VAT rates were reduced from July 1 to December 31, 2020 to 16% and 5%!
With the cabinet decision of June 12, 2020, the way was cleared for a temporary reduction in VAT rates. The standard rate was lowered from 19% to 16%, and the reduced rate — applicable, for example, to food and books — from 7% to 5%. This measure was intended to stimulate consumption and strengthen the economy.
For businesses and tax authorities alike, the reduction created significant administrative work. Prices had to be recalculated, cash register systems reprogrammed, and invoice templates updated. Since the measure took effect on July 1, 2020, preparation time was short. The Bundestag was scheduled to pass the measure on June 29, making it advisable to prepare in advance rather than waiting for formal adoption.
Which VAT rate applies and when?
- General rule is that the VAT rate applicable is the one in effect at the time the service is performed. All services rendered between July 1 and December 31, 2020 must be invoiced using the reduced rate (16% or 5%).
- Advance payments:
If an advance invoice was issued at 19%, the final invoice must apply the reduced rate of 16% to the entire service. - Subscriptions and recurring invoices:
For subscriptions or recurring invoices (e.g., rent), adjustments must be made for July through December 2020 to reflect the reduced rates. - Company cars (1% method):
Special attention is required when calculating VAT for private use of company cars under the 1% method during this period. The reduced VAT rate must be applied. - Construction services:
The decisive factor is the completion date of the (partial) service. For example, if completion occurs on July 15, 2020, the reduced rate applies even if work began earlier. If separable partial services exist, the applicable rate is determined when the partial service is completed, typically upon acceptance. - Deliveries, especially online purchases:
Example: An online order is placed on Sunday, June 28, and delivered on July 2. For transported goods, the decisive time is when shipping begins. This determines the applicable VAT rate. In this example, the relevant date is when the item was handed over to the postal service.
If you have any questions or would like assistance with implementation, please feel free to contact us. We are happy to help with specific issues to find the best and fastest solution for you.
Janina Rochel, tyskrevision
jaro@tyskrevision.com