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5 things you need to know as a freelancer concerning the VAT reduction in July 2020

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Corona has serious economic consequences for many people. To support the economy the German government was forced to many ad-hoc decision, among them to reduce the value added tax (Umsatzsteuer) in Germany. Read here the 6 things you need to know now as a freelancer concerning the reduced VAT rates due to the Corona crisis.

1. The reduction of value added tax applies to everybody

From 1 July 2020, the rates of VAT are to be reduced:

  • from 19% to 16%.
  • from 7% to 5%

The new VAT rates apply to all industries and services. There are no exceptions and it is compulsory: all entrepreneurs and freelancers must participate in the reduction of VAT. This also applies if they have only entrepreneurs as customers and the lower VAT rate has no effect for them.

Incorrect VAT rates on invoices may result in special audits, additional payments and penalties. Important: Entrepreneurs must pay the VAT shown on the invoice to the tax office. However, if they have invoiced the VAT incorrectly, this can lead to the other party not being allowed to deduct VAT on their side. The VAT return is effectively lost.

💡 Tip from Accountable: use our free invoice template to create legally correct invoices for Germany.

2. The reduction in VAT is only valid for half a year

On January 1, 2021, the old tax rates of 19% and 7% will apply again. This change will happen automatically – no new law will be needed. The rules described above will continue to apply however. This means freelancers will again have to pay close attention to the correct VAT rate.

However, it is possible that the Federal Government will change its mind and extend the deadline, depending on how the current crisis will play out. You should therefore keep an eye on the legal situation in order to be able to adjust to a new law in time.

3. You don’t have to pass the benefits of the decrease on to your clients

Lower VAT rates mean lower prices for consumers. Right? Not necessarily. Because the entrepreneur can still set his own prices. And there is no obligation to lower the gross price. So as a freelancer you can keep the benefits for yourself and you do not have to lower your gross prices.

4. The delivery time is the deciding factor

It doesn’t matter when the customer pays or which date is on the invoice: The VAT rate is based exclusively on the point in time when a service or good is delivered. If the service is provided over a period of several days, the last day is considered the time of delivery.

Example: The service was provided from 01 June to 30 June. The invoice date is 2 July and the invoice is paid on 10 July. The service is performed on June 30. The value-added tax rate is 19% and 7% respectively.
You have to be careful especially with down payments. In some cases the invoice is issued and paid in advance.

Example: The service was provided from 30 June to 2 July. The customer made a down payment in June and has already issued the invoice. The VAT rate is 16% and 5% respectively, as July 2 is considered the date of performance.
In this example, the entrepreneur must therefore correct his invoice.

5. You should check all incoming invoices carefully

What applies to your invoices to customers, naturally also applies vice versa to expenses. All other entrepreneurs must also comply with the rules and show the correct VAT and tax rate. If the VAT is incorrect, you might be unable to reclaim the VAT  in your Umsatzsteuer-Voranmeldung. This could lead to you losing a lot of money.

That is why freelancers should carefully check all expenses and incoming invoices. If the VAT is wrong, you should immediately contact the supplier and ask him to correct it.

💡 Tip from Accountable: If you use Accountable to manage your receipts and write invoices, you don’t need to worry. We have already implemented the new VAT rates.

Tino Keller, Managing Director & Founder of Accountable Germany
Tino Keller, Managing Director & Founder of Accountable Germany

Tino already built two companies and therefore knows the challenges freelancers face first hand. With Accountable he wants to solve all those challenges related to taxes.
When not working, Tino enjoys a nice Asado with a glass of Malbec as well as celebrating one of the occasional wins of favourite soccer team 1. FC Köln.

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