Everything you need to know about down payments with reduced VAT rates
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Everything you need to know about down payments with reduced VAT rates

If advance payments for goods or services are received before July 1, 2020, the previous tax rates of 19 percent or 7 percent will generally apply. When the service is rendered, the value added tax in the final invoice must then be corrected to the reduced tax rates of 16 percent or 5 percent. Yesterday we described that the time of performance is decisive for the application of tax rates. Today you will receive valuable advice on how to deal with down payments in the case of reduced VAT rates.

To proceed with invoicing before the tax rate change

You can already issue down payment invoices with the tax rate that applies at the time the service is performed. If it is already certain that a service will finally be performed between July 1, 2020 and December 31, 2020, you can already apply the reduced tax rate (16 percent or 5 percent) to the down payment invoices.

Three exemplary cases of advance payments with reduced VAT rates

1. A final service or partial service will be provided by June 2020

  • In this case, apply the tax rate of 19 percent or 7 percent.
  • For down payments up to June 2020, you neither will receive a relief nor is subsequent taxation necessary, since the service is calculated completely with the previous tax rate.

2. A final service or partial service will be provided between July and December 2020

  • In this case, apply the tax rate of 16 percent or 5 percent.
  • For down payments until June 2020, the VAT rate of 19 percent or 7 percent applies. Alternatively, you can apply the reduced VAT rate of 16 percent or 5 percent. In this case, however, you must be sure that final services or partial services are provided between July and December 2020
  • The VAT rate of 19 percent or 7 percent applies to advance payments up to June 2020. Alternatively, you can apply the reduced VAT rate of 16 percent or 5 percent. In this case, however, you must be sure that final services or partial services are provided between July and December 2020.
  • The reduced VAT rate (16 percent or 5 percent) will apply to advance payments received between July and December 2020).

3. A final service or partial service will be provided from January 2021

  • In this case, apply the tax rate of 19 percent or 7 percent.
  • For down payments until June 2020, the VAT rate of 19 percent or 7 percent applies.
  • For down payments between July and December 2020 the VAT rate of 16 percent or 5 percent applies in principle. If you are certain that the final service or partial service will not be provided until January 2021, the VAT rate of 19 percent or 7 percent applies.
  • For down payments from January 2021, the VAT rate of 19 percent or 7 percent applies.

How the tax treatment of reduced VAT rates works

In the case of taxation according to agreed remuneration, the so-called debit taxation, this principle applies: A relief from or a subsequent taxation of the sales tax from down payments takes place in the pre-registration period in which the paid service or partial service was actually performed.

If taxation takes place according to the remuneration received, the so-called actual taxation, then the credit or subsequent taxation takes place in the pre-registration period in which the remaining remuneration is received.

Important practical advice: Please make sure that the VAT shown in the invoices for down payments is openly deducted in the final invoices for services or partial services provided, indicating the VAT rate applied.

 

A calculation example for down payments with reduced VAT rates

Service date = invoice date 20 July 2020

Purchase price net20.000,00 €
16% VAT3.200,00 €
Purchase price goods gross23.200,00 €
Down payment 29 May 20205.000,00 €
19% VAT   950,00 €-5.950,00 €
Down payment 03 July 20205.000,00 €
16% VAT   800,00 €-5.800,00 €
Final payment11.450,00 €

As an entrepreneur, you can also correct down payment invoices retrospectively. In this case, the sales tax adjustment must be made in the assessment period in which the tax display is corrected. There is no retroactive effect.

Advance payments in the case of reduced rates of VAT: Our assessment

Please deal premature with the changes in tax rates between 1 July 2020 and 1 January 2021. Plan technical conversions, the adjustment of your processes and the choice of the procedure with down payments already now. Our experience has taught us that you should not take the conversion and preparation effort lightly. We are happy to be at your disposal as a consultant and sparring partner. We can also support you within the scope of process consulting, minimise risks and design your processes efficiently. Talk to us.

Other contributions to the reduction of VAT rates deal with permanent benefits, long-term contracts and vouchers.

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Lars Rinkewitz
Lars Rinkewitz
Tel.: +49 211-90 86 70
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