VAT Liability Explained Simply – Definition and the Exception for Small Businesses

The cost is borne by the end customer, yet businesses play an important role in relation to VAT: they collect the tax and then remit it to the tax office. However, this does not apply to all self-employed individuals: business owners with low annual turnover may make use of the small-business (Kleinunternehmer) scheme. More detailed information on this scheme can be found in the second half of this article. First, we turn to the question of how the state structures VAT liability and what the consequences are for the self-employed.

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VAT is a classic indirect tax. Indirect means that the taxpayer does not have to bear the cost of this tax personally. This may sound complex, but it can be explained easily using VAT as an example:

- The tax liability falls on businesses. They are required to collect VAT and pass it on to the tax office.

- Businesses show VAT on their invoices, which increases the net price. The cost of the tax is borne by the customer. Accordingly, VAT is an economic burden on consumers, but businesses must collect and remit it. The state does not collect it directly from those who bear the economic burden, but indirectly through the businesses that are liable to pay it.

For businesses, VAT is a pass-through item. They collect the tax and forward it to the tax office.

If you, as a self-employed individual, pay VAT yourself on goods or services, you can deduct this as input tax. No additional costs arise. Claim the input tax in your VAT advance returns and in your

VAT return. If the amount of input tax exceeds the VAT you have collected, you will receive a refund from the tax office.

In Germany, the current standard rate of VAT is 19%. This rate applies to a large number of goods and services. The reduced rate is 7% and applies to various types of products and services. For example, the state charges only 7% VAT on most foodstuffs. Further examples include:

- Books, magazines, and newspapers

- Tickets for local public transport and long-distance travel

- Letting of hotel rooms

The legislature exempts certain areas from VAT liability. These include:

- Medical treatments

- Care services

- Letting of residential properties and other premises

Detailed rules can be found in the VAT Act (Umsatzsteuergesetz, UStG).

As a business owner, you are required to collect VAT and remit it to the tax office, unless you fall under the small-business (Kleinunternehmer) scheme. If you fail to charge and collect VAT from your customers, you are still liable to pay it. In that case, significant financial loss threatens. This risk arises, for example, for founders who have not given sufficient thought to their VAT obligations. It can also occur following a switch from the small-business scheme to the standard VAT regime.

Your obligations include submitting VAT advance returns at specified intervals and filing an annual VAT return once a year. Where VAT collected is low, the requirement to submit advance returns does not apply. The following thresholds are relevant:

- less than 1,000 euros of VAT in the previous year: no advance return required

- between 1,000 euros and 7,500 euros: quarterly advance return

- more than 7,500 euros: monthly advance return

As part of these advance returns, you make advance VAT payments. The tax office takes these payments into account when processing the annual tax return.

If you make use of the small-business (Kleinunternehmer) scheme under § 19 UStG, you are not required to remit VAT. In return, you may not claim input tax. This scheme is available to all freelancers and traders with low annual turnover. It is an opt-in arrangement: you are free to decide whether you wish to take advantage of it.

For this option, only the level of annual turnover is relevant. It makes no difference, for example, whether you operate as a freelancer or as a trader. The following thresholds currently apply:

- turnover of no more than 22,000 euros in the previous year

- turnover of no more than 50,000 euros in the current year

You may estimate the figure for the current tax year. A different rule applies to founders, as they have no prior-year turnover figures:

- turnover of no more than 22,000 euros in the year of founding

- turnover of no more than 50,000 euros in the following year

As a founder, you may estimate both figures. These estimates should be made on a well-founded basis — it is best to leave this task to your tax adviser.

Founders must inform their tax office of the establishment of the business — for this purpose there is the questionnaire for tax registration (Fragebogen zur steuerlichen Erfassung). In this questionnaire you also indicate whether you wish to use the small-business scheme or opt out of it.

If you opt out of this scheme, you are bound by that decision for a total of five calendar years. After this period has elapsed, you may inform the tax office by means of an informal letter that you wish to make use of the small-business scheme going forward.

Do you wish to switch from the small-business scheme to the standard VAT regime? You may take this step at any time. Inform the tax authority by means of an appropriate letter or, for example, submit an annual VAT return.

If you exceed the VAT threshold for small businesses, you will automatically be moved to the standard VAT regime. Make sure that you begin charging VAT in good time! The switch takes effect from the following year. If your turnover in the current calendar year exceeds 22,000 euros, the standard regime begins on 1 January of the following year. As a business owner, you must keep track of this yourself!

Weigh carefully whether you wish to use the small-business scheme. The advantages are:

- You avoid administrative complexity.

- You can offer your services at a lower price. This is advantageous where your customers are not entitled to deduct input tax. Typical examples are private customers and other small businesses.

The disadvantage is that you cannot deduct input tax. Is the small-business scheme worthwhile? This depends on the individual case. Seek advice from experienced tax experts!

Your specialists at Guhr Steuerberatung provide comprehensive assistance on all matters relating to VAT. They handle tasks such as preparing VAT advance returns and the annual VAT return. You can also rely on well-founded advice on all aspects of VAT law!

Free initial consultation

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.

Request a consultation

https://www.deutsche-handwerks-zeitung.de/wann-die-umsatzsteuerpflicht-greift-138569/

https://www.ihk-muenchen.de/de/Service/Recht-und-Steuern/Steuerrecht/Umsatzsteuer/