Temporary VAT rate reduction ended on 1 January 2021

At the turn of the year, the temporary VAT rate reduction in effect since July 1, 2020 expired. Since January 1, the regular VAT rates of 19% and 7% apply again. The Federal Ministry of Finance (BMF) has published two accompanying letters with guidance on the temporary VAT rate reduction, which also contain explanations for companies to return to the original tax rates beginning 1 January 2021.

The temporary VAT reduction has done little to stimulate consumer spending, according to a Forsa survey conducted for ifo Institute. Nevertheless, the temporary reduction in the German sales tax rate has in some cases caused considerable administrative expense for companies and uncertainty in its day-to-day application. In order to avoid financial damage resulting from future tax audits, businesses are nevertheless urged to continue to deal with the temporary VAT rate reduction.

Below, we would like to reiterate what companies need to consider when returning to the regular VAT rates:

• As for the question which tax rate applies, the time of performance of the service is generally decisive. The time when a contract is concluded, when invoices are issued or when payments are made is irrelevant for the applicable tax rate. It is also irrelevant whether sales are taxed on the basis of the consideration received (Ist-Besteuerung) or on the basis of the agreed consideration (Soll-Besteuerung).
• If down payments were received at the reduced tax rates of 16% or 5% before 31.12.2020 and if the service on which is based the down payment is performed after 31.12.2020, the tax rate for the down payment must be adjusted to the regular tax rate of 19 % or 7 % in the final invoice.
• If there are subsequent adjustments to the payment, the time of the service rather than the time of subsequent adjustment decides which tax rate applies.
• Where annual bonuses are granted to customers for 2020, the BMF has provided for various simplification rules. Among other things, no objections will be raised if the regular tax rate is applied to the annual bonus as a whole. However, in this case, both the customer and the party granting the bonus must treat this aspect in a uniform way. Therefore, to ensure uniform treatment, one should inform the customer that the simplification rule will be applied.
• In the case of permanent services that are not deemed to have been provided until expiry of 2020, the regular tax rate applies to those services as a whole. This is the case, for example, with licences or membership fees. This also applies if advance payments have been made at the reduced tax rate. In these cases, the invoice may have to be corrected to apply the regular tax rate. If permanent services do not end until after 31.12.2020, the regular tax rate of 19 % or 7 % must be applied.
• If permanent services are to be treated as partial services (rental or leasing contracts, for example), the valid tax rate applies to the respective partial service rendered. For rents subject to VAT, this means that the reduced tax rate applies until 31.12.2020 and that the regular tax rate applies from 01.01.2021. If partial services are settled by means of standing invoices or if, for example, rental agreements are used as invoices, these must be adjusted back to the regular tax rates as of January.
• In the case of outgoing invoices, it is mandatory to apply the valid tax rate. If an outgoing invoice for services performed after 01.01.2021 shows not the regular tax rate but rather the reduced rate, the issuer of the invoice must pay VAT at the regular rate even though they only received the reduced VAT rate from the customer.
• IT systems must be readjusted to the regular tax rates. However, tax codes or sales accounts that come with automated tax functions or tax keys introduced to address the reduced tax rates must not be deleted immediately because further adjustments may be necessary for the period during which the lowered tax rates applied.
• If vouchers were issued during the applicability of the reduced tax rates, when redeeming them after 31 December 2020, attention must be paid to whether an adjustment to the sales tax may have to be made. This depends in particular on whether the vouchers are single-purpose or multi-purpose vouchers, or down payments.   
• If goods are delivered to customers via consignment warehouses, the tax rate depends on the date the customer removes the goods from the consignment warehouse. A delivery is deemed to be performed on the date the customer removes the goods.
• It is important to note that if company cars are provided to employees, the regular VAT rate reapplies from 01.01.2021.

If you have any questions, please do not hesitate to contact us.