You can take reduced VAT rates into account in long-term contracts as follows
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You can take reduced VAT rates into account in long-term contracts as follows

Reduced VAT rates lead to problems in the case of gross contracts agreed before the reduction was decided. We explain how you can consider reduced VAT rates in long-term contracts.

As is well known, on 12 June 2020, the Federal Cabinet decided on a six-month reduction in VAT rates from 19 percent to 16 percent and from 7 percent to 5 percent.

The changes will apply from 01 July 2020 and the changeover is limited to six months. However, the Federal Government’s well-intentioned, quick and unbureaucratic action raises questions in practice.

The problem: Closed gross contracts are based on the previous VAT rate

Gross contracts are a problem, for example in the media industry for commissioned productions. These contracts set fixed gross prices for the duration of the contract in return. Therefore, the VAT is priced already in here and taken into account in the calculation of both parties.

If such a contract was concluded before 12 June 2020, the parties have based the contract negotiations on the value added tax of 19%. However, for services performed after 30 June 2020, the performing party may apply a VAT rate of 16 % irrespective of the date of the contractual agreement.

Long remaining terms mean enormous advantages for a contracting party

This arises a unilateral advantage if the contracts are of long duration. Finally, the party providing the services benefits for 3 % of the contractually agreed consideration. Since no change in the VAT was to be expected at the time of conclusion of the contract, the contracts often lack a provision on compensation claims in the event of an adjustment of the VAT rate.

You can consider reduced VAT rates in long-term contracts as follows

The solution is provided by § 29 (2) of the VAT Act. This provision provides for a compensation claim for the contracting parties to long-term contracts who are disadvantaged by a change in the value added tax.

Long-term contracts are considered those concluded more than four months before the change in law takes effect. The background to this regulation is that it was assumed previously that a change in the tax rate would be discussed at least four months before it came into force.

A situation such as the current Corona crisis was not conceivable when § 29 of the Value Added Tax Act was conceptualised. Here it could be argued certainly that the four-month period provided for must be shortened.

Compensation at an appropriate level

The prerequisite is therefore that the service is based on a contract concluded by the parties before 1 March 2020. With the argumentation described above, a shorter period could also apply.

Of course, the service must be carried out after 30 June 2020. In addition, the parties must not have already made a provision in the contract for the case that the VAT changes.

  • 29 (2) of the VAT Act then provides for appropriate compensation for the additional or reduced VAT burden.

Our assessment

Even in the case of long-term contracts in which the parties had agreed fixed gross prices and were now surprised by the very short-term reduction in VAT, the disadvantaged party to the contract is entitled to compensation.

Whether and to what extent this is, depends on § 29 of the VAT Act. In our view, the requirements of this law should be adapted and interpreted to the current situation.

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Rechtsanwalt in Düsseldorf and Krefeld, Marcus Büscher
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