COVID-19 Crisis: An Explanation of the VAT Cut

The global coronavirus pandemic has completely changed everyday life for everyone. Many businesses are also suffering from the economic impact of the crisis. As we reported on our blog a few weeks ago, the federal government is attempting to help struggling businesses through rapid relief measures. These emergency measures have given many businesses a new lease on life in the short term. Nevertheless, despite the easing of measures to contain the pandemic, a financial crisis persists. To stimulate the economy, the German government passed a comprehensive tax stimulus package on June 12, 2020. A central component of the package is the reduction in the value-added tax (VAT). In this post, we—as tax advisors in Düsseldorf and Oberhausen—will report on the changes.

What is changing with regard to VAT?

As part of the policy measures, the value-added tax will be reduced from July 1, 2020, to December 31, 2020. The standard tax rate will be reduced from 19% to 16%. This tax rate applies to nearly all products and services. The reduced tax rate will be lowered from 7% to 5%. This tax rate applies to specific products, such as basic foodstuffs, hygiene products, or published materials. After this period, the VAT is expected to return to the previously applicable rates.

Who can benefit from the VAT reduction?

Ultimately, the end customer must pay the VAT. This suggests that consumers are the primary beneficiaries of the approved VAT reduction. In practice, however, the situation is different: The fiscal stimulus package gives companies the freedom to decide whether to pass the savings on to customers or retain them. This is intended to support companies struggling with economic challenges. If a company is not facing financial difficulties, customers may have reason to celebrate. However, it is safe to assume that very few companies will pass up this financial boost from the government. As end consumers, we are therefore unlikely to notice much of a difference from the reduction.

What should companies keep in mind regarding the new VAT rate?

The tax change means that companies must handle the new regulations with care. First, it is important that companies pay attention to the new tax rate when issuing invoices. In addition, incoming invoices should be checked for the correct sales tax. Errors in tax processing could lead to problems with the tax office later on, so it is worth taking a close look at both issued and received invoices. We recommend exercising particular caution and consulting with a qualified tax advisor.

It is also important to ensure that the new tax rates are correctly applied to the relevant time period. The date on which the service is performed determines which tax rate must be stated on an invoice. Tax law contains a variety of definitions regarding when a service is considered to have been performed. We will not address the different scenarios in this article. You can find further information here in our current fact sheet on the topic.

Support from Tax Advisors in Düsseldorf and Oberhausen

It is understandable that many business owners quickly feel overwhelmed by the new tax regulations. If you have questions on this topic or need support from a professional tax advisor, we are your first point of contact in Düsseldorf and Oberhausen. Our team is always up to date and will help ensure your business complies with the latest regulations. This prevents unnecessary errors and complications down the line. Contact us to schedule a consultation.