Thanks to the decision of the German federal government, VAT (Value Added Tax) has been reduced by a few percent on the 12th of June, 2020. This decision has been made because of the significant impact the Coronavirus has on the economy in general.

Right now, this temporary reduction is part of the economic stimulus package in Germany. It took effect on the 1st of July, when the before 19 percent VAT rate dropped to 16 percent. This is only the normal rate, as there is also the reduced VAT which is now 5 percent instead of 6.

As mentioned, it is only temporary and only applies to this year.

The Main Beneficiaries of Lower VAT Rates

During the VAT reduction, there are beneficiaries on both the buyer and the seller side of the market. This is great news for entrepreneurs, as their VAT can be reclaimed through input tax for all the goods they have purchased. All they need to do is request it from tax authorities (Finanzamt).

For this, you need to own a registered company that is eligible to income tax deduction. This makes businesses that sell their products and services to their customers the main beneficiaries of VAT reduction.

In fact, this reduction of VAT helps everyone. Now businesses can cut down the prices of their products and services a bit. This is great for private customers as well, not to mention that it creates a higher demand for the less expensive merchandise.

Thus, more people are going to buy, the profits are going to raise and companies are not going to go bankrupt that easily. The main problem is that businesses don’t have to cut down their prices in accordance with the reduced tax rate.

The reduced VAT can be passed on fully, partly or not at all. However, if people buy their products, the company still has a reduced tax rate, which can count as an increase in profit.

How does Reduced VAT Affect Companies?

With the VAT reduction, businesses have also been requested to modify their cash registers, accounting and billing systems. Software pieces, debit mandates, contracts and master data had to be updated following the VAT rate changes.

Unfortunately, there are many small businesses that are not as competent when it comes to applying these changes. In these cases, it can become a serious burden to work on these adjustments. Companies that rely on accounting software often have the advantage of their provider dealing with these changes.

How Should Entrepreneurs Adjust to New VAT Rates?

The date when the sales tax is imposed is the main factor that determines which VAT rate needs to be used. It is important to take a look at Germany’s VAT Law (Umsatzsteuergesetz or UStG) which defines two different types of deliveries or services:

• Services that have a VAT levied and due by the end of the same month
• Services for which you need to issue an invoice. In these cases, the VAT is being levied on the invoice issue date

As you can see, this is a question of time and it applies to distributing gift certificates to customers for a set price. Gift vouchers are also split into two categories such as multi-purpose and single-purpose ones. If it’s a single purpose one, it only comes with the 16 percent VAT rate if claimed before the 1st of July 2020. This has to be included in the invoice and a VAT adjustment has to be made.

Multi-purpose vouches only get taxed once they get redeemed. The VAT rate reduction also applies to down payments received before that date for a service that will take place after it. Whether you get the service or provide it, an adjustment to input tax deduction or VAT has to be made.