What is the difference between Umsatzsteuer and Mehrwertsteuer?
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When starting out in the world of self-employment, many freelancers find themselves having to deal with taxes for the first time. The different terms used for the various taxes that freelancers in Germany have to pay can be quite confusing.
What is the difference between Mehrwertsteuer und Umsatzsteuer? And what exactly is input tax? In this article, we shed some light on the differences between these terms and explain them in more detail.
What is Umsatzsteuer (VAT)?
The Umsatzsteuer is applied to all sales made by businesses in Germany. For each product sold or each service provided, companies and self-employed persons have to pay a certain percentage of their sales to the government. In most cases, it’s either 19% or the reduced amount of 7%.
You can add the tax rate that applies to your business to your invoices. For example, if you issue a customer an invoice for €100, you still have to disclose the sales tax:
- Net amount: €100
- Regular sales tax rate: €19 (19% of the net amount)
- Gross amount: €119
💡 Accountable tip: When you create your invoices using Accountable’s tax solution, the correct VAT rate is calculated automatically! Create invoices directly in the free app or on your laptop.
Umsatzsteuervoranmeldung (Advance VAT return)
The Umsatzsteuer that you receive must be paid to your local tax office (Finanzamt). You determine the amount due in the Umsatzsteuervoranmeldung, which you need to submit annually, monthly or quarterly, depending on your tax office’s requirements.
On this form, you not only declare the amount of VAT you have received and that you will remit to the tax office, you also have the opportunity to reclaim the VAT you have paid for in purchases relevant to your business.
You are a fashion designer, and you purchase fabric worth €100 + €19 VAT. This purchase is necessary for your job.
This means you can claim the €19 you paid in your next Umsatzsteuervoranmeldung. The €19 will then be offset against the amount of sales tax you have to pay.
💡 Accountable tip: You can be exempt from paying Umsatzsteuer if you are considered a small business owner. This can be helpful, for example, if you have almost no business expenses or work mostly with private customers. The exemption from sales tax makes it easier for your to offer lower prices to your customers. This article explains when it makes sense to make use of the small business regulation.
What is Mehrwertsteuer?
The term Mehrwertsteuer is identical to Umsatzsteuer. However, Mehrwertsteuer is more of a colloquial term. If you want to express yourself correctly when it comes to tax law, you should always use the term “Umsatzsteuer”.
Nevertheless, the term Mehrwertsteuer is mainly used on receipts. If you look on your most recent receipt from your evening out at a restaurant or your last shopping trip, you will no doubt find the abbreviation “MwSt.”, which indicates the calculated sales tax.
The origin of the term “Mehrwertsteuer”
Mehrwertsteuer came to be due to the introduction of the value-added principle, which has been in effect in Germany since the end of the 1960s. This means that companies and self-employed persons only have to pay sales tax on the value that is created when selling a product or service. So, if you incur expenses in the process of offering your product or service, these expenses can be deducted from the income generated. The sales tax only has to be paid on the surplus, i.e. the added value.
Let’s stick with our example from before:
- As a fashion designer, you purchase fabric that costs €100 + €19 sales tax.
- The tax office pays you back the €19 sales tax you paid for purchasing the fabric. Your costs are therefore €100.
- Now you make a garment and sell it for €150 + €28.50 sales tax.
- The added value is €50: Cost of materials €100, selling price €150, added value = €50.
- You pay €28,50 sales tax to the tax office and get back €19 for your material costs:
- €28,50 – €19 = €9,50.
- So in the end you pay €9,50 sales tax, which is 19% of the €50 added value.
What is Vorsteuer (input tax)?
The term Vorsteuer (input tax) differs from Umsatzsteuer (VAT) only from the perspective of the invoice payer. Businesses account for sales tax on their products and services, and in turn, must pay input tax on products and services they purchase.
Let’s use our fashion designer example to illustrate the difference:
- The fabric shop sells fabric that costs €100 to the fashion designer. The fabric shop has to add 19% Umsatzsteuer to the price.
- The fashion designer purchasing the fabric must now pay this 19% as Vorsteuer (input tax).
In other words, incoming invoices show Vorsteuer, whereas outgoing invoices list Umsatzsteuer. The amount is the same, only the term changes depending upon whether you are sending or receiving the invoice.
Summary – Umsatzsteuer or Mehrwertsteuer?
The topic of taxes can be quite complicated. A basic overview of the different terms can help you to get a better grasp of the topic. Let’s take a look at all three terms one more time so you no longer have to wonder what the difference is between Umsatzsteuer, Mehrwertsteuer and Vorsteuer.
It is actually quite simple because as a self-employed person, the term Umsatzsteuer is probably the most important. This is because you show Umsatzsteuer on your invoices and pay this in turn to the tax office.
Mehrwertsteuer refers to the exact same tax and is a colloquial term that is more commonly used.
Vorsteuer is also just another term for Umsatzsteuer. It is the tax amount you pay for professional expenses.
💡Accountable is the tax solution for the self-employed. Download the free app or create an account directly online. This ensures you have your accounting and tax obligations under control right from the start. This includes the Umsatzsteuervoranmeldung (advance VAT return), Einkommensteuer (income tax) and all other tax returns that self-employed professionals have to file.
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