Government Plan: temporary reduction of VAT on gas supplies

Consumers are already groaning about high gas prices, and the planned gas procurement levy will become an additional burden. However, as the levy is included in the overall amount owed for the gas supply, VAT will also be owed on this levy - derailing Finance Minister Lindner's proposal to waive VAT in this respect. Applying a reduced VAT rate of 7% to the overall gas price, the method now chosen by the federal government is, however, permissible under tax law although politically controversial. This temporary reduction is reminiscent of the temporary tax rate reduction that was implemented to support the COVID-battered economy.

It appears that the VAT rate reduction would not be limited to the supply to corporate consumers or even private consumers, but would apply to all levels of trade. The number of those affected would thus be very large.

The reduced tax rate of 7% on gas would probably apply as long as the gas procurement levy is levied – as at present from 1 October 2022 to 31 March 2024, or strictly speaking until 1 April 2024, 6:00 a.m. as per § 1. (2) of the Gas Price Adjustment Ordinance (Gaspreisanpassungsverordnung = GasPrAnpV). As clear as this may seem at first glance, it is difficult to allocate it correctly for VAT purposes, because the applicable VAT rate depends on the date of supply. The date on which the contract was concluded or the invoice was issued or paid is irrelevant.

Pursuant to Section 13.1 (2) sentence 4 of the VAT Application Decree, gas supplies are deemed to have been made at the end of the respective meter reading period. Accordingly, for example, for a meter reading period extending from 1 January 2022 to 31 December 2022, the reduced VAT rate applies overall because the end of the meter reading period falls within the (expected) period of application of the reduced VAT rate. Conversely, the standard tax rate of 19% would have to be applied overall to a meter reading period that begins, for example, on 1 July 2023 and ends on 31 July 2024.

In this context, it is important to keep the following in mind:

  • particularly in the case of supplies of goods to consumers who cannot claim an input VAT deduction, it may be advantageous to apply the reduced VAT rate as widely as possible and, to this end, to postpone the originally agreed meter reading date to a date falling within the period in which the reduced VAT rate applies. Whether this is permissible, however, is not only a VAT issue but also a civil law issue.
  • If gross price agreements were in place, it would be possible (although politically undesirable) to not pass the VAT rate reduction on to customers.
  • Standing invoices and contracts that are considered invoices must be adjusted.
  • Pursuant to § 13b (2) No. 5 of the German VAT Code (UStG), the reverse charge procedure applies to gas supplies to certain entrepreneurs. The tax thus arises when the invoice is issued, but at the latest at the end of the calendar month following the performance of the supply, § 13b (2) UStG. This can lead to a situation in which the gas is supplied during the period in which the tax reduction applies, but the VAT only arises thereafter. This raises the question of which VAT rate applies for the invoice to be issued and the turnover to be included in the preliminary VAT return.
  • The same applies to advance payments and down payments. Here, the tax arises when the payment is received, § 13 (1) no. 1 lit. a p. 4 UStG. Thus, the payment may be made before the reduced VAT rate applies, but may relate to a gas supply that falls within the period in which the reduced VAT rate applies.
  • Wrongfully issuing invoices with 19% VAT would raise the question of the input VAT deduction and the options available for correcting this.

In its letter dated 30 June 2020 (supplemented by a letter dated 4 November 2020) on the temporary general VAT rate reduction in the second half of 2020, the  Federal Ministry of Finance (BMF) ordered various relief measures. This is also to be expected with regard to the reduced VAT rate on gas – as far as the yet unpublished law itself does not regulate easing of the tax rate. However, it remains to be seen whether this will be the case.

As described above, the temporary reduction in the VAT rate will substantially increase the administrative effort involved. In addition to the purely VAT-related effects, the question remains as to whether these measures will have the desired effect and justify the effort involved.

Industrial customers entitled to deduct input VAT generally do not benefit from the VAT rate reduction and will continue to bear the full burden of the gas procurement levy. It is questionable whether consumers will be compensated for the additional burden of the gas procurement levy. At 2.4 ct per kW/h, this is relatively high and will not be sufficiently offset by the VAT rate reduction, at least for low-cost gas tariffs.

To summarise, the reduced VAT rate is more likely to be a burden to suppliers. Invoicing will become more complicated and time-consuming for them, and they also face greater VAT-related risks. The end customers and consumers are more likely to benefit from this, even though they are not likely to experience full relief from the gas procurement levy.