VAT: Everything you need to know

Turnover tax, also known as value added tax (VAT), is an important Tax in Germany. It affects both businesses and consumers and plays a crucial role in the German tax system. It is therefore very important to understand VAT and its impact on business and transactions.

Key Takeaways

• Value added tax is a Tax on the turnover of companies.
• Every company that sells goods or services is affected by VAT.
• VAT is calculated on net sales and there are different tax rates.
• There are certain transactions that are exempt from VAT, e.g. medical services.
• Companies can deduct input tax in order to reduce the VAT burden.

What is VAT and who is affected?

VAT is an indirect tax levied on the sale of goods and services. It is paid by the end consumer, but is collected by companies and paid to the tax authorities. VAT is an essential part of the German tax system and contributes significantly to the financing of the state.

Every company that operates in Germany and achieves a certain turnover is obliged to pay VAT. This applies to both domestic and foreign companies doing business in Germany. The exact regulations on Value added tax liability may vary depending on the type of company and transaction.

How is VAT calculated and what tax rates apply?

In Germany, there are different tax rates for goods and services. The regular tax rate is currently 19%, while the reduced tax rate is 7%. Some goods and services are exempt from VAT.

VAT is calculated on the net amount of a product or service. The net amount is the price without VAT. To calculate the sales tax, the net amount is multiplied by the corresponding tax rate. The resulting amount is the gross amount that must be paid by the customer.

Which transactions are exempt from VAT?

There are certain transactions that are exempt from VAT. These include, for example, medical services, educational institutions and non-profit organisations. Certain financial services and insurance services may also be exempt from VAT.

However, exemption from VAT may be subject to certain conditions and may require authorisation or registration with the tax authorities. It is important to know the exact regulations for each type of transaction to ensure that there is no VAT liability. Value added tax liability exists.

How does input tax deduction work?

Input tax deduction allows companies to deduct the VAT they have paid on the purchase of goods and services from the VAT they charge on their own sales. This reduces the actual tax burden for the company.

In order to claim the input tax deduction, the company must have a valid invoice that contains all the necessary information. This invoice must then be included in the Accounting and can be claimed in the advance VAT return.

What special features apply to cross-border transactions?

Special rules and regulations apply to cross-border transactions. If a company sells goods or services to another EU country, it may not have to charge VAT but apply the so-called reverse charge rule. This means that the buyer must pay the VAT in their own country.

For companies not based in the EU that do business in Germany, it is possible to apply for a refund of the VAT paid. However, this process requires precise documentation and compliance with certain deadlines.

How should VAT be recognised in the accounts?

The sales tax must be properly recognised in the Accounting are recognised. This includes the correct allocation of income and expenses to the corresponding tax rates and the recording of input tax deductions.

In addition to the proper Accounting companies must also regularly submit an advance VAT return. In this report, the turnover and input tax amounts for a certain period are stated. The VAT must then be paid to the tax authorities.

When and how should VAT be paid to the tax authorities?

VAT must be paid regularly to the tax authorities. The exact payment deadlines can vary depending on the company and sales volume. As a rule, however, companies must submit an advance VAT return every quarter and pay the VAT due within a certain period.

Payment can be made either by bank transfer or direct debit. It is important to adhere to the exact payment deadlines in order to avoid interest on arrears or other penalties.

How should special VAT cases, such as invoice corrections or credit notes, be handled?

There are certain special cases with VAT, such as invoice corrections or credit notes. If an invoice has been issued incorrectly or the amount has changed, a correction must be made. This can have an impact on the input tax deduction and the advance VAT return.

It is important to handle these special cases properly and to ensure that all necessary Documents must be retained. If you are unsure, it is advisable to consult a tax consultant or VAT expert.

What are the consequences of breaching VAT regulations and how can you avoid them?

Failure to comply with VAT regulations can have serious consequences. These include fines, interest on arrears and possibly even criminal penalties. It is therefore important to follow the VAT regulations precisely and to submit all required declarations and payments on time.

To avoid infringements, it is advisable to keep up to date with the latest changes in legislation and regulations. It can also be helpful to consult a tax advisor or VAT expert to ensure that all requirements are met.

How can I contact experts if I have questions about VAT?

If you have questions about VAT, there are various resources for obtaining expert advice. These can be tax advisors, lawyers or specialised consulting firms. It is important to choose an expert who has in-depth knowledge and experience in the field of VAT.

When choosing an expert, it is advisable to ask for references and consider the cost of the consultation. It can also be helpful to ask for recommendations from other companies or colleagues.

Conclusion

VAT is an important tax in Germany and affects both businesses and consumers. It is important to understand VAT and its impact on business and transactions. By correctly recording, calculating and paying VAT, companies can avoid offences and possible consequences. If you have any questions or uncertainties, it is advisable to contact a VAT expert.