<small>Corona crisis: </small><br/>VAT – What you need to know from 01/01/2021!

The corona crisis is putting citizens and businesses to a tough test. The economic impact – as is already becoming apparent – is enormous and difficult to assess in detail. Policymakers responded swiftly with emergency measures and support programmes for struggling businesses. Extensive tax relief measures have also been adopted, including the deferral of tax payments and the reduction of advance payments.

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To revive the economy after the corona shock of recent months, the German federal government adopted a comprehensive tax stimulus package on 12/06/2020. A central element of these measures is the temporary reduction of the statutory VAT, with the standard rate being lowered from the current 19 % to 16 % and the reduced rate from 7 % to 5 %. In principle, you as an entrepreneur can choose whether to pass the savings on to your customers or to increase your margin. However, this change presents a challenge for bookkeeping and invoice verification in your company, not least because of the extremely short lead time for implementation.

We have compiled the most important aspects of the VAT reduction for you below.

Which rate applies when?

From 01/07/2020 to 31/12/2020, i.e. for six months, the standard VAT rate is to be reduced from the current 19 % to 16 %. The same applies to the reduced rate, which is to be lowered from the current 7 % to 5 %. The reduced rate applies, for example, to a wide range of basic foodstuffs, hygiene products and press and publishing products. After 31/12/2020, the previous rates of 19 % (standard rate) and 7 % (reduced rate) are expected to apply again. The law on the measures of the stimulus package is expected to be passed at the end of June.

The Federal Ministry of Finance (BMF) has already published a draft application letter setting out possible simplification rules. However, this is still being coordinated with the supreme tax authorities of the federal states and is not yet applicable.

The reduction of the VAT rates is relevant both for issuing invoices within your company and for verifying incoming invoices. If the VAT rate shown on an invoice is too high, this higher rate is also due for payment to the tax office. However, the recipient of the supply cannot simply claim the input VAT deduction, as the rate on the invoice is incorrect. The invoice may then need to be corrected to the lower rate.

There are currently no general simplification rules that would allow a full input VAT deduction even where the VAT shown is incorrectly too high. In its draft application letter, the BMF provides for this only in certain cases, namely for partial payments made before 01/07/2020 for supplies that are only performed after 30/06/2020. In such cases, no correction of invoices for partial payments at the old rates is required if the final invoice applies the new rates of 16 % or 5 %. The final ruling remains to be seen.

Reduction of VAT on restaurant and catering services

Under the First Corona Tax Assistance Act, already adopted on 05/06/2020, the VAT rate on food supplied as part of so-called restaurant and catering services was temporarily reduced from the current 19 % to 7 %. Affected supplies include not only the provision of food in restaurants or snack bars, but also the services of food retailers, catering companies, bakeries and butchers, where ready-to-eat food is supplied. The reduced rate applies from 01/07/2020 to 30/06/2021.

Due to the further reduction of the reduced rate from 7 % to 5 % in the second half of 2020, the VAT rate on restaurant and catering services will be even lower. From 01/01/2021 to 30/06/2021, the rate will rise to 7 % again, and from 01/07/2021 the regular rate of 19 % will apply once more to food consumed on the premises. The supply of beverages as part of restaurant and catering services remains subject to the standard VAT rate and is only reduced from 19 % to 16 % between 01/07/2020 and 31/12/2020.

Change of VAT rate for restaurant and catering services

01/07/2020 to 31/12/2020

5 % on food,
16 % on beverages

01/01/2021 to 30/06/2021

7 % on food,
19 % on beverages

from 01/07/2021

19 % on food (if consumed on the premises) and beverages

How do you correctly allocate the VAT rates over time?

General rule: performance of the supply

The decisive factor for allocating the applicable VAT rate is generally the point in time at which the respective supply is performed. This determines the VAT rate at which the turnover is to be calculated or the input VAT deduction is to be claimed. Particularly with regard to input VAT deduction, it is also important when verifying invoices to recognise whether an incoming invoice contains the correct VAT rate or whether it must be returned to the issuer for correction. As regards when a supply is deemed to have been performed, VAT law recognises various legal fictions. This does not necessarily coincide with the point in time at which a supplied item is received or a service is performed. It is a statutory assumption. Nor does the time of payment or receipt of the invoice matter for determining when the supply is performed within the meaning of VAT law. The following basic scenarios should be considered with respect to the time of performance.

Supplies of goods

In VAT terms, supplies of goods refer to all transactions involving goods. For a supply of goods that is dispatched or transported, the transaction is deemed performed at the start of the dispatch or transport. Dispatch means that the goods are sent to the customer via a service provider. With transport, the seller themselves handles the delivery to the customer. In the case of contract work supplies, the item supplied is only created through the relevant work (e.g. by assembling a machine on site at the customer's premises). Here, the power of disposal usually only passes once the supplied item has been completed. Only then is the supply deemed performed.

Example 1:

A ordered a new company car from car dealer B on 03/02/2020 for €50,000 + 19 % VAT (€9,500). The originally planned delivery date was 01/05/2020. Due to the corona crisis, delivery is delayed. On 02/07/2020, B finally receives the vehicle from the wholesaler and delivers it to A the same day.

Solution:

Since the delivery to A only began on 02/07/2020, the VAT rate of 16 % applies. Accordingly, A only has to pay €8,000 in VAT instead of €9,500. B must also only show 16 % VAT on the invoice. (For the question of when the seller is not obliged to pass on the lower rate, see section 4.)

Other services

In VAT terms, any supply that is not a supply of goods is referred to as another service. These are services where the use of goods is only minor. Other services are generally deemed performed at the time of their completion. Where another service is divided into separable partial supplies, the service is deemed performed upon completion of each individual partial supply.

Example 2:

The A-GmbH provides IT services. It supports company B in setting up an online shop. The A-GmbH carries out programming work in three separate steps, each covering different topics. €5,000 + 19 % VAT (€950) is agreed for each step. Step 1 is completed on 15/06/2020, while steps 2 and 3 are each completed on 02/07/2020.

Solution:

Separable partial supplies have been agreed. The relevant VAT rate is determined by the completion date of each individual partial supply. This means that for partial supply 1, the VAT rate of 19 % still applies, as it was performed before 01/07/2020. Partial supplies 2 and 3 were only performed after 30/06/2020, so the rate of 16 % applies.

In the context of the rate change, it may be advisable, for simpler handling, to subsequently divide contracts for single supplies into partial supplies where they can in fact be separated. The BMF's draft application letter sets out requirements for such contract amendments: the relevant partial supply must have been completed before 01/07/2020, and the partial supplies must have been agreed before 01/07/2020. Any corresponding contract amendments must also have been validly made before 01/07/2020.

Note:

When verifying invoices, it is advisable to be guided by the supply date shown on the invoice (not the date of issue) regarding the performance of the supply. This makes it possible to assess whether the VAT shown is too high. VAT shown at too high a rate does not entitle the recipient to input VAT deduction (not even in part up to the correct amount). The issuer may need to be asked to amend the invoice.

Special case: construction services

In practice, the problem often arises with construction services in particular that partial supplies are not clearly delineated. Construction services in this context are works on buildings or other fixed installations that alter their condition. While the supplies may be economically separable, there is often no specific agreement on partial supplies. In such cases, the construction service is generally deemed performed upon acceptance. If the acceptance of a construction service therefore falls within the period from 01/07/2020 to 31/12/2020, and no partial supplies were agreed, the VAT rate of 16 % applies to the entire supply.

Note:

Where construction services are provided to customers not entitled to input VAT deduction, it makes sense to schedule the acceptance of the supply, if feasible based on the actual circumstances, within the period from 01/07/2020 to 31/12/2020. In that case, the recipient would benefit from a VAT burden of only 16 %. With acceptance after 31/12/2020, they would again be burdened with 19 % VAT.

Which special cases must be considered?

Down payments / advance payments

Down payments or advance payments are irrelevant for the application of the respective VAT rate, as what always matters is when the corresponding supply was performed.

Example 3:

Entrepreneur A orders new office furniture in May 2020 for €10,000 + 19 % VAT (€1,900). In May 2020 he pays €4,000 + 19 % VAT (€760) as a down payment and receives a corresponding invoice from the supplier. The furniture is delivered on 05/07/2020.

Solution:

The supply is performed after 30/06/2020, so the entire supply is subject to a VAT rate of only 16 % (€1,600). The VAT on the down payment invoice was therefore €120 too high and must be corrected in the final invoice.

According to the BMF's draft application letter, however, it should not be objectionable if down payment invoices issued before 01/07/2020 for supplies that are only performed after 30/06/2020 already apply the reduced rates of 16 % or 5 %. However, this simplification rule is not yet in force.

Continuing supplies and contracts as invoices

Continuing supplies are supplies (of goods or services) extending over a longer period, for example rental and lease agreements, maintenance contracts, telecommunications contracts, licensing arrangements, subscription deliveries. Continuing supplies are deemed performed once the supply has been rendered. The respective billing periods define the separable partial supplies. For continuing supplies, the contract may simultaneously serve as the invoice, provided it contains the mandatory VAT details. Any details missing from the contract must be contained in other documents to which the contract must refer. However, an invoice must explicitly state the applicable VAT rate.

The relevant contracts may therefore need to be adapted, or separate invoices must be issued. Otherwise, the recipient may face problems with input VAT deduction because no proper invoice can be presented.

Example 4:

The rent for company A's business premises is invoiced monthly in advance. All VAT-related invoicing requirements are met in the contract, and VAT is stated at 19 %.

Solution:

From July 2020, the rent is invoiced at 16 % VAT. To ensure a proper invoice for input VAT deduction, either the lease agreement must be amended to 16 % for the period 01/07/2020 to 31/12/2020 or a separate invoice must be issued.

Note:

A review is recommended to identify which incoming supplies under annual (or similar) continuing supplies have already been invoiced at 19 % (where these are not partial supplies). Such invoices would then need to be corrected. The same applies to any outgoing supplies that are not partial supplies.

Other specific cases

• Membership fees for the entire calendar year 2020 are to be applied uniformly at the rate of 16 %. Where amounts have already been prepaid at 19 %, a correction may need to be initiated.

• The provision of a company car to employees for private use triggers, in the period 01/07/2020 to 31/12/2020, taxation only at the reduced rate of 16 %.

• For annual passes (e.g. services, admission entitlements), the supply is only performed at the end of the term. Accordingly, annual passes for 2020 are to be taxed at the rate of 16 % or 5 %.

• The exchange of an item means that the original supply is reversed. If the replacement item is delivered after 30/06/2020, the lower VAT rate applies to it.

• For vouchers, a distinction must be made between single-purpose vouchers and multi-purpose vouchers.

  • With a single-purpose voucher, the supply and its VAT rate are already determined upon issue; redemption is no longer subject to VAT. VAT arises upon sale of the voucher. If this takes place before 01/07/2020, a VAT rate of 19 % or 7 % applies; if sold after 30/06/2020, the rate is 16 % or 5 %.

  • With a multi-purpose voucher, the supply and in particular the VAT rate have not yet been determined, as the voucher can be used for various goods. The sale of the voucher is merely an exchange into another means of payment; no VAT is charged. Only upon redemption is the corresponding supply performed. Here it therefore depends on whether redemption takes place after 30/06/2020 or before 01/07/2020.

Note:

According to the BMF's draft transitional rule, however, the VAT rate of 19 % could still be applied where a multi-purpose voucher is redeemed between 01/07/2020 and 31/08/2020. Where redemption takes place after 31/08/2020, the rate of 16 % must be applied. If the multi-purpose voucher was issued to another business and the latter is economically advantaged by the then lower VAT rate, it must adjust its input VAT deduction. This would be the case if it claimed 19 % or 7 % input VAT on acquiring the voucher and then receives supplies after 30/06/2020 containing only 16 % or 5 % input VAT. The simplification would therefore not apply in that case.

Must the VAT rate reduction be passed on to customers?

Contracts often stipulate net prices, on which VAT is then calculated. At least for long-term contracts concluded more than four months before the VAT rate change, the customer has a right to compensation if they have already made down payments at the old, higher rate. However, this right to compensation may also be excluded contractually. In case of doubt, the provisions of the respective contract govern. For simple over-the-counter sales after 30/06/2020 or for supplies under contracts concluded after 30/06/2020, there is no obligation to pass on the savings from the lower VAT rates to end customers by reducing gross prices.

From a practical perspective, the VAT reduction could be passed on to customers, for example, through a general discount. This might be easier to implement within the company than amending price lists or entering new prices into the inventory management systems.

Checklist for implementing the VAT rate change

You should consider the following when implementing the VAT rate change:

• Set up new tax codes in your business systems (e.g. accounting software, ERP system, inventory management system).
• New balance sheet accounts should also be created for the proper allocation of output VAT / input VAT. Simply overwriting the existing tax codes for 19 % or 7 % is not advisable for reasons of traceability.
• Adjust the settings for the electronic submission of VAT pre-registrations.
• You must also adapt operational POS systems to the new VAT rates. In particular, till receipts must be able to reflect the new rates. Also remember to switch back from 01/01/2021!
• Train the employees responsible for invoice approvals.

Note:

All changes to your business IT must be documented in a comprehensible manner and presented in a procedural documentation. If you need information on proper procedural documentation, please feel free to contact us.

Other time-related aspects

The VAT rate changes will first become relevant for VAT pre-registrations for July 2020. These are due by 10/08/2020. Where a permanent filing extension is in place, the relevant date is 10/09/2020. Particularly if changeover problems are emerging, e.g. concerning IT or invoice amendments, it may be worth considering applying for an in-year permanent filing extension at the tax office. This can be done at any time up to the date for filing the respective VAT pre-registration, i.e. up to the 10th of the following month. However, a special advance payment of 1/11 of the VAT paid in the previous year must then also be made.

Conclusion

The reduction of VAT rates entails considerable effort that should be addressed early on. Later adjustments due to incorrect invoices are often even more time-consuming than structured upfront changes. The VAT reduction also offers some flexibility in pricing, particularly in end-customer business. If you have questions about the stimulus package – particularly regarding the VAT reduction – please do not hesitate to contact us. Together, we will find the best solution for you.