Which VAT rate should I charge my German clients?

In Germany, there are two different VAT rates: 19% is the general rule, but there’s also a reduced rate of 7%. Due to the Corona crisis, the government has temporarily reduced the two rates to 16% and 5% for the second half of 2020. A very small number of services are charged with no VAT at all.

But which rate gets charged where and for what? As with many aspects of German tax law, this is, as our tax consultant Andreas Reichert explained, “definitely too complicated”. A reassuring comment from a professional, to be sure.

Thankfully he has shared with us some tips to ensure you charge the correct VAT rate as a freelancer in Germany.

19% VAT is charged on most invoices

There is one easy rule of thumb, according to Reichert: “For 95% of services it’s clearly 19% VAT. It’s only in a few cases that the reduced rate will be charged.” These are good odds, indeed.

The German Basic Law includes a list of services that should be charged with a reduced VAT rate, but the text is inaccessible to the average German, let alone newcomers. Thankfully registered tax consultants are on hand to interpret the law for us.

“Usually you don’t need to ask a tax advisor what to charge, because in nearly every case it’s 19%,” says Reichert. He says that within the professions that work with reduced VAT rates, you’ll generally hear about it from your network. 

When can I charge 7% VAT?

“Then we have some special cases with 7%,” says Reichert. “Like artists, for example. In these cases you need to check the details and that’s when it makes sense to ask a tax advisor.”

Reichert explains that if you are working as an artist, you can generally charge 7% VAT – but there are a handful of artistic services that are charged at 0% VAT. Doctors charge 0% VAT, too.

What makes the difference isn’t your job title (“doctor” or “artist”) but the specific services you provide.

“It’s also possible that it’s mixed,” he continues. “Let’s say two of my clients are working as public speakers. Some of their services are taxed at 19% and others at 7%. It depends on what specifically they are doing.”

How to check your VAT rate

If you’re still unsure which VAT rate to charge on your invoices, your network can’t provide the answers you need or you’re still too new in Germany to know who to ask, it’s probably time to contact your local tax office (Finanzamt) to clarify your VAT rate – you can find the contact details and opening hours on your city’s Finanzamt info page, like this one. The Finanzamt is legally obligated to offer you free advice.

Reichert recommends contacting them in writing rather than visiting in person, in order to have your VAT rate clarified in writing. However, “this can take some time, so it might be better to ask a tax advisor.” Accountable can help you find a certified tax consultant.

What happens if you charge the wrong VAT rate

If you charge the wrong VAT rate to your clients, there are a couple of possible scenarios.

“If all your clients are companies, then it doesn’t really matter,” says Reichert. “If you charge someone 19%, but you actually should have charged them 7%, it doesn’t make a difference as long as the client can deduct it from their own VAT return.”

Because VAT is a cost passed through businesses to the end-user, then as long as your client is a business or organization charging VAT itself, this won’t be such a hassle for them.

In any case, charging 19% VAT with help keep you covered. “If your client received an invoice from you with 19%, and this is wrong, then the Finanzamt could adjust it so they only pay 7%,” explains Reichert. Ideally, you would avoid these administrative errors, but in this case, all that would happen would be that your client would get a small refund from the tax office.

Where things get trickier is if you are not charging enough VAT. 

“If the Finanzamt audits you and they say you should have charged 19%, rather than 7%, then you’ll have to pay the 12% to the Finanzamt,” says Reichert. “In most cases it’s not possible to go back to your client and change the invoice.” This would have you paying out of your own pocket.

“In those cases, it’s better to clarify at the beginning,” he says.

Quick tips for the correct VAT rate

Here are Andreas Reichert’s quick tips for ensuring you charge the correct VAT rate:

• Check with colleagues to see what they’re charging for the same services
• Clarify with the Finanzamt or a tax consultant if you are unsure
• If all else fails, charge 19% VAT to err on the side of caution
• Only charge a reduced VAT rate if you are very certain it matches the services you provide