UPDATE: The Bundesrat has approved the Annual Tax Act 2024. This means that the aforementioned changes will apply from next year!
As many people know from occasionally glancing at their bills when they go shopping, services provided by companies are taxed with sales tax, also known as value added tax. For small businesses, § 19 UStG is currently relevant. Accordingly, so-called small businesses are exempt from the collection of sales tax. However, a change is on the horizon for this regulation, which could have a significant impact and not only advantages but also pitfalls.
When are you (currently) considered a small business?
According to § 19 Abs. 1 S. 1 UStG, a small business is currently defined as a business that generated a turnover – not profit – of up to €22,000 in the previous calendar year and is not expected to exceed a turnover of €50,000 in the current year. The actual turnover generated in the previous year is decisive. For the current year, a forecast must be made at the beginning of the year. The first pitfall arises in precisely this examination. The exemption can only be enjoyed if both thresholds are not exceeded. If only one of the two limits is exceeded, the tax liability remains in place. This results in a two-stage test. First, the previous year's turnover must be checked. If this exceeds €22,000, the tax liability remains. Otherwise, in the second step, a forecast must be made for the current year as to whether it is expected that the annual turnover of €50,000 will be exceeded. If the answer is no, the regulation can be applied. For the benefit, it is irrelevant whether, contrary to the forecast, the actual turnover in the current year exceeds the €50,000 threshold. The benefit remains. It would only lead to the exemption not being applied in the following year.
What are the advantages of being a small business? What do you need to bear in mind?
The main advantage of this regulation is that small businesses are not subject to VAT. This means that they do not have to charge their customers any additional tax for their services. They therefore have more freedom when it comes to pricing. Furthermore, they do not have to submit a VAT return or advance returns, as long as there are no special reporting requirements (e.g. for vehicle suppliers). This saves the tax advisor time and money.
On the other hand, the small business owner is not allowed to deduct input tax. This means that he cannot get the VAT charged to him back from the tax office. In addition, certain records must continue to be kept, such as those required under § 65 of the German VAT Implementation Code (UStDV) for the values of the services received in return.
As the name small business owner suggests, the person is still considered an entrepreneur. Therefore, despite the non-collection, he must continue to create invoices, send them to the customer and keep them. In this, he must specifically point out that no tax is shown because he is a small business owner. In addition, the invoice must not show any tax.
If someone wants to deduct the input tax despite fulfilling the requirements, for example, this is possible. The application of the regulation can be waived. However, in this case, the other obligations, such as the VAT liability and the declaration obligation, apply again.
What changes are planned?
The current plan is to change the conditions and legal consequences of the small business regulation. It is envisaged that the thresholds will be raised. The previous year's turnover will rise to €25,000, and this year's to €100,000. Consequently, more people will be included and greater leeway will be created.
But the test for the current year will change significantly. Instead of the forecast, the actual turnover will be the deciding factor in the future. You need to worry less about the expected turnover at the beginning of the year. However, this also means that exceeding the threshold will already be relevant in the current year and a VAT liability will arise. In the future, there will be a tax-free allowance. Tax liability would only apply to the amount in excess of the allowance. The exemption will continue to apply to the rest. Therefore, in the future, you would have to keep an eye on the current turnover. From the point at which the threshold is exceeded, not only would taxes have to be paid, but the invoice details would also have to be corrected. VAT would have to be shown from this point on.
The taxation will be changed so that in the future it will no longer be a matter of non-collection, but of a real tax exemption. In addition, no additional reference to the small business exemption should be necessary. In addition, an independent regulation is introduced with § 34a of the Value Added Tax Implementing Regulation, from which the requirements for the invoices of small businesses arise. A significant simplification is likely to be an amendment introduced just before the end. This exempts small businesses from the dreaded obligation to issue e-invoices. Nevertheless, you have to be able to receive such e-invoices.
Finally, a separate reporting procedure is to be introduced with § 19a UStG so that domestic small businesses can also take advantage of the exemption when the service is provided in another EU country.
Summary/conclusion
In summary, it can be seen that the small business regulation is intended to relieve the burden on small businesses in particular. However, they already have a lot to consider. Although an increase in the threshold values is planned for the coming year, the further change means that you have to keep an eye on sales not only for the economic efficiency of the business, but also because of tax obligations. Because of the planned changes, it is important to wait and see over the next few weeks whether there will be any changes after all and what these will ultimately look like.
The statements represent initial information that was current for the law applicable in Germany at the time of initial publication. The legal situation may have changed since then. Furthermore, the information provided cannot replace individual advice on a specific matter. Please contact us for this purpose.