June 18, 2020

Economic stimulus package: Reduction of VAT rates in the second half of 2020 - curse or blessing?

 

Background

On 3 June 2020, the Coalition Committee adopted a comprehensive aid package to deal with the Corona crisis. One measure that affects everyone is the reduction of VAT rates, which is limited in time from 1 July 2020 to 31 December 2020. The standard value-added tax rate is to be reduced from 19% to 16% and the lower rate from 7% to 5% during this period. It remains to be seen who will ultimately benefit from this - businesspersons or consumers.

What is certain, on the other hand, is that the change in the VAT rate will impose a considerable burden on, and mean additional tax risks for, businesses. And not just once, but both when the VAT rates are reduced and later, when they are returned to the previous rates after six months.

In the meantime, a draft law and a draft letter of the Federal Ministry of Finance have been published. The following highlights important aspects that need to be taken into account, as there is not much time left before the changes go into effect.

The basics

When are the reduced tax rates to be applied?

The only factor that applies is the point in time when supplies are performed. If this is in the second half of 2020, the reduced VAT rates are to be applied. The time of invoicing and the date of payment are irrelevant, however. The form of tax collection (target or actual VAT) does not have any influence on the applicable VAT rate, either.

When is a supply deemed to be performed?

Supplies of goods and provisions of services are generally deemed to be performed with the buyer is handed over the power to dispose over the goods or services, i.e. in the case of

  • Transport and dispatch deliveries upon the commencement of transport or dispatch,
  • When the customer picks up the goods: upon handover to the customer or his agent,
  • Provisions of services (e.g. construction work) upon handover and acceptance by the recipient of the service
  • Supplies of electricity, gas, heat and water at the end of the respective meter-reading period.

Other services are deemed to be performed at the time of their completion. In the case of continuous services that extend over a certain period of time (e.g. rental, leasing, maintenance services), the time of performance is deemed to be the end of the agreed-upon term, unless partial performance has been agreed upon.

What needs to be kept in mind?

  • Invoicing

It should be clear that there is a need to ensure that invoices list the correct VAT rates. The following cases in particular need to be prevented:

1. Issuing outgoing invoices with a VAT rate that is too low; the consequence of this will be: the fiscal authorities will demand payment of the VAT actually owed but not paid. In practice, the attempt to subsequently charge the customer with this VAT is often unsuccessful, be it because the contractual basis does not allow such (e.g. fixed-price agreement), the customer is insolvent or there is a desire to avoid negatively affecting the customer relationship.

2. Acceptance of incoming invoices with an excessively high VAT rate; the consequence of this is: if the value added tax is listed at too high an amount, it cannot be claimed as input tax, although it has been paid to the service provider. The procedure for correcting such invoices is complex. Here as well, there is a risk that the correction will not be successful.

Contractual agreements

When contractual agreements are concluded, it should be clearly specified whether and how a change in the VAT rate affects the invoicing of the service and thus also who is economically responsible for any VAT increase or decrease. If there are no concrete contractual agreements in this regard, this can not only result in incalculable additional burdens, it can often also lead to unnecessary disputes between the contracting parties, including legal disputes.

If contractual agreements have been concluded in the past, such clauses, if at all, are contained in contracts for projects that extend over several years. Therefore, if such a clause is missing and the corresponding services are then supposed to be carried out in the coming half-year, it may be necessary to examine who benefits from the lower tax rate: the service provider who achieves a higher margin or the customer who can demand a reduced gross price. It should be noted here that sec. 29 of the German Value-Added Tax Act (UStG) stipulates a civil law compensation claim for long-term contracts under certain conditions.

Practical examples (simplified)

Case 1: Car purchase

Purchase of a motor vehicle by private individual P from businessman U. 
If the vehicle is handed over to P in the second half of 2020, the tax rate is reduced from 19% to 16%. Whether P benefits from this due to a lower price or U due to a higher margin depends on the contractual agreement.

Case 2: Building projects

Landlord V commissions building contractor B in 2018 to build a residential complex, which is later to be let tax-free by V. A fixed price including value-added tax in the amount of € 2.38 million is agreed. B has calculated net proceeds of € 2.00 million. In the years 2018 and 2019, B prepared invoices on account and paid 19% VAT on these invoices as soon as V paid these. If completion and acceptance take place in the second half of 2020, the reduced tax rate of 16% will be applied to the entire construction work, including to the extent that B has already received advance payments from V. B will now receive a net amount of approx. € 2.05 million, i.e. approx. € 50,000 more than calculated.

Option 1: V and B have agreed on a net fixed price (e.g. € 2.00 million net plus statutory VAT). In this case, V has the advantage of a reduced price for the property.

Option 2: V and B have agreed on partial services. If this is the case, partial services performed before 1 July 2020 are subject to the VAT rate of 19% and partial services or the remaining final service performed in the second half of the year are subject to the VAT rate of 16%. It should be noted in this context that instalment payments have nothing to do with the agreement of partial services. Partial services are economically delimitable parts of a uniform service for which the remuneration is agreed and invoiced separately. Thus, for example, the agreement of a partial performance in connection with a construction project requires its separate acceptance, among other things with the consequence being that the warranty period begins upon acceptance of the partial performance, irrespective of the acceptance of the entire project.

Case 3: Permanent benefits

Driving school F charges a basic fee (January 2020), fees per driving hour (June to July 2020) and for attendance of the exam (October 2020). The driving lessons and attendance of the exam are treated as partial services, i.e. the VAT rate depends on the month in which the driving lesson was given (June 19%, July 16%) or attendance of the exam took place (October 16%). The basic fee, on the other hand, is deemed to a permanent service. Although this fee was paid in January 2020, it is taxable at 16% if the training is completed in October 2020.

What is to be done?

At present, it can be assumed that the bill will be adopted. Companies must prepare themselves for this. Given the short lead time, the timeline for affected taxable persons is extremely challenging. However, an update of the financial accounting software alone is not enough. All departments affected (e.g. financial accounting, sales, IT, marketing, legal, etc.) must analyse to what extent adjustments are necessary and implement these at short notice. Our advisors will be happy to support you in all this.

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