Who counts as a small business, and what decides it

A graphic designer in Leipzig invoiced 24 800 € last year and remits no VAT at all. Her neighbour, same trade, reached 26 100 € and must now show tax on every invoice, file advance returns and make advance payments. Between the two of them lie 1 300 € of turnover and a single sentence of the VAT Act. That sentence carries two figures and two tenses, and both of them decide.

The two limits of § 19 (1) UStG

The small business rule is neither a reduced rate nor an option you apply for. It is a legal consequence that follows once two conditions hold at the same time. The statute states them in a single sentence, and that sentence is the whole test.

§ 19 (1) sentence 1 UStG exempts a business established in Germany where its Gesamtumsatz did not exceed 25 000 euros in the preceding calendar year and does not exceed 100 000 euros in the current one. The two conditions sit side by side, joined by "and". If either fails, the exemption falls.

Since the recast, the turnover is expressly exempt. That is more than a shift in wording: exemption is the hook other provisions hang on, among them the exclusion of input tax deduction. We return to it in the second module, because that is exactly where the price of this rule sits.

The two figures are often melted into one, and that is where the costliest misreading of this topic begins. There is no averaged limit and no limit you could spread across two years. There are two tests, each with its own period and its own number.

Establishment matters too. The exemption under subsection 1 presupposes that the business is established in Germany or in the territories named in § 1 (3) UStG. Businesses established elsewhere in the Community fall under a subsection of their own, with conditions of their own, which we take up below.

That the rule is a consequence rather than an application has a practical side. No notice establishes small business status, and there is no date from which it would be granted. Whoever meets the conditions is a small business; whoever stops meeting them stops being one.

The whole of the work therefore shifts onto watching your own figures. Nobody will point out during the year that a limit is coming closer. The test is a self-assessment, and its raw material is the record of amounts actually received.

What the Gesamtumsatz covers

The term that matters is neither profit nor total money in, but the Gesamtumsatz within the meaning of § 19 (2) UStG. It carries its own definition, and that definition parts company with the commercial notion of turnover at three points.

The first departure hides in the words "computed on amounts received". What counts is what actually came in during the calendar year, not what was billed. An invoice written in December and paid in January therefore falls into the year of payment, not the year it was issued.

Allocation by receipt has an awkward property: it can no longer be corrected at year end, though it can be influenced by the date of invoicing. Anyone working close to the limit should therefore know which open items are likely still to be paid inside the current year.

The second departure is the deductions. The statute names two groups of exempt supplies, each with its own cross-reference into § 4 UStG, and treats them with different strictness. The third, the exclusion of capital assets, sits in a sentence of its own at the end of the subsection.

• Starting point: taxable supplies under § 1 (1) no. 1 UStG, that is, supplies of goods and services made for consideration in Germany
• Computation: on amounts actually received, so by receipt and not by invoice date
• Deduction: the exempt supplies named in § 19 (2) no. 1, among them those under § 4 nos. 11 to 29 UStG
• Deduction: the exempt supplies named in no. 2, but only in so far as they are ancillary supplies
• Left out: supplies of capital assets of the business

The last line of the list is the most effective one in practice. Selling a company car or a machine during the test year does not raise the Gesamtumsatz. The statute takes such supplies out expressly, because they say nothing about the running business, only about its equipment.

The second deduction is narrower than it looks. The exempt supplies of no. 2 reduce the Gesamtumsatz only where they are ancillary supplies, arising alongside the actual activity. A business whose main trade consists of them cannot deduct them.

The distinction between the two numbers is therefore not a point of drafting style; it decides amounts. The supplies of no. 1 are deducted without further condition. Those of no. 2 only subject to the proviso that they are ancillary.

The statute itself supplies an illustration through its cross-references. No. 2 names, among others, § 4 no. 8 letters a to h UStG, that is, certain financial supplies. A business earning them occasionally beside its main trade deducts them; a financial services provider whose trade they are does not.

Because the Gesamtumsatz is a gross figure measured on receipt, a plain working method pays off: one column in the cash or account journal that assigns every receipt to the calendar year it arrived in. Keep that column and the limit can be read off at any time instead of reconstructed in December.

That one column answers both tests from the same data. Its total for the closed year is the first condition; its running total for the year under way is the second. Two figures from one source, and neither of them has to be estimated.

The two time axes of the test

The statute uses two different tenses for the two conditions, and that is no accident. For the preceding calendar year it says "did not exceed"; for the current one, "does not exceed". The first test looks back at a closed period, the second accompanies the year while it runs.

For the backward-looking test this means that on 1 January the answer to the first condition is settled for good. The Gesamtumsatz of the year just ended no longer moves, and neither does the answer. That condition stays stable across the whole year.

For the running test the opposite holds. It is a condition that must remain satisfied during the year. As long as the 100 000 euros are not exceeded it holds; once the limit is passed in the course of the year, it no longer does. The exemption thus hangs on a figure that moves with every payment.

One practical consequence of this asymmetry concerns new businesses. A trader starting during the current year has no preceding calendar year with a Gesamtumsatz of their own. The second limit, by contrast, applies from day one and is the only one that genuinely has to be watched in the first year.

Watching the second limit calls for a running total rather than a forecast. The distance between turnover so far and 100 000 euros is the only figure that counts in case of doubt, and it can be carried forward one line at a time after every payment.

The asymmetry also explains why the two figures sit so far apart. Looking back at 25 000 euros decides entry into the exemption for a whole year. The running limit of 100 000 euros is a ceiling for that same year and therefore sits higher.

For planning this means that the figure deciding next year is created during this one. Anyone wanting to know whether they will be exempt next year reads it off on 31 December, not in the following January, when nothing can be changed any more.

Businesses established elsewhere in the Community

Subsection 4 carries the exemption over to businesses established elsewhere in the Community. The transfer is not literal, however: the reference figure there is not the German Gesamtumsatz but the annual Community-wide turnover determined under Article 288 of Directive 2006/112/EC.

For that Community-wide annual turnover the statute names a single figure, 100 000 euros, and demands it for both periods: not exceeded in the preceding calendar year and not exceeded in the current one. The 25 000 to 100 000 stagger of subsection 1 does not reappear here.

• Reference figure: Community-wide annual turnover under Article 288 of Directive 2006/112/EC
• Limit: 100 000 euros, in the preceding and in the current calendar year
• Additional condition: a small business identification number granted by the state of establishment
• Waiver: declared to the tax authority of the state of establishment, under its own rule on when it takes effect

The identification number is not a formality but a condition in its own right, standing beside the turnover limit. The statute lists both points under "where" and joins them with "and". Without the number granted, subsection 4 does not apply, however far below the limit the turnover may be.

The waiver is separately regulated for these businesses too. Under subsection 5 it is declared not to the German tax office but to the competent tax authority in the member state of establishment. Jurisdiction follows establishment, not the place of supply.

The moment it takes effect is determined differently as well. The waiver takes effect from the beginning of the calendar quarter following receipt of the declaration; where the declaration arrives in the last month of a quarter, only from the second month of the following quarter. The five-year minimum binding period applies here too.

When the rule never applies in the first place

Subsection 6 takes one case out expressly: subsection 1 does not apply to intra-Community supplies of new vehicles. A business supplying a new vehicle to another member state therefore cannot invoke the small business exemption for that supply, whatever the size of its Gesamtumsatz.

Alongside that, subsection 1 sentence 2 switches off a series of provisions that would otherwise apply. Named among them are the exemption for intra-Community supplies, the waiver of exemptions under § 9 UStG and the reporting duties of § 18 (1) to (4) UStG. The second module takes these consequences one by one.

The same list covers stating VAT identification numbers on an invoice under § 14a UStG. That provision does not apply either. The small business invoice follows a shorter rule of its own instead, which we walk through point by point in the second module.

Two provisions are expressly left untouched: § 149 (1) sentence 2 of the Fiscal Code and § 18 (4a) UStG. The switching-off is therefore not wholesale but a list with two named exceptions — a difference that counts the moment the tax office calls for a return.