Every business subject to Mehrwertsteuer or Umsatzsteuer (VAT) can deduct Vorsteuer (input tax) to reduce its VAT liability. This involves offsetting the input tax a business pays against the VAT that it charges its customer. This makes the Vorsteuerabzug (input tax deduction) a crucial item for the Umsatzsteuervoranmeldung (advance VAT return).
- What is the Vorsteuerabzug (input tax deduction)?
- Can all businesses make input tax deductions?
- Which invoices are suitable?
- When can I make input tax deductions?
- Which invoices can I not deduct input tax from?
- What are the common pitfalls?
- Would you like to know more?
When you buy goods or services for your company from other businesses, you pay VAT on them. These tax payments are called Vorsteuer (input tax). At the same time, your company also receives VAT revenue when customers pay invoices issued by you. But, before you pay the taxman the VAT, you can offset it against your VAT liability.
The balancing and offsetting of Vorsteuer (input tax) and Umsatzsteuer (VAT) are what the Vorsteuerabzug (input tax deduction) is all about.
The deduction of input tax from the VAT liability enables companies to purchase goods free of VAT. However, this relief only applies to business activity expenses. Private purchases are generally not tax-deductible.
How to calculate the input tax deduction
The sum of VAT receipts from invoices received
– Total input tax payments your company has paid
= Remaining VAT liability after input tax deduction
or surplus of input tax paid
The result is either negative or positive.
A positive result represents the remaining VAT liability that you have to pay to the tax office.
A negative result means there is a surplus of input tax payments or VAT credit. For this sum, you receive a refund from the tax authority.
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The Vorsteuerabzug (input tax deduction) is regulated by the VAT Act (§15 UStG). It sets out certain conditions for the tax office to accept your deductions:
- You don’t use the Kleinunternehmerregelung (small business regulation) and therefore charge VAT.
- The input tax deducted results from incoming invoices and/or credit notes issued.
- The invoices in question meet the minimum legal requirements:
- Mandatory details of an invoice for an amount of €250.01 or more following §14 USt
- Mandatory details of a small-value invoice up to an amount of €250 following §33 UStDV
- You properly store the original copies of the invoices, ready to give to the tax authorities if they ask you for them.
The VAT Act also regulates which types of invoices are eligible for the input tax deduction. As an example, imagine that you run a small shop for fresh fruit and vegetable goods.
- VAT (Umsatzsteuer)
- on supplies and other services (e.g. payment received for goods supplied to a restaurant in your neighbourhood)
- in the reverse charge procedure (eg, invoices for the rental of an air-conditioning system from another EU country in which the VAT is not indicated)
- when goods are removed from a VAT warehouse
- Import turnover tax (EUSt) on goods from non-EU or third countries (eg, outgoing payment for delivery of mangoes from South America)
- Tax on the Intra-Community acquisition of goods (eg, outgoing payment for delivery of apple juice to a Luxembourg supermarket)
NB: All invoices must contain the mandated basic information.
In principle, the deduction is claimed on the date of performance – the actual payment date doesn’t come into play. The only exception is for down payments or advance payments. These amounts only become eligible for the input tax deduction on the date of payment.
The date of input tax deduction doesn’t depend on whether your turnover is declared using the actual or debit taxation principle.
Input tax deductions in the advance Umsatzsteuer-Voranmeldung (VAT return)
If you make regular advance returns for VAT (monthly or quarterly), you must make the necessary entries for the input tax deduction. Lines 55 to 62 are relevant here, in which you must enter the following values:
- VAT payments received from other companies
- Input tax amounts from Intra-Community acquisitions (an Intra-Community acquisition is when goods are delivered from one EU country to another EU country.)
- Import VAT (Einfuhrumsatzsteuer)
- Input tax amounts from reverse-change transactions (service recipient must pay VAT)
- Input tax at average rates (agricultural and forestry businesses)
- Adjustments to the input tax deduction
- Input tax deduction for Intra-Community supplies of vehicles
Tip: While you have to declare your revenue as a net amount without VAT, the tax office only wants the sum of the tax amounts collected for the input tax amounts.
If you submit solely an annual VAT return (Umsatzsteuer-Jahreserklärung), you only make the input tax deduction in this return.
In principle, expenses that serve economic activity are input tax-deductible, but every rule has its exceptions. There are three main types of non-deductible business expenses that the Income Tax Act rules out:
- Benefits for persons who are not employed by the company
- Private perks for business owners
- Expenses related to improper or illegal behaviour
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Non-deductible business expenses
- Gifts with a total value of more than €35 per business year which are not intended for employees
- Business meals if they exceed 70% of the expense regarded as reasonable according to general business practice
- Expenses for hospitality venues (eg hotels, casinos, etc.) owned by the business and not intended for employees
- Expenses for hunting, fishing, sailing and motor yachts and related entertainment
- Additional expenses for meals that exceed the statutory flat rates
- Travel expenses between the place of business and home that exceed the statutory flat rates
- Home office expenses provided that the home office does not constitute the centre of professional activity
- Personal lifestyle type expenses (eg rental costs of the private flat, clothing, personal hygiene items, newspaper subscriptions, etc.)
- Compensation payments to external shareholders
- Regulatory fines or penalties
- Interest on tax evasion for unpaid taxes
- Surcharges for unrecorded business transactions (§ 162 paragraph 4 AO)
Every beginning is difficult, especially when it comes to tax and accounting. But, new entrepreneurs can avoid the input tax deduction pitfalls with the following advice.
Invoices that fail to meet the requirements
Many order confirmations, receipts or tickets that you receive as an entrepreneur don’t meet the legal requirements for an invoice. You’ll find orders from abroad, or for subscriptions quite often have insufficient information on them. However, with many companies, you can request a complete invoice retrospectively. Typical purchases for which a retrospective detailed invoice is additionally required are
- Airline tickets
- Delivery receipts
- Monthly licences for tools and software
Office rent is not deductible
The actual rental agreement is not an invoice, so shop or office rental expenses are not eligible for an input tax deduction. To change this, your landlord must issue a proper rental period invoice.
Incorrect invoice addressee
Many a founder forgets to rewrite contracts that he or she concluded in his or her name before the formation of the company. A classic example is the company’s mobile phone bill. These invoices are not deductible for input tax but are considered private expenses of the founder.
Luckily, the solution is a small bureaucratic effort: contracts must simply be rewritten using the company name. FYI – the registered postal address of the company can be used for entering into contracts.
Important: You may not change any contracts using the business as a contracting party that isn’t business related.
Invoices issued on thermal paper are often difficult or impossible to read. So, the additional action of scanning the invoice is necessary to make it acceptable for the Finanzamt (tax office).
Ambiguous description of services
Vague descriptions of services or items in invoices can lead to the tax authorities refusing the input tax deduction. Formulate the services you provide clearly and unambiguously to avoid this problem.
Missing tax number and VAT ID
Invoices over €250 must contain at least the Steuernummer (tax number), often even the Umsatzsteuer-ID (VAT ID) number of the issuer of the invoice. If the issuer of the invoice is a company based abroad, it is mandatory to include the VAT ID to qualify for the input tax deduction. Therefore, always check all invoices for completeness and request a corrected version if necessary.
Incorrectly posted input tax
Business transactions that have not been posted or have been posted incorrectly prevent your input tax deduction from working smoothly. Always use the input tax account (receivables account) for posting incoming invoices, but not the VAT account (payables account)!
Any good tax adviser can help you with all questions regarding the registration and deduction of input tax.
We have a Master List of all our articles about business financial administration in German here. In particular, you may find these articles useful:
- One-Stop-Shop (OSS)
- Profit distribution & taxation of a GmbH
- What employers need to know about the continued payment levies
- What entrepreneurs need to know about the VAT ID in Germany
- What you need to know about capital gains tax in Germany