After the Bundesrat decided on VAT reductions for the hotel and restaurant industry on 5 June 2020 to overcome the economic difficulties caused by the coronavirus, the Federal Government initiated the reduction of VAT rates for all entrepreneurs and private individuals from 19% to 16% (standard tax rate) and from 7% to 5% (reduced tax rate) on 12 June 2020. Even though not all details are yet known and some discussions are still being held about possible simplifications and simplifications in practical implementation, all companies should be prepared for the fact that the reduced VAT rates will apply to VAT from 1 July 2020.
The rather short-term and surprising reduction in VAT poses a challenge for all companies.
Cut-off date for the application of the reduced tax rates
Subject to the law that has yet to be adopted, it can be assumed that the VAT rates for the period from 01 July 2020 to 31 December 2020 will be reduced. The VAT treatment of services provided before 1 July 2020 or after 31 December 2020 is undisputed. The tax rates 19% and 7% respectively apply here.
Critical are the cases in which the performance of the service began before 01 July 2020 and the end of the service provision is in the period from 01 July to 31 December 2020. The same applies to cases in which a benefit was started after 1 July 2020, but is not terminated until after 31 December 2020.
For the incurrence of VAT and thus for the use of the “correct” tax rate, it is decisive when the service (supply or other service) is performed. The time of invoicing or receipt of the invoice amount is irrelevant here.
Deliveries are generally made/executed when the recipient of the service is given the power of disposal over the delivered item.
Other services are provided upon completion; then the sales tax is incurred. Continuous services that are provided for a limited period of time are provided at the end of the performance period if no partial services are available.
In the case of intra-Community acquisitions, the special feature is that the VAT is incurred either at the time of the invoice or at the end of the month following the acquisition.
Partial services, deposits, discounts and bonuses
An invoicing of orders in several instalments (parts) does not automatically lead to the assumption that partial services exist for VAT purposes. Partial services are considered to exist if they are economically sensibly definable services. Furthermore, there must be a contractual agreement on the provision of the services in partial services. And finally, the partial service must be accepted and billed separately.
In the case of advance payments on services, the special feature is that the VAT is already incurred with the receipt. The down payments will be offset against the later final invoice. If, for example, a down payment is already received by the supplier in June 2020 for a delivery made in the month of October 2020, the down payment is taxable at 19% in June 2020; however, the final invoice in October is filed with 16% VAT, as the service was only provided in October. The VAT already paid (19%) will be credited.
Price reductions, discounts and discounts represent subsequent reductions in fees. In this respect, these must always be taken into account at the VAT rate that was applied to the underlying supply. Thus, a discount granted in July 2020 on a delivery from June 2020 must be taken into account at 19% (or 7%). Annual bonuses granted in 2021 for the entire year 2020 must be divided into a bonus of 19% and a bonus of 16%, assuming the standard VAT rate.
Risk: Liability for incorrectly stated VAT
The transitions from 19% to 16% (or 7% to 5%) on 1 July 2020 and then again from 16% to 19% (or 5% to 7%) on 1 January 2021 will be problematic. This poses liability risks for companies. If a company provides a service after July 1, 2020, but submits an invoice with the old tax rate of 19%, it is liable for the overstated VAT. In particular, non-adjusted standing invoices (rent, leasing) and contracts are susceptible to this VAT liability.
Input VAT deduction in the event of incorrectly stated VAT
Since companies are only allowed to claim the legally permissible VAT from incoming invoices as input tax, companies must also pay attention to the appropriate VAT taxation by the supplier in their incoming invoices.
Need for adaptation in the accounting and IT environment
In addition to implementing new accounts and tax codes, all forms, especially invoice layouts, need to be reviewed and adjusted if necessary. Upstream and downstream billing systems must not be forgotten here.
Need for adjustments to contracts and recurring invoices
It is not uncommon for remuneration to be agreed exclusively in contracts without separate additional accounting. These need to be reviewed and adjusted. Standing invoices for rental and leasing contracts must also be checked and adjusted.
Training needs for employees
Employees in the invoicing and accounting departments must be prepared for the upcoming changes in VAT law. There is therefore a need for training for them. However, employees who undertake or organise business trips (travel service area) must also be trained in dealing with changing tax rates so that, for example, hotel accommodation, rental cars or train tickets are correctly invoiced by third parties for VAT purposes. Especially the changeover phases around July 1 and December 31, 2020 are prone to errors.
Only temporary reduction of VAT rates
With all changes and adjustments that companies implement in the coming days and weeks, it should always be noted that according to the current status, the reduction in tax rates will expire on 31.12.2020 and then the “old” legal status will be restored. In this respect, there is again an additional effort for the “undoing” of the changes at the end of the year.
Far-reaching consequences of the Corona-related VAT reduction for practice
The surprising and short-term reduction in VAT rates will tie up considerable time and personnel resources for companies and their software partners in the coming days and weeks. For many companies, this will lead to additional financial expenses, which will usually not be offset by cost savings on the expenditure side. In this respect, many companies are faced with the question of whether the relief effects desired by the federal government will reach every company. It is to be hoped that in the course of the legislative process or through administrative instructions, facilitations and simplifications for companies will be provided. It can be assumed that in future tax audits or special VAT audits, the tax office will pay particular attention to the VAT treatment of business transactions in the period from July to December 2020.
Customer support by ICS adminservice
As a BPO service provider in finance and accounting, we check the appropriate application of VAT changes by their suppliers for our customers; for the invoicing agents and other affected employees of our customers, we are available to provide information in addition to their tax advisors. If we have also taken over the IT support for the customer’s ERP software, we assure the timely adaptation of the software.
How do you see the temporary reduction in the general and reduced VAT rate as of 1 July 2020 as an aid measure to cope with the Corona crisis? We look forward to your comments.
Image source: Adobe Stock, Photographer: XtravaganT
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