German VAT Programs

VAT increase in 2021: How to master the return to 19 percent well

The VAT cut to 16 percent caught most companies off guard. You can now prepare better for the VAT increase or return to 19 percent at the turn of the year 2020/2021. Please find an overview of what companies can already check and initiate.

The VAT reform was a good idea in principle. On the one hand, the demand for goods and services from private customers should be increased because of the lower prices. On the other hand, entrepreneurs financially burdened by the Corona crisis can increase their profit margin, provided they do not pass the lower VAT on to customers and keep the old prices. However, the VAT reform is limited until the end of the year as Chancellor Angela Merkel rejected a possible extension. 

Expiry of the VAT reform: start planning early

Even if it will take just under four months for the VAT reform to expire, entrepreneurs should start preparing today to include the correct VAT rate in their invoices from January 1, 2021.

Currently, the standard tax rate is 16 percent sales tax, and the reduced tax rate is five percent. From January 1, 2021, the standard tax rate of 19 percent and, as a reduced sales tax, the seven percent sales tax rate must be shown in invoices.
The following procedure is recommended so that the conversion from the previous to the new VAT rates from January 1, 2021 works without delays:

Recommendation 1: Identify affected systems

Locate the accounting systems in which the new sales tax rates must be stored from January 1, 2021 (e.g. electronic cash register, PC cash register, accounting program, software used to create invoices). 

Recommendation 2: Make an appointment early

Ask the manufacturer of these products for an appointment at an early stage when the changeover can take place. The appointment should be made early because on January 1, 2021, you will not be the only entrepreneur who needs help in adjusting the settings for sales tax.

  • Practical tip: If you want to be on the safe side, you should include a clause in the commissioning that protects against a payment obligation, contrary to the announcement by Chancellor Merkel can be extended beyond December 31, 2020, and the date for adjustment by the specialist company will not be necessary. Ultimately, it remains to be seen how the economy will develop after the Corona crisis or as a result of a feared second wave.


Recommendation 3: Check open orders

Divide up the individual services that are still open at the turn of the year or are being processed and determine together with your tax advisor how the invoice should look like. Background: The new sales tax rates for 2021 will only be due if a delivery or service is carried out (terminated) from January 1, 2021.

  • Example: You received an order from a customer for a net amount of 5,000 euros in October 2020, which is expected to be completed in January 2021. Consequence: Since the service is deemed to have been performed in January 2021, you must show 19 percent sales tax on the invoice.
  • Variant: You received an order from a customer for a net amount of 5,000 euros in October 2020, which will be completed in December 2020. However, the invoice will be issued in January 2021 at the earliest. Consequence: Since the service is deemed to have been performed in December 2020, you must show 16 percent sales tax in the invoice. The time of invoicing is irrelevant when it comes to the correct VAT rate.

Recommendation 4: delegate tasks

Since you as the business owner should perform other tasks, it is advisable to select suitable personnel who are responsible for the implementation of the end of the VAT reduction. It would be best to have two employees so that a contact person is always available.

  • Practical tip: Take care of suitable training for the selected staff at an early stage. Even if, contrary to expectations, the VAT increase or the return to 19 percent VAT does not materialize, special training courses are worthwhile. Because at some point the day will come when you have to switch back to the 19 percent or 7 percent sales tax rate. With early training of your staff, you can look forward to it calmly.

Be careful when agreeing on partial services in the second half of 2020

If you provide craftsman services to private customers and have agreed a net amount plus sales tax, these customers will understandably insist that the service is completed (carried out) in 2020 so that only 16 percent sales tax is due.

If the completion of the entire service can no longer be achieved in 2020, the execution and billing of partial services in the period between July 1, 2020, and December 31, 2020, can be considered. In this case, only 16 percent sales tax is due for partial services provided in the second half of 2020 and the private customer only has to pay 19 percent sales tax on the net invoice amount for the remaining amount of the services performed in 2021.

  • Practical tip: But watch out! During the last VAT hike, the tax authorities' auditors were on the lookout for courtesy bills. These are invoices in which partial services are billed at a lower sales tax rate, although the requirements for partial services were not met. So only agree with partial services with private customers if the requirements are actually met. Otherwise, in the event of a later examination by the tax office, you will, in the worst case, be left with the difference between the lower and the higher sales tax rate.

In order to be able to invoice partial services in the period from July 1, 2020, to December 31, 2020, with 16 percent sales tax, the following four requirements must be met in particular:

  • The partial service must be an economically definable part of a working delivery or work service (economic divisibility).
  • The service part, if it is part of a working delivery, must have been accepted (separate acceptance); if it is part of a work, it must have been completed or terminated.
  • It must have been agreed that corresponding partial fees are to be paid for parts of a working delivery or work service (separate agreement).
  • The partial fee must be billed separately (separate billing).