Target and actual taxation – also called target and actual taxation – is the taxation of deliveries and services. The tax law subject of target and actual taxation is sales tax . The legislature differentiates target and actual taxation according to the point in time at which sales tax liability arises. Because the target and actual situation often deviate from one another when it comes to sales tax (VAT for short). For example, if customers pay their invoices late, but the invoice has already been reported to the tax office as an item subject to VAT.
What is the difference between target and actual taxation?
In the case of target and actual taxation, a distinction is made between the agreed and the fees received by the entrepreneur. The debit taxation represents the agreed amounts, while the actual taxation represents the actually received. In the case of actual taxation, you can only treat invoices that you send to a customer for VAT once your customer has paid them. In contrast, you have to pay the sales tax for debit taxation to the tax office in the month following the invoice date.
What is debit taxation?
According to usvsukenglish, the target taxation is the taxation according to the agreed fees. In the advance VAT return you have to enter the sales tax for invoices that you write in the corresponding month in order to then pay them to the tax office. Even if the customer pays the invoice a few months later, you have to pay the sales tax for the debit taxation. So you have to advance it at your own expense and, in the worst case, with interest. You have to pay the tax on sales for outgoing invoices to the tax office at the beginning of your self-employment in the following month. This also applies if you later only report your sales tax on a quarterly basis. It doesn’t matter whether the customers have already paid their bills. Debit taxation can lead to liquidity bottlenecks if bills with large amounts are written and not paid by customers. Actual taxation can be better,
What is the actual taxation?
With actual taxation, you only have to pay sales tax when the customers have paid their invoice, i.e. the actual cash flow has already taken place. Then you are actually in possession of the collected tax. The sales tax must be stated in the sales tax return for the month in which the money was received. Actual taxation can be an advantage, especially for bills with large sums, as it can protect you from financial bottlenecks. However, certain requirements apply to the actual taxation.
Up to a total turnover of 600,000 euros in the previous year of the application, you can apply to the tax office for actual taxation. Companies with a higher net annual turnover cannot make use of the actual taxation. Even companies that are not obliged to double-entry bookkeeping and the associated accounting can submit an application for actual taxation. This applies to companies that do not generate more than 600,000 euros in sales or no more than 60,000 euros in profit within a year. Actual taxation is particularly suitable for newly founded companies that meet these requirements, as it avoids liquidity bottlenecks due to high sales tax prepayments from outstanding receivables.
Actual taxation: when are sales considered as received?
For tax purposes, cash flows are deemed to be received at different times, depending on the payment method. This is also known as the creation of sales tax. Here are a few examples of common operations:
- Cash payment -> time of payment
- Transfer to current accounts -> time of credit at the bank
- Bill of exchange -> time of redemption of the bill of exchange
- Check -> time of delivery
- Assignment of a claim ( factoring ) -> time of the assignment of the claim
Who can apply for actual taxation?
You can apply for actual taxation if
- your company has a turnover of less than 600,000 euros.
- you are a freelancer according to § 18 Abs. 1 Nr. 1 EStG.
- you are not obliged to keep books and accounts.
The application for actual taxation is not tied to any form. You can send it informally to the responsible tax office. Important: In principle, the tax office has to approve an application for actual taxation.
How does the advance VAT return work?
When starting a business, it plays an important role in terms of tax whether you opt for target or actual taxation. If you do not want to or cannot make use of the small business regulation, you have to pay the sales tax to the tax office. You therefore undertake to make a regular VAT return. Business start-ups who pay sales tax must submit a sales tax return at the end of a financial year. The VAT returns already submitted will be taken into account in this declaration.
If you do not make use of the small business regulation, sales tax is a transitory item. Because you demand sales tax from your customers, which you pay to the tax office. You will also get a refund of the VAT from the supplier. Small businesses who make use of the small business regulation only have to submit the advance VAT return for incoming invoices on which the VAT is shown in order to have the VAT reimbursed by the tax office. This means that you can also purchase your assets and services at a net price.
Target and actual taxation for start-ups
In the first two years of self-employment, entrepreneurs have to submit a monthly VAT return to the tax office. The VAT registration must be received by the tax office by the 10th of the following month. However, companies can use the permanent extension . In this case, you have one month longer to submit your VAT return. If the sales tax burden in the second financial year is less than 7,500 euros, you do not have to submit the sales tax advance notification monthly, but quarterly. In any case, the actual taxation can be particularly favorable for company founders, because the liquid funds are then not tied up in unpaid invoices and their taxes that have already been reported to the tax office.