As a self-employed freelancer, you usually have to deal with two types of tax, the income tax for private individuals and the value added tax (VAT) for businesses. In Germany, the standard VAT rate on sales (goods or services) is 19% and reduced 7% (please notice that in the period from July to December 2020 a reduced rate of 16% and 5% applies). However, some services of specific self-employed groups are always exempt from VAT.
VAT exemption helps to reduce the costs for essential services and makes the prices more affordable for private individuals who consume the services.
Who is VAT exempt?
The following professions are usually covered by the VAT exemption:
Self-employed teachers, if the service is offered for school or university education or professional training. Services which serve purely for leisure activities are not VAT exempt, e.g. dance classes given for a wedding couple.
Medical professions such as doctors, dentists, physiotherapists, alternative practitioners, midwives, or similar health care professions such as psychologists.
The following professions are not covered by the VAT exemption:
Sports- and other masseurs, if they are not state recognised
Psycho- or body therapists or psychologists without formal education as a doctor, or alternative practitioners.
Further supplies and services which may be VAT exempt:
Renting and leasing of real estate
Financial and insurance services
What kind of activities are VAT exempt?
It is important to keep in mind, that even for the above-mentioned professions, there are some activities that are not VAT exempt.
If for example, psychologists sell their specially designed relaxation training on CD or doctors have revenues through the sale of medicines, food supplements, or other remedies, a trading activity is pursued and trade tax is due.
How do I invoice my customers for VAT exempt services?
If you are within the above-mentioned group and provide services that are exempt from VAT, you do not have to apply for VAT exemption as these services are exempt by law. However, in some cases, the tax office requires proof e.g. if you are a self-employed teacher at a private school then the school must issue a corresponding confirmation for the tax office for each year.
Furthermore, on your invoices, you must state the reason for your exemption. Here are a couple of examples:
For self-employed teachers: "exempt from VAT according to § 4 No. 21b UStG. Certificate of the client is available."
For medical professions: "exempt from VAT according to § 4 No. 14a UStG"
Can I deduct VAT for expenses if my income is VAT exempt?
In general, self-employed teachers, doctors and other healthcare professionals can not deduct VAT from made purchases because of the VAT exemption. If you are renting and leasing real estate or provide financial services, you can opt to waive the VAT exemption.
Is the small business regulation relevant to me?
If you offer services or goods that are subject to VAT next to your tax-free services it is worth considering to opt for the small business regulation if the requirements are set (taxable turnover is less than 22.000 EUR).
💡 The achieved revenue from VAT exempt services is not taken into account when it comes to determining the turnover subject to VAT for small businesses.
Above all, it is important for you to always spot any income which could be subject to VAT and either:
Apply for the small business regulation, or
Include VAT in your pricing of optional services early on.
The worst-case scenario would be when the tax office claims back the VAT retroactively and unplanned for several years...
What changes on my tax reports?
If you are not a small business owner but belong to the above mentioned professional group with VAT exempt services you do not have to report VAT to the tax office by monthly or quarterly advanced VAT reports.
However, you are also obliged to submit an annual VAT report to the tax authorities reporting your VAT exempt revenues.
Looking for a solution to simplify your tax reports?
Sorted guides your through adding your income and expenses, and automatically prepares your tax reports, so that you can submit them to the tax office with one click.
Sorted tax guides are provided without liability and do not replace a tax advisor.
To get an accurate answer for your specific case, please consult a tax advisor.
You can get additional help from your dedicated tax advisor on Sorted.