Preliminary value-added tax (VAT) returns oblige companies and self-employed traders to report and pay the VAT collected from their customers to the tax office on a quarterly or monthly basis. This article explains the process for preliminary VAT returns in Germany, and it answers some important questions about the legal regulations.

What’s in this article?

• What is a preliminary VAT return?
  
• Who is required to submit a preliminary VAT return?
  
• How often are businesses required to pay VAT to the tax office?
  
• What happens if the deadlines are missed for preliminary VAT returns?
  
• How can businesses extend the deadline for a preliminary VAT return?
  
• How can businesses register their preliminary VAT return in Germany?
  
• What are the special regulations that apply to photovoltaic systems (PV systems)?
  

What is a preliminary VAT return?

A preliminary value-added tax (VAT) return is a form that must be submitted to the competent tax office at regular intervals. This is the form used by self-employed traders, entrepreneurs, and small business owners to report how much VAT they have collected from their customers. VAT is generally charged on products and services and must be paid to the tax office. This VAT return is a provisional one, as a final tax return is submitted at the end of the financial year and includes a calculation of the actual VAT amount owed by the company. The two different methods used for calculating VAT in the preliminary VAT return are accrual-based and cash-based taxation.

What are accrual-based and cash-based taxation?

There are two methods in Germany for making preliminary VAT returns and paying VAT to the tax office: accrual-based and cash-based taxation. The methods differ in the ways that calculated and collected VAT are handled:

Accrual-based taxation

The VAT is due in the period in which the invoice is issued to customers. This means that the VAT is payable as soon as the service has been provided, regardless of whether the payment has already been received. Businesses must report the VAT and pay this to the tax office for the period in which the invoice was issued.

Cash-based taxation

The VAT is only due once the customer’s payment has actually been received in the company’s account. This means that the VAT is only charged on revenue that is actually and physically booked in the form of payments. Businesses are only required to report and pay the VAT to the tax office in the period in which they have actually received the respective payment from their customers.
The choice between accrual-based and cash-based taxation is usually made at the start of the year and then applies for the whole year. It depends on the size of the business and the type of services provided.

Who is required to submit a preliminary VAT return?

As a general rule, businesses that are subject to VAT must complete a form on the amounts of VAT collected and submit this return. This generally applies to businesses that sell goods or services in Germany and that have a turnover exceeding a particular threshold. Small business owners with a turnover below this threshold may be exempt from this obligation.

The duty to report the VAT generally applies to:

• Entrepreneurs/business owners: This includes individuals or businesses that carry out commercial or freelance activities and charge VAT on their goods or services.
  
• Self-employed traders: This includes individuals who are self-employed and charge VAT on their income, such as freelancers.
  

When are small business owners exempt from the duty to charge VAT?

The preliminary VAT return for small business owners is subject to special regulations. Under Section 19 of the German VAT Act (UStG), businesses are categorized as small businesses if their projected annual turnover in the previous calendar year did not exceed 22,000 euros and does not exceed 50,000 euros in the current calendar year.

Exempting small businesses from the duty to charge VAT provides them with the benefit of not being allowed to charge VAT on their outgoing invoices, and accordingly, they are not required to reclaim any input tax. In order for this to happen, they must make reference to the application of the small scale entrepreneur rule and add the following notice to the invoice: “Kein Ausweis von Umsatzsteuer, da Kleinunternehmer gemäß § 19 UStG” (“No VAT stated as small business in accordance with Section 19 of the German VAT Act (UStG)”). Small business owners must still submit an annual VAT return despite the exemption from VAT.

Who may be exempt from the VAT liability?

Founders and small business owners may opt for the small scale entrepreneur rule in the tax registration form. The turnover criteria that apply here are clear:

• Turnover must not exceed 22,000 euros in the year that the business was founded, while the upper threshold in the second year is 50,000 euros.
  
• The turnover is calculated on a pro rata basis if the company was founded in the middle of the year (e.g., a business founder who launches their business at the beginning of July may generate turnover of 11,000 euros by the end of the year).
  
• The small scale entrepreneur rule option ceases to apply if business founders expect to exceed the specified turnover thresholds.
  

Any voluntary waiver of the small scale entrepreneur rule in cases where the turnover is expected to be low can only be reversed after five years. Any sound decision on whether to apply the small scale entrepreneur rule therefore requires precise consideration of sales forecasts and long-term planning.

Selecting the right tax model depends on the individual business situation. The small scale entrepreneur rule may be of benefit to some companies—particularly those that primarily do business with private customers—as they can then offer lower prices to these customers since there is no VAT applicable.

Example case study on preliminary VAT returns for small business owners

What happens if small business owners or founders of startups exceed the income threshold in the current financial year?

Small business owners cannot claim the exemption from VAT liability in this case as the turnover exceeds the small business threshold. Small businesses must submit the preliminary VAT return retrospectively for the current year, subsequently offset the VAT against the prices and the turnover generated with these, and remit the tax to the tax office. The income above the threshold is declared and taxed in the business’s individual income tax return.

Exceeding the income threshold is an indication of a growing business, which is generally a positive factor. Tools for finance and turnover automation can assist here.

How often are businesses required to pay VAT to the tax office?

The frequency for submitting preliminary VAT returns depends on the amount of VAT that was paid in the previous calendar year. The following regulation applies:

• Monthly mandatory submissions: You are required to submit the preliminary VAT return on a monthly basis if the VAT paid in the previous year amounted to more than 7,500 euros.
  
• Quarterly mandatory submissions: You must submit the VAT return on a quarterly basis if the VAT paid in the previous year was between 1,000 euros and 7,500 euros.
  
• Exemption option: You have the option of obtaining an exemption from the preliminary return if the VAT paid in the previous year was below 1,000 euros.
  
• Special regulation for founders of new businesses: Anyone founding a new business must submit the preliminary VAT return monthly in the first year that the business was founded and in the following year, regardless of the tax payable.
  

The general rule is that the tax office determines the frequency with which preliminary VAT returns must be submitted.

What are the deadlines for submitting preliminary VAT returns in 2023 and 2024?

Monthly returns must currently be submitted by the 10th day of the following month. Quarterly VAT returns are due by the 10th day of the month following the end of the quarter. If the 10th day is on a weekend or a public holiday, the deadline is the next working day. Here are the deadlines for the following frequencies of preliminary VAT returns:

• Monthly preliminary VAT returns in 2023: Jan. 10, Feb. 10, Mar. 10, Apr. 11, May 10, June 12, July 10, Aug. 10, Sept. 11, Oct. 10, Nov. 10, and Dec. 11.
  
• Quarterly preliminary VAT returns in 2023: Jan. 10, Apr. 11, July 10, and Oct. 10.
  
• Monthly preliminary VAT returns in 2024: Jan. 10, Feb. 12, Mar. 11, Apr. 10, May 10, June 10, July 10, Aug. 12, Sept. 10, Oct. 10, Nov. 11, and Dec. 10.
  
• Quarterly preliminary VAT returns in 2024: Jan. 10, Apr. 10, July 10, and Oct. 10.
  

What happens if the deadlines are missed for preliminary VAT returns?

Late submission of the preliminary tax return or late payment of any VAT due may result in late payment interest and late payment penalties, the exact amount of which depends on the nature and duration of the delay. Late payment interest means additional costs charged for each tax form that is submitted late or for each late payment.

In addition to the late payment interest, late payment penalties may be also due, particularly in the event of repeated defaults or significant delays. The tax office may take further steps in the event of a persistent failure to comply, including implementing enforcement proceedings to collect any taxes outstanding, which may include seizure of the business’s assets or bank accounts.

Serious cases such as deliberate tax evasion may even have criminal consequences, including fines and even prison sentences in extreme cases. Any businesses experiencing difficulties or unforeseen circumstances should contact the tax authorities at an early stage and apply for an extension to the deadline for their preliminary VAT return.

How can businesses extend the deadline for a preliminary VAT return?

Businesses in Germany can extend the deadline for their preliminary VAT return if they have compelling reasons that make it difficult for them to submit their return on time. They should contact the tax office in good time before the original deadline expires, ideally in writing, by telephone, or in person. The reason for the extension must be clear and comprehensible (e.g., as a result of technical problems or unforeseen circumstances). The extension may be granted as appropriate once it has been reviewed by the tax office. Once the request has been approved, businesses must ensure that they submit the preliminary VAT return within the new deadline and pay the amounts owed on time.

If business owners are required to submit monthly returns, they can use a permanent deadline extension so that they only need to submit their preliminary VAT return for January by the end of March 10. The request and a special advance payment must be submitted by February 10 in this case. The advance payment is deducted from the VAT previously owed.

How can businesses register their preliminary VAT return in Germany?

The form for preliminary VAT returns in Germany can be recorded and submitted via the “ELSTER” electronic tax return portal. ELSTER is the German tax authority’s electronic portal that enables users to submit their tax returns electronically. It provides an efficient and secure method for this.

Alternatively, businesses can use special accounting software or enterprise resource planning (ERP) systems to generate their preliminary tax returns automatically and submit these electronically.

What are the special regulations that apply to photovoltaic systems (PV systems)?

Since January 1, 2023 some changes to VAT have come into force that provide for a 0% VAT rate for the sale of systems of up to 30 kWp along with their associated products and services, as well as some further systems and exceptions. The operators of PV systems are considered to be business owners for tax purposes, as they supply electricity that they generate to the grid and receive compensation for the power that they supply. They are required to submit a preliminary VAT return as a result.

The new 0% rule also means that income tax is no longer due on the proceeds of selling electricity and on consumption of their own power generated in-house. This means that as small business owners, the overwhelming majority of private operators of PV systems can use these systems exempt from VAT. The amount of tax payable is lowest with the small scale entrepreneur rule. The general turnover thresholds apply of 22,000 euros in the year that the company was founded and 50,000 euros in the second year.

However, retroactive tax exemption for legacy systems installed before 2023 is not possible. A preliminary VAT return must still be submitted in this case.

Note: If the operators have already registered a business for other reasons or are working on a freelance or self-employed basis, they are not required to—and indeed cannot—also register as a small business owner, as the tax office assumes that there is one taxable entity and combines all turnover from self-employment, pensions, and other income with the turnover from selling electricity.

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