The Kleinunternehmer Scheme and the Switch to Standard VAT Taxation

In this article, we explain the circumstances under which the Kleinunternehmer scheme ceases to apply and what consequences follow. We also examine voluntary waiver of the Kleinunternehmer scheme and the possibility of switching back and forth between the two regimes.

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The legislature ties the Kleinunternehmer scheme — and therefore the non-collection of VAT — to clear conditions. Kleinunternehmer must satisfy both of the following requirements:

• Turnover in the preceding calendar year did not exceed 22,000 euros.
• Turnover in the current calendar year is expected to be no more than 50,000 euros.

For start-ups the same figures apply, but they relate to the year of formation and the following year. Business owners must make a plausible estimate of both annual turnover figures, since for understandable reasons no actual figures are available. In the year of formation, turnover must be expected to reach no more than 22,000 euros, and in the following year no more than 50,000 euros.

The Kleinunternehmer scheme lapses automatically in the following year if start-ups or established business owners exceed the 22,000 euro threshold in the current year. If your relevant turnover in 2022 amounts to 23,000 euros, you will no longer be treated as a Kleinunternehmer in 2023 — you will switch to standard VAT taxation.

The Kleinunternehmer scheme is optional: as a start-up with a correspondingly modest turnover, you decide whether to use this option or to prefer standard taxation. You may face the same decision as an established business owner if your annual turnover falls below the threshold. You can then operate as a Kleinunternehmer in the following year or waive that status — provided you have not already made an explicit and binding waiver.

Please note: if you waive the Kleinunternehmer scheme, you are bound by that decision for five years. Only after that period may you make use of this simplification scheme again. Standard VAT taxation applies to you for at least five full calendar years — your actual turnover is irrelevant.

Many people ask how the switch from the Kleinunternehmer scheme to standard VAT taxation works in practice. In the case of a mandatory switch triggered by turnover, the transition is largely automatic — you do not need to formally notify the tax office. However, there is an urgent need for action in respect of your bookkeeping.

As part of the tax return process, the tax office checks whether Kleinunternehmer continue to satisfy the conditions. A look at the relevant turnover figure is sufficient for this purpose. If you exceed the threshold of 22,000 euros in the relevant year, the tax office will levy VAT with immediate effect from the following year. An example will illustrate this:

You achieve relevant turnover of 23,000 euros in 2022 and submit your tax return in May 2023. The tax office will in this case treat you as subject to VAT from 1 January 2023. You must pay VAT for the whole of 2023 — including retrospectively.

When you switch to standard VAT taxation — whether mandatorily or voluntarily — at the start of the new year, you must update your invoices immediately. Show VAT at the rate applicable to your goods or services. It is best to hold these amounts in a separate account so that you can settle the subsequent VAT demand from the tax office without difficulty. If you have sufficient funds available, this step is not strictly necessary.

The tax office will demand the VAT regardless of whether you have actually collected it from your clients. For commercial clients, you can send corrected invoices if you omitted the VAT. For private customers, this is not possible — so it is best to think ahead in good time.

If you exceed the annual turnover threshold of 22,000 euros, you will leave the Kleinunternehmer scheme in the following year. This does not, however, constitute an explicit waiver of the Kleinunternehmer scheme — accordingly, the five-year binding period is irrelevant. As soon as your turnover is again 22,000 euros or less, you return to the Kleinunternehmer scheme.

When switching from the non-collection of VAT to standard VAT taxation, a wide range of questions and problems can arise — for example, how to handle invoice amounts around the time of the year-end transition. In such cases, please contact your competent Guhr Steuerberatung.

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Taxes not your thing? Then they're ours.

Guhr Steuerberatung handles your bookkeeping, tax returns and tax planning – so you can focus on your business.

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• Image source: Pexels.com - Liza Summer