Small businesses are obligated to create invoices for the goods or services they sell. With small businesses benefiting from the value-added tax (VAT) exemption, several special rules apply. This article explains how the exemption for small businesses takes effect, how you—as a small business—can create error-free invoices, and what you must think about in relation to this.
What’s in this article?
- What is the exemption for small businesses, and how does it take effect?
- 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 if your small-business invoice isn’t paid?
What is the exemption for small businesses, and how does it take effect?
The exemption for small businesses, as per Section 19 of the German VAT Act (Umsatzsteuergesetz, or UStG), is intended to reduce the paperwork and tax burden on businesses with low annual revenue. Self-employed people and freelancers are allowed to use the exemption and avoid any value-added tax liability. So 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 the business is founded, or it can approach the relevant tax office later. The exemption remains valid provided the business’s revenue is below €20,000 in the year it was founded or in the previous year and 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 the business remains below the revenue limit. Be aware 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 service or delivery has been provided in full commercially, you are obligated to issue an invoice. Section 14, paragraph 2 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 program. Make sure 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 program to create invoices. These programs are usually not free, but they can automate many aspects of the invoice creation process.
Mandatory information on a small-business invoice
The following mandatory information is set out in Section 14, paragraph 4 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 be used only once and be part of an ongoing series of numbers. So if your first invoice shows the invoice number “10000,” your next invoice must show the number “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 for each item number in the ongoing series the volume, unit, name, and the individual and total price of the goods or service sold.
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, 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 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 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 enough, provided you reference Section 19 UStG.
Example: “Invoices do not show value-added tax as per Section 19 UStG.”
Further voluntary information
Once your invoice contains all the mandatory information, you may add voluntary information. One important aspect is information about the payment deadline. This provides your customers with some clarity and allows you to better manage your cash flow. If your invoice does not contain any 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 the telephone number and email address so your customers can send you 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 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 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 informally). If you are a tax adviser or legal professional, your invoice also must contain your signature.
Retention obligation
You are obligated to retain the originals of your invoice documents as per Section 14b UStG for 10 years. This applies to invoices you have issued (outgoing) and invoices you receive for goods and services purchased (incoming). This period starts from the end of the calendar year in which the invoice was issued, as opposed to from the invoice date.
Tip: Don’t just save your invoices on your computer. If your documents are lost (e.g., after 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—by printing your invoices and filing them in folders or digitally in a personal cloud storage space or by uploading them to an online invoicing program.
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 noticed only 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 nonpayment by issuing a reverse invoice. A reverse invoice must be clearly marked as such and is 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 if your small-business invoice isn’t paid?
If your customer does not meet the payment deadline you set, there might be various reasons for this. You may want to contact them and ask whether your small-business invoice arrived (i.e., it did not get lost or go to spam). 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 you refer to the invoice number concerned to avoid misunderstandings.
If the invoice remains unpaid after 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 late-payment interest.
If your customer becomes delinquent as per Section 286 BGB, you may initiate statutory dunning proceedings instead.