Understanding VAT — Basics for the Self-Employed

How does VAT work?

Value-added tax (VAT), also known as sales tax, is a tax on sales and services. Businesses add it on top of the net price, and customers pay the gross amount including VAT. The collected tax is remitted to the tax office but can be reduced by input tax (VAT you paid on your own purchases). Ultimately, the end consumer bears the tax, not the business.

There are two tax rates:

• 19% (standard rate)
• 7% (reduced rate, e.g. for books, food, etc.)

→ The legal basis for VAT is the Value Added Tax Act (UStG).

The exception: Small Business Exemption (§19 UStG)

The small business exemption is a simplification for self-employed people with low revenues.

If your revenue in the previous year was below €25,001 and you don't expect more than €100,000 in revenue in the current year, you qualify as a small business under §19 UStG and the VAT obligation is waived. You then issue invoices without VAT, don't need to file monthly or quarterly advance VAT returns, and consequently don't need to file a VAT annual return either. Source

However, as a small business, you also cannot deduct input tax — meaning the VAT you pay on products and services you purchase is not deductible.

You can voluntarily waive the small business exemption and switch to standard taxation — but this decision is binding for 5 years.

Is it worth it?

Yes, it's worth it if:

• you plan few investments/purchases, since no input tax deduction is needed or possible
• your main customers are primarily private individuals who are not entitled to input tax deduction themselves
• you want to minimize bureaucratic effort

No, it's probably not worth it if:

• you have many business customers who want to deduct input tax — this is only possible if you show VAT on your invoices
• you plan high expenses including VAT → forgoing input tax deduction makes it more expensive

Standard Taxation & Input Tax Deduction

If you don't fall under the small business exemption (§19 UStG) or choose to waive it, standard taxation applies. This means:

• You charge VAT on your services → usually 19% and in some cases 7%.
• You can deduct input tax on your expenses — you subtract the VAT included in your incoming invoices from the tax you owe.

Advance VAT Return & Annual Declaration

If you are subject to VAT, you must regularly report to your tax office how much VAT you have collected and remit it.

→ Detailed information can be found in our guide Simpler Than It Sounds — Advance VAT Return

Advance VAT Return (UStVA)

Monthly or quarterly, you report the VAT to be remitted minus your input tax to the tax office. The deadline is the 10th day after the end of the reporting period.

Annual VAT Return

After the end of the calendar year, you file a final return that accounts for all advance returns.

Writing invoices correctly

Your invoice must contain certain mandatory information to be legally valid and to allow the recipient to deduct input tax if applicable.

What must be included?

• Full name (or company name) and address of the service provider (you) and your customer
• Your tax number or VAT identification number (VAT ID)
• The issue date of the invoice
• A sequential invoice number
• The quantity and type of service or delivery
• The net amount, the applicable VAT rate (e.g. 19% or 7%) and the VAT amount in euros
• The date of service, if it differs from the invoice date
• Note on tax exemption (if tax-exempt!)

💡 Our tip: Use a template with fixed mandatory fields (e.g. invoice number, tax rate, net/gross). This helps you avoid errors and stay legally compliant.

⚠️ What if you use the small business exemption?

You still need to issue an invoice, but without showing VAT. Instead, a reference to §19 UStG should be included.

Special case: International business

If you work internationally or with special types of services, additional VAT rules apply.

Deliveries abroad

• Exports of goods to non-EU countries are generally VAT-exempt in Germany.
• For services to businesses in other EU countries (B2B), no German VAT is shown, as the place of supply is in the recipient's country (reverse charge procedure).

- You write on the invoice, e.g.: "Reverse charge — VAT liability transfers to the recipient (§ 13b UStG)" - Important: - You need the VAT ID of your customer (and your own) - You must report the revenue in the EC Sales List to the tax office.

• For occasional and small services to private individuals abroad (B2C), the VAT obligation usually remains.

- Within the EU, from a revenue of €10,000/year, the OSS procedure applies and the tax must be remitted via the Federal Central Tax Office. - More information on the OSS procedure is available here: Federal Central Tax Office

Purchasing services from abroad

If you purchase services from EU or non-EU countries, the reverse charge procedure can also apply — this time in reverse: You become the "tax debtor".

You must calculate the German VAT on the foreign service and simultaneously deduct it as input tax (if you are entitled to input tax deduction).

→ No financial burden, but obligation to report in your advance VAT return!

• Example: You buy a Canva Pro subscription (based in Ireland). You calculate 19% VAT on the invoice yourself and report it in ELSTER. At the same time, you deduct it as input tax.

Common mistakes

1. Wrong tax rate

- 7% or 19% mixed up, e.g. with mixed services

1. VAT reported too late

- The advance VAT return must be filed by the 10th day of the following month. Late filing incurs surcharges

1. Permanent extension of deadline forgotten

- If you apply for it, you get one extra month — but it must be renewed every year

1. Input tax deducted twice

- This happens, e.g., when incoming invoices are booked twice or wrong receipts are used → always check invoice date and number

1. Missing note for special cases

- e.g. for reverse charge transactions