Input Tax as a Central Component of the VAT System

As a freelancer or trader, there are several aspects of input tax you need to bear in mind. For instance, you may be wondering whether you are permitted to deduct input tax — and when the deduction may be made. This article provides the answers.

VAT — also known in Germany as Mehrwertsteuer — is ultimately aimed at the end consumer. It is not intended to burden business owners. In practice, however, self-employed individuals also purchase various VAT-liable goods and services that they require for their business activities. They pay VAT on these purchases but are permitted to offset it against the VAT they have collected, treating it as input tax.

In concrete terms, this means: no financial burden arises. If the input tax paid exceeds the VAT collected, an input tax surplus exists. In this case, the tax office (Finanzamt) will refund the corresponding amount. The invoice date is decisive for the input tax deduction and for inclusion in the VAT return.

In principle, all VAT-liable businesses are entitled to deduct input tax. Anyone who charges their clients VAT and is required to remit it to the tax office may claim the amounts paid to suppliers as input tax.

This covers all goods and services used to generate taxable turnover. Excluded in particular are:

• Expenditure on private living expenses
• Costs in areas where you generate income exempt from VAT

The second case applies to doctors, for example: if a medical practitioner purchases equipment for VAT-exempt medical treatments, an input tax deduction is not permitted.

The input tax deduction also applies to import VAT and to VAT arising in connection with intra-Community acquisitions.

As a rule, you as a business owner deduct the actual input tax incurred from the VAT you have collected. You add up all the VAT amounts that other companies have invoiced to you. For certain industries and professional groups, the legislature provides the option of a flat-rate input tax deduction (Vorsteuerpauschale), provided the business has an annual turnover of no more than 61,356 euros.

Self-employed individuals can determine their input tax using an industry- or profession-specific average rate applied to total turnover. This flat rate simplifies bookkeeping and may result in either financial advantages or disadvantages.

You report input tax in your regular VAT return and in your annual VAT return. Should any questions or issues arise in this regard, please contact your Guhr Steuerberatung advisers. The experts can also analyse, where needed, whether you should take advantage of the small-business scheme or the flat-rate input tax deduction.

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