date | theme

08. June 2020 | Sales tax reduction: What consumers should know now (this post)

08. June 2020 | Change in the 2020 VAT rate: reduction from 19% to 16%

10. June 2020 | Corporate tax for partnerships as a new alternative

12. June 2020 | Loss carryover 2020: increase of the maximum amount to 5 million euros

Now the announced reduction of the sales tax has been decided by the federal government. In this way, the economy is to be supported to overcome the consequences of the corona pandemic. In particular, domestic demand is expected to increase. Thus, from 1 July 2020 until the end of the year, the sales tax will be reduced. The regular VAT rate is then 16% instead of 19%. The reduced rate of taxation on everyday necessities, especially foodstuffs, will also be reduced. It is then only 5% instead of the previous 7%. In addition, even catering services are also to be charged at the reduced VAT rate of 5 % during this period. Until now, this only applied to taking food away from home for consumption. However, the regular tax rate of 16% should apply to drinks.

Due to the impact that the COVID19 pandemic also has on the German economy, the German government introduced short-term countermeasures, such as COVInsAG to avoid insolvencies. The Federal Government has also recently launched a comprehensive economic recovery plan. One of these measures concerns the reduction of VAT. On this occasion, we will explain to you which positive changes consumers can now expect and how long they will apply.

But before we turn to the new rules on sales tax, a small introductory remark is allowed. Although we are aware that the majority of our readers can correctly legally assign the term VAT, due to the current demand for information on this, we are sure that readers who are more familiar with the term VAT will also be aware of our contribution. VAT is merely a colloquial variant of the legal term VAT. However, since we as a tax law firm want to impart professional competence at all levels, we briefly point this out in order to use the correct technical term sales tax in the further course of our article.

2. reduction of sales tax: the regular tax rate

Now that this has been clarified, we come to the details of the VAT reduction. The regular tax rate is reduced to 16%. Until now, there has been a tax rate of 19%. According to the Federal Government, consumers should be able to save 3% on the purchase of most items. This means that, for example, if you buy a car that used to cost EUR 47,600, with the price of EUR 7,600 in sales tax included, you now only cost EUR 46,400. So in this example you save EUR 1,200.

We have chosen the example of buying a car quite well at this point, because the car industry has assured that it will pass on the reduction in sales tax to its buyers in full.

Until now, the Federal Republic of Germany has imposed a reduced tax rate of 7% on the purchase of everyday goods. This was primarily about food, but also certain hygiene articles fall under this particularly low VAT rate. However, the reduced rate also includes goods such as books and flowers.

The new regulation now reduces the tax rate to 5% of the net value. Although this may hardly matter at first glance for a loaf of bread, for which the new regulation now pays EUR 4.41 instead of EUR 4.50. If you consider, however, that this example reflects only a fraction of the food consumed in the course of a six-month period alone, then you can see that there is also potential for savings for the consumer.

Special rules for gastronomy

Special regulations for the catering industry are provided for the reduction of sales tax. In this way, this industry, which is now facing major challenges as a result of the pandemic, should receive effective support.

So far, the catering was covered by the regular tax rate of 19%. Only taking food away from home for consumption benefited from the reduced tax rate. But now the local service should also benefit from the reduced tax rate of 5%. However, this applies exclusively to food, while drinks continue to be charged at the regular tax rate, which is therefore 16%.

5th duration of the new regulations

As gratifying as the reduction in sales tax may be, it is associated with the serious developments in the German economy due to the corona effects. It is therefore hardly surprising that the reduction in sales tax is of limited duration. It only applies from 1 July 2020 until 31 December 2020 and therefore expires again at the end of the year. For gastronomy, however, a duration from 01.07.2020 to 30.06.2021 applies. The Federal Government has stressed that an extension of the new rule beyond the turn of the year is excluded. So anyone who has planned larger purchases anyway in the near future can save money in the second half of the year by reducing sales tax.