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VAT Reduction Extension – What Can Entrepreneurs Expect?

On June 3, 2020, the ruling coalition agreed on one of the most extensive aid packages, unprecedented in German history. This package became necessary due to the global corona pandemic and should not only stimulate the economy in Germany. The reason for the VAT cut was also that it was intended to save many companies from ruin. A VAT reduction was then decided for the period from July 1 to December 31, 2020. Now there are calls for a VAT cut extension demand. But is this realistic? What would the VAT extension bring you as an entrepreneur? What do you have to consider if the VAT is increased again?

Decision to reduce VAT from July 2020

In the so-called second Corona Tax Aid Act, a reduction in VAT was decided for July 1, 2020, to December 31, 2020. This decision to reduce VAT from 19 percent to 16 percent for the regular tax rate and from 7 percent to 5 percent for the reduced VAT rate surprised many.

It was envisaged that both private consumers and entrepreneurs should benefit from this VAT cut. The federal government hoped that the reduced value-added tax would be passed on to private consumers as a price reduction due to this reduction.

The desired effect of the VAT cut does not materialize

But did the VAT cut have the desired effect? According to Federal Finance Minister Olaf Scholz, reducing VAT costs the federal budget around 20 billion euros. After a slight recovery in the economy in the summer months, due to the many easing of the restrictions in the corona pandemic, things seemed to be looking up again. However, it was evident that the desired effect was not really felt .

The economy slowly recovered, but not all parts of the retail sector have benefited as desired. Private consumers have not increased their consumption as much as retailers had hoped. Especially in the area of ​​the many small businesses, the effect has fizzled out. The vast majority of these companies do not see any change. Perhaps you don’t see the VAT cut as the economic driver that was forecast.

Parts of the economy are calling for a VAT cut extension

The demands do not only come from Bavarian politics. Other parts of the economy are calling louder and louder that there should be a VAT extension. Scholz vehemently contradicts the economy after the sense of an extension and sees no reason to consider an extension of the VAT reduction. But from a business perspective, there are some good reasons in favor of the extension:

  • The threat of bankruptcy continues due to the expiry of state aid
  • The second corona wave leads to another lockdown light in Germany
  • After the presidential elections between Biden and Trump in the USA, there is a threat of great uncertainty about the further direction of trade policy and relations with the EU
  • The crisis could be better defused, especially in the catering sector

Above all, the strict measures due to the second corona wave could now lead to a rethink, and an extension of the VAT cut is being considered. Perhaps the extension will remain until Germany has been elected in 2021.

VAT reduction extension in Austria

In our neighboring country Austria, new measures were introduced not only in September 2020, which should lead to the containment of the coronavirus. Measures were also adopted to dampen the economic consequences. One of these measures is the extension of the VAT reduction for Austria for the year 2021. There the VAT reduction applies to the areas of gastronomy, culture, and tourism.

In Austria, too, the time-limited VAT reduction was originally only planned until December 31, 2020. But now Federal Chancellor Sebastian Kurz has announced that there will be an extension of the VAT cut valid for 2021. The reduced tax rate of five percent should bring the hoped-for help to the very badly hit gastronomy.

This rate applies in Austria to the distribution of beverages and food in restaurants and shops such as bakeries, butchers, and confectioners. There is also a reduction to five percent for overnight stays. This applies from the hotel to other accommodation providers to campsites. In the cultural sector, too, this tax rate applies above all to the import, delivery, and purchase of books, newspapers, and the like.

VAT increase in 2021 – you should pay attention to this

So that you are not as surprised as when you were with the VAT cut, you should start preparing for the 2021 VAT hike now. It’s not a VAT increase from 16 to 19 percent, but rather a return to the traditionally applicable rate. Regardless of the discussions about a further extension beyond the current date, it can’t hurt if you start the necessary planning now. To do this, the following steps must be carried out for you:

  • Think carefully about which systems in your accounting are affected by the VAT increase after Corona, if you can talk about it at all. This can be your electronic cash book, open cash register, or possibly some accounting software you use.
  • If a change has to be carried out and the respective manufacturer takes over this, you should make an appointment in advance. Remember that many others besides you need these measures.
  • Perhaps you already have orders that are not expected to be completed until 2021. It would help if you clarified here what the future invoice could or must look like. Just ask your tax advisor.
  • If you can, entrust one or two employees to take care of the change. This gives you enough time to take care of your essential entrepreneurial tasks.

Conclusion

Whether there will be an extension of the VAT reduction until December 31, 2020 cannot currently be answered with a clear yes or no. Most small business owners and the self-employed state that this has not had the desired effect on them. Federal Finance Minister Olaf Scholz and Federal Chancellor Angela Merkel are currently strictly against extending the VAT cut for 2021.

But it remains to be seen whether this rejection will remain or whether it will follow the neighboring country of Austria. The calls for an extension from business and the federal government are not only getting louder because of the second corona wave. But instead of waiting, you recommend using the preparations for a VAT hike in 2021. Please do not wait too long, and I am preparing for a possible change at the end of the year. Always keep an eye on the news and find out about the discussions of the CDU and SPD.

Also Read: How Scammers Catch Small & Medium Enterprises (SMEs)

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