Input Tax and VAT: Significance for Businesses

The two terms input tax and VAT are directly connected. Businesses charge their customers VAT and remit it to the tax office. At the same time, when purchasing products and services they pay VAT, which they can claim as input tax in the VAT advance return.

In essence, input tax and VAT are one and the same: they are two sides of the same coin. What matters is whether a business is paying or collecting the VAT.

Input tax: Businesses record a separately stated VAT amount on incoming invoices. From their perspective, this represents input tax — they can reclaim the VAT from the tax office as input tax.

VAT: Most businesses are required to charge their customers VAT. The VAT collected is remitted to the tax office.

The state precisely prescribes the rate of VAT for various categories of goods and services.

Three categories can be distinguished:

• Standard rate of 19%
• Reduced rate of 7%
• VAT-exempt supplies

The reduced rate of 7% applies, for example, to a wide range of foodstuffs. There is a long list of exceptions to the standard VAT rate, which frequently gives rise to political and academic debate.

Some of these exceptions are the result of lobbying by individual interest groups — they can scarcely be explained on the basis of tax law logic.

VAT-exempt supplies include various medical and dental treatments as well as care services. The state also exempts the letting and leasing of property from VAT liability. A complete list can be found in § 12 UStG.%20Die%20Steuer%20betr%C3%A4gt%20f%C3%BCr,3%20und%204).)

The handling of input tax and VAT is comparatively straightforward. Businesses record all input tax amounts paid and all VAT amounts collected.

They then deduct the input tax from the VAT collected. In doing so, check whether you can deduct the individual items as input tax. It is also important that you record the input tax in the correct calendar year.

The relationship between VAT collected and input tax paid determines the amount that businesses must remit to the tax office. If the input tax amount exceeds the VAT collected, businesses are entitled to a refund.

The settlement is made by means of the VAT advance return, which most freelancers and traders submit quarterly or monthly. The interval for this advance return depends on the VAT liability in the preceding year. Where the VAT liability exceeded 7,500 euros in the previous year, the state requires a monthly advance return.

The same applies to newly established businesses in the first two years, provided they are not operating under the Kleinunternehmer scheme. Where the prior-year VAT liability does not exceed 1,000 euros, the tax office may waive the advance return obligation; the authority then determines the VAT net of the input tax deduction as part of the annual VAT return.

There is an important difference in the treatment of input tax and business expenses: for business expenses, the date of payment is generally decisive; the date of invoicing is irrelevant.

With input tax, the position is the reverse — the invoice date is decisive! If a supplier invoices you for amount X on 15 December and you transfer the sum on 7 January, you report the input tax to your tax office in the VAT advance return for December!

VAT with input tax deduction represents a considerable administrative burden for businesses, unless they can or wish to use the flat-rate input tax method. It is best to leave this task to the experts: your Guhr Steuerberatung handles all the challenges of financial accounting, VAT advance returns, and the annual VAT return!

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