For a large number of smaller businesses, the administrative burden associated with VAT and the required advance returns represents an enormous strain.
Under certain conditions it is therefore possible to make use of the so-called small business exemption (Kleinunternehmerregelung) under Section 19 of the VAT Act (Umsatzsteuergesetz), with the result that the business owner's turnover is not subject to VAT.
The condition for this is that total turnover in the preceding calendar year did not exceed 17,500.00 euros and that it is not expected to exceed 50,000.00 euros in the current calendar year.
Total turnover based on receipts collected is calculated as follows:
Sum of taxable supplies carried out pursuant to Section 1(1) No. 1 UStG
less tax-exempt supplies under Section 4 Nos. 8(i), 9(b) and 11 to 28 UStG (e.g. income from medical treatment by doctors, rental income)
less tax-exempt ancillary supplies under Section 4 Nos. 8(a)-(h), 9(a), 10 UStG (e.g. granting of loans, supplies subject to real estate transfer tax)
= Total turnover
If a business owner commences business during the current year, total turnover must be calculated on a pro-rata basis. (Example: a business owner opens their business in October of a year. Total turnover may then be at most 17,500.00 euros x 3/12 months = 4,375.00 euros.)
However, if a business owner makes use of the small business exemption, this also means that the following provisions of the VAT Act do not apply:
- Intra-Community supplies pursuant to Section 4 No. 1b UStG, Section 6 UStG
- Waiver of tax exemption under Section 9 UStG
- Separate statement of VAT under Section 14(4) UStG
- Inclusion of the VAT identification number under Section 14(1), (3), (7) UStG
- Input VAT deduction under Section 15 UStG
The business owner may declare to the tax office that they wish to opt out of the small business exemption; this decision is binding on the business owner for 5 years.
Applying the small business exemption is particularly advantageous when the majority of customers are private individuals, as they cannot reclaim the VAT shown on invoices in any case.
The small business exemption should be waived if the majority of customers are business customers, as they can deduct the separately stated VAT as input tax. In addition, the business owner then also has the option to recover input VAT, which can be advantageous - especially at the start of the business, when significant investment expenditure arises.
Change of taxation method
Supplies that the business owner made prior to switching to the standard taxation method also fall under the small business exemption if the consideration is received after that point in time.