Self-employment comes with new entrepreneurial duties – including dealing with business taxes. A very central point is the sales tax, which must be reported to the tax office and paid. This can be avoided with the so-called small business regulation because this relieves companies with low sales of sales tax. We will explain to you where the sales limits are, whether anything will change for 2023, and what advantages and disadvantages it entails.
This Is How The Sales Tax Principle Works
To show you what the benefits of the small business limit are for you, you need to understand at least the basics of how sales tax works. This is a tax that is levied at a flat rate on the sale of a good or service. The person who takes them must pay them to the tax office. As a rule, it is 19 percent; a reduced tax rate of 7 percent only applies to selected product groups. Alternatively, you may also come across the terms “ VAT ” (colloquial) or “Vorsteuer” (sales tax that an entrepreneur pays for purchases and services used).
It is important to know that the sales tax on the invoices you issue does not count toward your sales. You take them, but you have to pay them back to the tax office in full and you get absolutely nothing from the fact that you took them. However, your customers still have to pay you the full price including sales tax. This can be an additional burden for them. The system is structured in such a way that the private end customer is always the one who bears the tax burden. Companies that have to pay input tax can offset this against the sales tax to be paid.
Definition: What Is The Small Business Scheme?
As a small business owner, you step out of this cycle to a certain extent because: You are allowed to create invoices without sales tax. This means you can simply estimate your net proceeds as the invoice amount. On the other hand, this also means that you are not allowed to reclaim any input tax from the tax office. I encourage you to read more about this blog here: Franchise: Success With A System Successfully
Accordingly, you become the “end customer” when you buy goods and services for your company. You are not allowed to repeat the tax, but you still have to pay it in full. This means that sales tax is no longer a passing item for you, but is fully part of your operating expenses and thus affects the small business limit.
Prerequisites For The Small Business Regulation
To be able to use the small business regulation, the following criteria must be met since 2023:
- In the case of the small business regulation, sales in the previous year must not have exceeded the 22,000 euro limit and
- The turnover in the current year must not exceed 50,000 euros.
- In addition, you must not waive or have already waived the application of the small business regulation in the questionnaire that the tax office sends you to set up a business.
If you would like to take advantage of this small business regulation directly in the year of foundation, the sales limit of 22,000 euros for the year 2023 applies to you. If your turnover is lower, you can use the regulation. If it is higher, you must automatically identify your invoices with the corresponding sales tax, create advance sales tax returns and pay the calculated amounts to the tax office. This is the small business limit.
Attention: If you start your business in the middle of the year, your turnover will be extrapolated for the assessment of the year. For example, if you start your company in November and plan to make a total turnover of 5,000 euros in the first two months, an annual turnover of 30,000 euros is assumed. This eliminates the application of the small business regulation or the small business limit for you.
Things get a little more complicated if you are already in an ongoing business and have opted out of the small business regulation. With this decision, you are initially bound for five years and can only then change your mind again. The limits mentioned apply to this: With the small business regulation since 2022, you may not have made a turnover of more than 22,000 euros in the 5th year and for the new 6th financial year you may not generate a turnover of more than 50,000 euros.
What Happens If I Generate Too Much Revenue?
Of course, you can only take estimates into account when determining sales. However, since estimates do not always reflect reality, you may exceed the intended turnover limits. This would make the small business regulation obsolete and you would have to pay sales tax on all your sales.
It depends on whether your guess was understandable and logical. As soon as it can be assumed that you intentionally misestimated your sales to gain an advantage, you have a problem. Then all your sales are taxable retrospectively and you have to pay sales tax on them. To avoid this, you must be able to credibly argue to the tax office that you could not have planned the higher sales at all. Examples of this could look like this:
1. EXAMPLE: LARGER PROJECTS THAN EXPECTED AT THE SMALL BUSINESS FRONTIER
At the beginning of your business, you started with relatively small projects that only generate a small turnover. Suddenly, in the course of your business, the opportunity arises to carry out a major project for a client. They will then pay you, for example, 2,000 euros per month for project support. At the same time, your other projects were essentially one-off, smaller stories that paid you $300-$800 per client. In that case, you’ve won a client you just couldn’t plan with so early in your business.
2ND EXAMPLE: REGULAR CUSTOMERS PAY MORE
The same applies if, over time, you win a customer who pays you an hourly rate well above average for your work. For example, if you work regularly for an hourly rate of 30 euros, but suddenly have a customer who uses you frequently and pays you 80 euros per hour for a comparable job, your sales will go up.
3RD EXAMPLE: YOUR QUALITY INCREASES
Also, you may suddenly find yourself doing a higher-value business for a client than you originally intended for your company. If you have a mobile office service that takes over document and administrative work for companies as required, you will earn less than if you were suddenly asked to do controlling analyzes and liquidity planning for one of your customers. You can’t plan that either, as long as you don’t consciously plan for it in your entrepreneurial activity.
It is important that you can explain why you chose your estimated value and why you could not expect to exceed it in this way.
Attention: Even if you do not get the small business regulation revoked for the past financial year if the sales are too high, you still have to automatically issue all invoices for the current year – including retrospectively – with sales tax or accept that your previous net sales are now recognized by the tax office as Gross sales are classified.
The Benefits Of The Small Business Scheme
Small business regulation brings with it many advantages and disadvantages, even as the limit increases. Because of this, you should consider to what extent this regulation is worthwhile for you. The advantages of the small business limit can be the following:
- Your customers are mostly private individuals.
- Your costs, which include VAT, are low.
- The administrative effort is reduced and the costs for the tax consultant are cheaper.
- You have a lower total price on sale.
- The advance sales tax returns do not apply to small business owners.
The Disadvantages Of The Small Business Scheme
Along with the advantages, small business regulation also comes with some disadvantages that you should be aware of before deciding whether or not to use it.
- Your customers are almost exclusively or exclusively commercially active.
- You often do commercial shopping abroad or use services abroad.
- As a small business owner, you shop expensively because you have to pay the sales tax for the small business owner yourself.
For Whom Is The Small Business Regulation Worthwhile?
Whether it makes sense to use the small business regulation for oneself essentially depends on the following questions and criteria:
- What is the input tax that you pay monthly on all purchases of goods, purchases of equipment, and all services used? The higher the value, the more it is worthwhile for you to get it back from the tax office through the small business limit.
- Which customer groups do you mainly address? Ordinary business customers, freelancers, and small business owners or private customers? The more “real” business customers you have, the more irrelevant it becomes whether you calculate your sales with or without sales tax. Finally, business customers can also claim the sales tax paid to them as input tax from the tax office. However, if you have many private customers or business customers without a VAT return, then the VAT you charge is an additional cost for your customers. This effectively makes your offer more expensive without making a bigger profit. You miss being able to offer a better price for the same turnover through the small business regulation or to generate more turnover at a normal price.
From this you can derive the following rule of thumb for you: The higher your monthly costs are, the more sensible it is for you to waive the small business regulation in 2022; the higher your sales with private customers, the more painful it is for your customers to pay sales tax. A clear answer as to which decision is the right one cannot be given in general. This can only be weighed up based on individual circumstances and the company structure. It is important that you know and understand the mechanisms behind it so that you can assess for yourself whether the small business regulation will help or harm you in your case.
How Do I Apply For The Small Business Scheme?
If you found your company, you will receive a questionnaire from the tax office. There you have to provide some information about your company, including what sales you expect in the current financial year. If you enter a value there that exceeds 22,000 euros extrapolated for the year, the small business regulation per se does not apply. If you are below this, you can tick the box that you do not want to be classified as a small business owner. If you don’t do this, you become a small business owner and the small business limit is an option for you.
What Else Do I Have To Consider And What Mistakes Should I Avoid?
When it comes to small business regulation, there are some mistakes you’d better avoid. Here are a few tips on how to use small business regulation most effectively.
1. ISSUE YOUR INVOICES WITHOUT SALES TAX AND WITH A REFERENCE TO THE SMALL BUSINESS COMMUNITY
When it comes to billing, you can make two serious mistakes. If you are a small business owner but still issue your invoices with sales tax, you will not have any additional profit as a result. Anyone reporting sales tax must also pay it to the tax office. While this can be corrected, it requires that you notify your customer, correct the invoice, and determine whether your customer claimed input tax from your invoice. If he doesn’t, the correction is comparatively easy. If he has already done this, he must transfer the input tax back to the tax office before the tax office pays it back to you. You probably want to avoid this paperwork.
You must also refer to your small business on the invoices you issue. A passage on the invoice such as:
“Due to small businesses (§19 UStG), no identification of the sales tax is possible.”
This way your invoice is clear, and understandable for everyone and you will not have any problems with the correct invoicing.
2ND PAY ATTENTION TO HOW LONG YOU CAN USE THE SMALL BUSINESS REGULATION
If you exceeded the turnover of 22,000 euros in the previous year or are likely to exceed the mark of 50,000 euros in the current year, you can no longer claim the small business regulation. However, you have to pay attention to that yourself. You don’t get a letter saying that from now on you can only issue invoices with sales tax. If you don’t pay attention to this and miss this point in time, you will also have to pay sales tax on all your sales – even if you still felt like a small business owner.
3RD THE SMALL BUSINESS RULE APPLIES PER PERSON, NOT PER COMPANY
Have you started several small businesses and possibly had the idea of just staying under $22,000 in sales with each business? You are welcome to do so, but not every company is rated individually. Small business ownership is tied to you as a person, not to the businesses you run. If you and all your companies together exceed the turnover of 22,000 euros in the year of foundation or 50,000 euros in the following year, then you are not a small business owner but are fully subject to VAT for all your companies. Here, too, you may have to pay a lot of sales tax if you don’t keep an eye on your sales.
Frequently Asked Questions (FAQ) About The Small Business Regulation
What Is The Small Business Scheme?
As a small business owner who uses the small business regulation for himself, you are exempt from sales tax and do not have to list it on an invoice. This applies up to an exemption limit of 22,000 euros.
What Criteria Must Be Met In Order To Benefit From The Small Business Regulation?
The following criteria must be met:
1. Sales in the previous year must not have exceeded the EUR 22,000 limit for the small business regulation.
2. The turnover in the current year must not exceed 50,000 euros.
3. You must not waive the application of the small business regulation in the questionnaire that the tax office sends you to set up a business. (Status: 2023)
What Are The Benefits Of The Small Business Scheme?
- Your customers are mostly private individuals
- Your costs, which include the statutory VAT, are low
- The administrative effort is reduced and the costs for the tax consultant are cheaper
- You have a lower total price in the sale
- Sales tax advance returns are dropped away
What Are The Disadvantages Of Small Business Regulation?
1. Your customers are almost exclusively or exclusively commercially active
2. You often do commercial deliveries abroad or use services abroad
3. As a small business owner, you buy expensively because you have to pay the sales tax yourself.
The small business regulation is intended to support companies financially and relieve them of bureaucracy, especially in the start-up period. However, this does not mean that an application is always useful just because you are allowed to use it. That depends on how much input tax you pay as an entrepreneur and whether your customer base can claim input tax from the tax office themselves or is additionally burdened by the sales tax to be paid. That should be the main criteria for you to weigh up whether the small business regulation makes sense for you or not.
If you use it, you are also responsible for keeping an eye on your sales at all times. The small business regulation is, also due to the increased turnover limit in 2022, really only a permanent solution for permanent small companies. On the other hand, if you have a growing company, you are responsible for noticing when you can no longer use the regulation for yourself. Otherwise, you face an enormous bureaucratic effort in combination with regular sales tax back payments. If you have this in mind, you should use the regulation if it gives you a financial and/or market advantage.
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