaining sales tax liability is the annual sales tax return: However, it is usually sufficient to enter the taxable annual sales of the last two years.

Small business status is definitely more convenient than “regular taxation”. However, administrative simplification also has its downsides:

  • Every invoice recipient recognizes at first glance that it is a mini-company. This may raise doubts about the professionalism of the provider.
  • Small business owners buy more expensive because they voluntarily waive the input tax deduction: This is particularly noticeable with high initial investments.
  • Price advantages due to the elimination of sales tax only result in private customer business: for business customers, sales tax is a transitory item.

Given the disadvantages, no one can force you to claim small business status. However, if you choose not to do so, you will be bound by this decision for five years. In this way, the legislature tries to prevent unwanted deadweight effects.

Reading tip: Whether and under what circumstances the small business regulation is worthwhile, what has to be considered and how the change to regular taxation (and back again) works, you can find out on our partner site "kleinunternehmer.de"

After the sales tax excursion back to the actual accounting duties.

Next page:Simple bookkeeping (EÜR)