Information on the temporary reduction of VAT rates

With the measures of the Second stimulus package, which takes decisive action to tackle the economic effects of the Covid-19 pandemic, the economy should quickly regain momentum. The focus here is on the temporary reduction of VAT rates. As these are to apply from 1st. July 2020 (the Federal Council is expected to approve them on 26th. June 2020), rapid implementation is necessary. In the following we have compiled some important information.

The VAT rate will be reduced for the period from 1st. July to 31st. Dec. 2020: the regular tax rate will then be 16 % instead of 19 %. The reduced tax rate (applicable for e.g. some food) is 5% (previously 7%).

The delivery of food for consumption on the spot is generally subject to the regular VAT rate. For restaurant and catering services provided after 30th. June 2020 and before 1st. July 2021 (beverages are excluded), the (First) Corona Tax Assistance Act already provided for a reduction to the reduced tax rate.

As a result of the reduction in tax rates, entrepreneurs will have to make adjustments to the accounting and cash register systems as quickly as possible, if they have not already done so.
But it is not only the short-term implementation of the tax rate reduction that is causing many companies problems. There are also numerous questions of demarcation, which the Federal Ministry of Finance addressed in an accompanying letter. However, this is currently only a draft (status as of 11th. June 2020).

Start of application
The new rates are to be applied to supplies of goods, other services and intra-Community acquisitions made between 1 July and 31 December 2020. The decisive factor is the point in time at which the respective turnover is executed. The time of the contractual agreement is as irrelevant as the time of the invoice.

Price labelling
The reduction in tax rates does not only require adjustments/changes in the accounting and cash register systems. One should also think of the time-consuming and correct re-labelling of goods (especially in retail). Here, the Federal Ministry of Economics and Energy has now presented a solution via flat-rate discounts in a letter dated 10th. June 2020. According to this, traders and providers of services for the temporary reduction of VAT can make use of the existing exemption option under Section 9(2) of the German Price Indication Ordinance (PAngV) and grant flat-rate discounts at the checkout without having to change the price display of all items.
Please note:  The option under § 9 para. 2 PAngV cannot be used for price-fixed articles (such as books, journals, newspapers and prescription drugs).

Continuous services/partial services
Continuous services can be either other services (e.g. rentals) or the entirety of several supplies (e.g. of building materials). Different periods of time (e.g. ½ year or 5 years) or no time limit are agreed for continuous services. Permanent services shall be performed, in the case of other services, on the day on which the agreed performance period ends – in the case of recurring deliveries (except deliveries of electricity, gas, heat and water) on the day of each individual delivery. The tax rate of 19 % or 7 % applies to VAT-taxable permanent services provided before 1st. July 2020. Permanent services carried out between 1st. July and 31st. December 2020 are taxed at 16 % and 5 % respectively.

Example: A monthly payment was agreed in a two-year lease agreement. Insofar as the monthly partial benefits are payable from 1st. July to 31st. December 2020, the tax rate is 16 %.
If contracts for permanent services are to be regarded as invoices, an addition may be necessary. This is particularly the case if the specific tax rate in the contracts (19 % or 7 %), and not only the turnover tax owed by law.

Advance payments
If an entrepreneur has received advance payments, several cases must be distinguished. Particular reference should be made to the following: If advance payments were received before 1.7.2020 for services rendered between 1st. July and 31st. December 2020, the tax rate of 19 % or 7 % applied to these advance payments. In the final invoice the sales tax must be corrected.

When reimbursing vouchers, the Federal Ministry of Finance points out the following simplification option in its draft letter: If the entrepreneur reimburses the vouchers issued by him from 1st. July to 31st. August 2020, the value-added tax – insofar as the sales are subject to the general tax rate – is to be corrected according to the tax rate of 19 % applicable until 30th. June 2020. In the event of a refund after 31st. August 2020, the value added tax is to be corrected according to the tax rate of 16 % applicable from 1st. July 2020.

Please note: In the case of a single-purpose voucher, the sales tax is incurred as soon as it is issued. Therefore, the tax rate at the time of issue is decisive here. The differentiation between single-purpose and multipurpose vouchers is therefore still relevant.

Incorrect application of the tax rate
If the value added tax is shown too high (e.g. 19% instead of 16%), the entrepreneur owes the tax office not only the legally owed tax (16%) but also the increased tax amount shown (3%).

Source:  Government draft of a second law on the implementation of tax aid measures to cope with the corona crisis (Second Corona Tax Aid Act); BMF letter in draft form (status: 11th. June 2020), Ref. III C 2 – S 7030/20/10009 :004

The content of the circular has been prepared to the best of our knowledge and belief. The complexity and the constant change of the legal matter make it necessary to exclude liability and warranty. The circular does not replace individual personal advice.