Small businesses have an obligation to create invoices for the goods or services that they sell. However, as small businesses benefit from the value-added tax (VAT) exemption, several special rules apply. This article explains how this exemption works and how you – as a small business – can create error-free invoices, as well as other factors you must consider.

What's in this article?

• What is the exemption for small businesses and how does it work?
  
• Benefits and drawbacks of the exemption for small businesses
  
• How to write an invoice as a small business
  
• What to do if value-added tax is showing in error
  
• What happens if your small-business invoice isn't paid?
  

What is the exemption for small businesses and how does it work?

The exemption for small businesses, as per Section 19 of the German VAT Act ("Umsatzsteuergesetz" or "UStG"), is intended to reduce the amount of paperwork and tax burden on businesses with a low annual revenue. Self-employed people and freelancers are allowed to use the exemption and avoid any liability related to value-added tax. As a result, there is no need for any preliminary VAT returns or to show VAT on invoices.

A business can apply for the small-business exemption in the tax registration questionnaire when it is founded. Alternatively, it can approach the relevant tax office at a later date. The exemption remains valid provided that the business's revenue is below €20,000 in the year it was founded or in the previous year, and it is unlikely to exceed a limit of €50,000 in the current calendar year.

A business has the option not to take advantage of the exemption, even if it remains below the revenue limit. However, please note that this decision will remain legally valid for five years, so you will not be able to switch back to the exemption for small businesses within this period.

Benefits and drawbacks of the exemption for small businesses

By releasing people from any value-added tax liability, the exemption for small businesses is suitable for newly established entities and people whose activity is more of a sideline. With less bookkeeping required, this frees up time that would otherwise be spent on tasks such as preliminary VAT returns. Because small businesses do not show VAT when quoting prices, they can offer their goods and services more cheaply, which puts them at a competitive advantage.

The exemption for small businesses might prove less advantageous in the case of larger investments in items such as technical equipment and vehicles. Unless there is an entitlement to deduction of input VAT, the tax office will not reimburse any value-added tax for business purchases.

How to write an invoice as a small business

Once a commercial service or delivery has been provided in full, you are obligated to issue an invoice. Section 14, paragraph 2 of the UStG states that you must issue an invoice for your service within six months. If this deadline is missed, fines might be imposed in a worst-case scenario.

Many free invoice templates are available online and they can be used with any word-processing programme. Make sure that there is no mention of value-added tax or other tax on the template because small businesses are not allowed to quote these.

You can also use an invoicing programme to create invoices. These programmes are not usually free, but they can automate many aspects of the invoice creation process.

Mandatory information on a small-business invoice

The following mandatory information to include on an invoice is set out in Section 14, paragraph 4 of the UStG:

• Full name and address of the business providing the service
  If you are not running your business as a legal entity, i.e. an Aktiengesellschaft (AG), Gesellschaft mit beschränkter Haftung (GmbH) or Unternehmergesellschaft (UG) in Germany, state your own name and your business address.

• Full name and address of the recipient of the service
  Tip: this information is not strictly necessary for a small invoice under €250.

• Tax number or VAT ID number of the business providing the service
  If you are trading as a natural person, state your personal tax number.

• Invoice issue date
  The date you are issuing the invoice to your customer.

• Invoice number
  The invoice number provides a way to identify any given invoice (each has a unique number). The number must only be used once and must be part of an ongoing series of numbers. This means that if your first invoice shows the invoice number "10000", your next invoice must be numbered "10001".
  Tip: based on this model, you can also use several series of numbers. This would allow you to number your invoices under different years – for example, "2023-10000".

• Volume or scope and type of goods or services provided
  Under the invoice items, you will list the volume, unit, name, and the individual and total price of the goods or service sold for each item number in the ongoing series.
  Note: be precise when naming the goods or service to avoid misunderstandings or potential questions. Do not combine wide-ranging services under a single item. For transparency purposes, break these down into all the various service components performed.

• Date of delivery or service
  If your service or delivery has taken several days, you must state the full duration.
  Note: if the date of the service and the invoice date are the same, you may also add a note indicating, "The date of the service is the same as the invoice date" next to the date stated.

• Invoice amount (including any bonuses or discounts agreed to in advance)
  When calculating the final amount payable by your customer, make sure that you do not show any value-added tax, as per the exemption for small businesses. The final amount will equal the total for the individual items.

• Reference the value-added tax exemption as per Section 19 of the UStG
  Because you, as a small business, do not show any value-added tax, you must point this out in writing on your invoice. A few words under the items listed will be sufficient, provided that you reference Section 19 of the UStG.
  An example of this would be, "Invoices do not show value-added tax as per Section 19 of the UStG".

Further voluntary information

Once all the mandatory information has been listed on your invoice, you can also add voluntary information. One important aspect is information about the payment deadline. This provides clarity for your customers and allows you to better manage your cash flow. If your invoice does not specify a payment deadline, the German Civil Code ("Bürgerliches Gesetzbuch" or "BGB") will apply, based on the statutory payment term of 30 days.

Common ways of expressing the payment deadline include "Payable within 14 days" or "Please pay this invoice by (date)".

Other useful information includes contact details, such as a telephone number and email address that your customers can use to get in touch with any questions. If you want to receive the invoice amount via a bank credit transfer, you should provide your bank information, too.

Sending the invoice

Once your invoice is complete, there are still a few points to consider before sending it. Section 14, paragraph 1 of the UStG states that the invoice document must be authentic, in satisfactory condition and legible. Authenticity is assured if the invoice can be clearly identified as one of yours. If the statutory mandatory information is intact, this means that the document is in satisfactory condition.

If your invoice satisfies these criteria, you may send it to your customer in paper form or electronically, including by email, if your customer agrees to this (even if they have done so informally). If you are a tax adviser or legal professional, your invoice must also include your signature.

Retention obligation

You are obliged to retain the original copies of your invoice documents for ten years, as per Section 14b of the UStG. This applies to invoices that you have issued (outgoing) and invoices that you have received for any goods and services purchased (incoming). This period starts from the end of the calendar year in which the invoice was issued, as opposed to the invoice date.

Tip: don't just save your invoices on your computer. If your documents are lost (e.g. following damage to a hard drive), this might result in criminal penalties in the event of an audit by your tax office. Ideally, you should arrange some form of backup, for example, by printing your invoices and filing them in folders, backing them up digitally in a personal cloud storage space or by uploading them to an online invoicing programme.

What to do if value-added tax is showing in error

Invoices issued by small businesses often show value-added tax in error, but there can be negative consequences. This kind of error is due to a lack of familiarity with the exemption for small businesses and using the wrong invoice templates.

If you notice any such error before the invoice is recorded in the accounting system, you may provide a corrected invoice. To do this, send your customer a corrected copy with the same invoice number. They will need to retain both copies of the invoice. This procedure applies to all corrections for invoices with incorrect or missing mandatory information that must still be recorded in the accounting system.

If the error is only noticed after the invoice has been recorded, you will, in theory, owe your tax office the value-added tax shown. You can avoid the costs and the potential criminal penalties for non-payment by issuing a reverse invoice. A reverse invoice must be clearly marked as such and must be given its own invoice number. By referring, in writing, to the original invoice and the corresponding negative amount, you render the incorrect invoice null and void.

What happens if your small-business invoice isn't paid?

If your customer does not meet the payment deadline that you have set, there may be various reasons for this. You may want to contact them and ask whether your small-business invoice did indeed arrive (i.e. check that it did not get lost or go into a spam folder). Check as well whether all the relevant information on your small-business invoice is correct – in other words, the payment deadline and bank account details.

Alternatively, you may choose to issue a written payment reminder with a new payment deadline. Make sure that you refer to the invoice number concerned to avoid misunderstandings.

If the invoice remains unpaid following the payment reminder, you are entitled to issue a dunning letter. You may issue up to three dunning letters, with increasing levels of urgency, reminding your customer to pay the invoice and referring to any interest resulting from a late payment.

If your customer becomes delinquent as per Section 286 BGB, you may initiate statutory dunning proceedings instead.