Companies subject to value-added tax (VAT) must regularly calculate their VAT liability. In this article, we explain what VAT liability is, how the tax office calculates it, when it is due, and how to account for it.

What’s in this article?

• What is VAT liability?
  
• How does the German tax office calculate VAT liability?
  
• When is VAT due?
  
• How do businesses record VAT liability?
  

What is VAT liability?

According to the German VAT Act (UStG), VAT liability, also called “VAT burden” or “tax burden,” refers to the difference between the VAT companies levy on deliveries and services (Section 1, Paragraph 1, No. 1) and the input tax that companies pay when purchasing goods and services (Section 15). Businesses must calculate VAT liability regularly as part of their preliminary VAT returns and annual VAT returns to ensure that tax obligations are paid in full or that the tax office issues a refund, if necessary.

What is the difference between a positive and negative VAT liability?

A positive VAT liability occurs when collected VAT exceeds deductible input tax. In this case, the company must pay the difference to the tax office. A positive VAT burden can arise, for example, if companies generate high sales and have low expenses.

A negative VAT liability arises when paid input tax exceeds the VAT collected. In this case, sometimes known as “input tax surplus,” the company receives a refund of the difference from the tax office. A negative VAT liability can arise, for example, when entrepreneurs start new business operations or open new business areas. During these phases, they might have to make large investments, allowing them to claim corresponding input tax amounts. On the other hand, revenue might still be manageable and, therefore, their collected VAT could be low.

How does the German tax office calculate VAT liability?

You can calculate your projected VAT liability using the following formula:

VAT Liability = Collected VAT − Deductible Input Tax

It is important that you use the sum of all VAT amounts and the sum of all input tax amounts for the relevant period. In the process, the tax office calculates VAT liability on the basis of accrual or cash-based taxation (Sections 16 and 20 of the VAT Act).

With accrual taxation, the VAT collected is due directly at the time of invoicing. In this case, you can also directly claim input tax when you receive incoming invoices (e.g., from suppliers).

With cash-based taxation, the VAT collected is due the date the customer pays the company’s invoice. For example, to determine the payment obligation for the month of June, do not include the VAT if the customer did not pay until July. The same applies to input tax. Actual cash outflow is important, so businesses should apply the time of payment principle.

Example for calculating VAT liability

VAT Amount – Input Tax Amount = VAT Liability

€7,600 – €4,750 = €2,850

The VAT liability in this example is €2,850. You would have to pay this amount to the tax office. This is with the assumption that the purchases and sales made are subject to VAT at a rate of 19%.

Stripe Tax can help you with this: Tax automatically calculates the correct tax amount for all sales. Additionally, you can see at a glance which transactions have incurred VAT so that you can include them in your calculations. This allows you to quickly and easily obtain an overview of your payment obligations at any time.

When is VAT due?

VAT liability is due regularly, as you must pay it as part of your preliminary VAT returns and annual VAT returns.

Preliminary VAT returns

According to the VAT Act, you must submit preliminary VAT returns monthly or quarterly (Section 18, Paragraph 1). The cycle depends on the amount of VAT paid in the previous calendar year. The following provisions apply:

• Companies that have tax liability in the previous year more than €9,000 must submit their VAT return monthly. Their payments are due on the 10th day of the following month.
  
• If the tax liability in the previous year is between €2,000 and €9,000, companies must file quarterly preliminary returns. They must pay the tax within 10 days after the end of a quarter.
  
• Companies that have VAT liability in the previous year less than €2,000 can be exempt from the preliminary return.
  
• Company founders are subject to a special regulation: they must submit the preliminary VAT return, regardless of the payment liability, in the first year of the company’s founding and monthly in the following year.
  

In principle, all companies that must submit an advance VAT return have the option to apply for an extension (Section 18, Paragraph 6 of the VAT Act). This gives them an additional month to submit advance returns and pay VAT liability. However, the tax office might order a special advance payment in return.

Annual VAT returns

In addition to advance returns, every company subject to VAT must submit an annual VAT return at the end of the year that determines the final tax liability. Normally, businesses must submit this annual declaration—including the calculated tax liability—by July 31 of the following year. For example, annual VAT returns for 2024 are due by July 31, 2025.

If you retain a tax advisor to prepare your declaration, the deadline is February 28 of the year after next (Section 149 of the German Fiscal Code). Accordingly, the deadline for the 2024 annual VAT return is February 28, 2026.

How do businesses record VAT liability?

It is best for businesses to record VAT liability on an ongoing basis as part of their accounting system. Businesses can record VAT and input tax in different accounts to have an overview of the two items at all times. That way, they can quickly determine payment amounts.

Here are the key steps for recording VAT liability:

Record collected VAT

Every time a VAT-registered company provides a service or sells goods, it charges VAT on the sales price. Initially, businesses should record this in the VAT account.

For example, a product sold with a gross value of €9,520 and an assumed tax rate of 19% results in a net sales price of €8,000 and a VAT of €1,520.

Record paid input tax

When purchasing goods or services, the company can claim input tax and post this to the input tax account.

For example, a purchased product with a gross value of €2,380 and an assumed tax rate of 19% results in a net purchase price of €2,000 and input tax of €380.

Offset VAT and input tax

At the end of the advance tax return period, the two accounts—VAT and input tax—are offset to determine VAT liability. Businesses can transfer the balance to the VAT settlement account or a similar account.

Debit (VAT Collected) – Credit (Input Tax Paid) = VAT Liability

Pay VAT

Finally, the company transfers the resulting payment amount (i.e., the balance of the VAT settlement account) to the tax office. If the input tax is higher than the VAT and there is an input tax surplus, the business should record a claim to the tax office instead.