Documenting the reduction in VAT correctly

Interview with tax adviser Lars Rinkewitz

As part of the German Government’s economic stimulus package, VAT is being temporarily reduced from 19 % to 16 %. What looks on paper like a minor measure with practical benefits represents an enormous amount of work for businesses, consultants and public authorities.

When it comes to the change in VAT, advisers and clients need to bear a few things in mind, such as ensuring proper documentation. But why is the Procedural documentation Is it really that important? For example, during a tax audit, the authorities might request evidence of how the client carried out the transition. In conversation with Paul Liese: tax adviser Lars Rinkewitz from ECOVIS KSO. This is how advisers can avoid pitfalls and take the right steps.

Paul Liese: Good morning, everyone, and welcome to our live stream from our offices. We’re discussing a topical issue: the changes to VAT. In just a few days’ time, we’ll all be feeling the effects. Joining us today is Lars Rinkewitz from ECOVIS in Düsseldorf. Hello, Lars!

Lars Rinkewitz: Hello, Paul. Thank you for inviting me.

Paul Liese: I’d be delighted. For everyone here today: this is a first for Lars. He’s practising for his webinar on VAT later on. You’ll be looking at the subject of VAT in more detail. I wanted to have a chat with you about VAT and its impact on documentation. In that respect, I’m really looking forward to discussing this with you, because over the last 12 to 15 months you’ve drafted a great deal of procedural documentation, handled many cases for clients and learnt a great deal.

So, to put it quite specifically: in your view, what impact will the change in VAT – currently at 16 % and returning to 19 % in January – have on documentation?

Lars Rinkewitz: Naturally, due to the reduction in VAT from 1 July, there are now many measures to be taken that will also affect technology and processes. This naturally means that the documentation will also need to be updated. Consequently, we need to review what is currently set out in the procedural documentation and the till documentation, and make the necessary adjustments accordingly.

For example: All cash registers must be converted and adjusted to the new VAT rates – 16 % and 5 % from 1 July. This also requires changes to the cash register programming. Therefore, the programming logs detailing the reprogramming to be carried out during the night of 30 June to 1 July must be documented accordingly and attached to the procedural documentation. After all, it is theoretically possible that on 1 July, a tax inspector might already be at the door wanting to carry out a cash register inspection. I don’t believe that will happen, but the risk does exist.

VAT reduced to 16 % – what does this mean for procedural documentation?

Paul Liese: Yes, but that would be rather cheeky. You’ve just been talking about programming logs. For anyone who’s getting a bit alarmed: this isn’t about the source code of the programme itself being documented somewhere – though that would obviously be nice too – it’s more about which settings have been applied. Right?

Lars Rinkewitz: That’s right. And, of course, it is also digitally flagged that, up to 30 June, the tax rate 19 %/7 % applies to the individual products, and that a new VAT rate will apply from 1 July. This is documented so that the tax inspector or even an external third party can read this information from the till and trace everything accordingly.

Paul Liese: So we’re now in agreement that those who operate a cash register – where cash is handled or card transactions take place – are the main risk group and must document this without fail. What about the wider online business sector? There are, of course, issues such as the timing of services and the timing of invoices, and so on. Isn’t it also important there to document how the online shop and related systems, as well as the interfaces to the merchandise management and financial accounting systems, are being modified?

Lars Rinkewitz: Yes, of course, that’s important too. It’s not just the till systems that need to be programmed, but also all the other systems – main systems, ancillary systems – that have anything to do with bookkeeping, invoicing or stock management. The ERP systems all need to be adapted. Here, too, active intervention in the programming is, of course, required. Ideally, this should be carried out by qualified personnel – experts in the field. Please do not attempt this yourself, if only for reasons of liability. And, of course, all of this must be documented. This should, of course, also be attached as an appendix to the procedural documentation.

It is also important to sort out appointments in good time. All the specialist staff who look after the till systems and the software only have two and a half weeks left until 1 July, and their diaries will already be quite full. Any business owner using such systems should make sure to arrange appointments well in advance to ensure everything runs smoothly.

Paul Liese: In two weeks’ time it’ll already be 30 June, so time is really tight on this issue at the moment. Why is it important to document this? What potential risk is there if I don’t?

Lars Rinkewitz: If I may return to the subject of till systems: I will, of course, need to reprogram them to reflect that a reduced VAT rate will apply from 1 July. If I continue to have the old tax rates in the till system’s programming, there are actually two errors that could occur.

The first error is that the 19% or 7% VAT rate is applied automatically, and incorrect data is sent to the accounts via the interface. This means that incorrect tax rates are calculated automatically, so that if the entries are then posted and declared incorrectly, I end up paying more VAT. The second area of error is this: if I state an incorrect tax rate on the documents or invoices I issue, I am also liable for this higher tax rate.

This means that if I have walk-in customers in my cash-only business and am still issuing cash receipts with 19 % VAT on 3 July, I am also liable for this VAT under Section 14c of the German VAT Act (UStG), which means I have to pay it. Theoretically, I could correct this, but then I’d need to know who received that receipt; I’d have to ask for the old one back and issue a new one. And, of course, that’s simply not possible with walk-in customers. As a result, my profit margin is reduced and I have to pay the increased tax rate to the tax office. These are the risks. Naturally, this also applies to invoicing systems.

Paul Liese: Well, for the first few weeks and months at least, there isn’t really much of a risk that I’ll be subject to a tax audit straight away. But it could still happen years down the line that I find myself facing an audit. And then I’ll have to provide evidence of how things actually went in my company during the second half of 2020. Neither of us is trying to provoke a reaction in the client by playing on their fears. Rather, the aim is to deliver added value. What added value does the client gain by thinking now about which systems and interfaces they have, what they need to adapt, and ensuring they document this?

Lars Rinkewitz: The biggest advantage is that, ideally, once this livestream is over, I can sit down and get on with it, knowing that I still have two weeks left. I can then make the necessary preparations. The sooner I start and get a comprehensive overview of my systems and what needs to be done, the better prepared I’ll be and, naturally, the less prone to mistakes I’ll be.

What’s more, as I’m only just getting to grips with this for the first time – because I don’t yet have any procedural documentation, because I haven’t yet reviewed my processes, and because I don’t yet have any till documentation – this reduction in VAT is a double bonus, namely because I am engaging with this system and my existing processes for the very first time.

I always like to put it this way: the business owner focuses on their business. Perhaps for the very first time. And if I take this as an opportunity to look into it for the first time, it automatically generates added value. I can examine the processes and assess the risks. And determine whether the processes are even efficient. Am I perhaps doing the same thing three, four or five times over? To realise this, you might need a little nudge – which the government has now given us by introducing a new measure, meaning that all business owners now have to get a bit of a move on.

Paul Liese: Well, the procedural documentation has been in place since 1 January 2015. All those companies that are already familiar with their processes – because they have already set them out in their documentation – are actually very well prepared, as they know where to start. All those who haven’t done this yet now realise how quickly circumstances can change, and how important it is to be able to act at short notice and to have a company document so that you know where action needs to be taken and who the relevant contacts are.

After all, this documentation should not only cover which systems and processes are used, but also who you’re working with. Now let’s consider a specific scenario: the client realises that their till needs to be modified. They ring the manufacturer or the service provider who set up the till, but that person is completely overwhelmed and has no idea what to do. As a client, what should I do in a situation like this?

Lars Rinkewitz: Try to find an alternative specialist. So someone should come along. If I still can’t manage it, I should document that as well – that I tried to organise a specialist, that it didn’t work out, that I’ll have to adjust my till a bit later as a result, and what I’ll be doing during the transition period. Perhaps I’ll be able to sort it out a bit differently – maybe switch back to an open till at short notice. Just think about what’s possible and what’s necessary. Documentation is absolutely key here – for the tax inspector, but also for yourself.

As you said earlier: what will things be like in two, three, four or five years’ time? By then, I won’t even remember what I was doing in early summer 2020. That’s why, in my view, it’s essential to document things. To minimise risk and keep a record of events. After all, we don’t know what lies ahead. The VAT reduction is due to come into effect on 1 July. But we already know that VAT will go up again on 1 January 2021. For the hospitality sector, there’s also a change coming on 1 July next year. And we have absolutely no idea what else the future holds.

Paul Liese: Yes. The German Government is responding at very short notice with this economic stimulus package, which will affect tax rates. This demonstrates once again how important it is to know your business and to have the relevant documentation to hand, so that one can react quickly in such situations. And that is why it can be said that the procedural documentation – which the tax authorities called for just over four years ago – was actually intended to ensure that every business owner knows what is happening within their company and can act swiftly.

Anyone who does not yet have any documentation should use the current migration as a starting point. Once the migration has been successfully completed, you might then set aside some time in August or September. You can then start documenting everything else related to it that still needs to be covered.

Lars Rinkewitz: Yes, exactly. You don’t have to say right now: „Right, over the next two weeks I’ll draw up a complete set of documentation.“ But you should at least start with the areas that are particularly sensitive right now – the ones that are definitely affected by the VAT change. If I tackle that first, I’ll already have a foundation on which to build.

„A documentary like that really comes to life, doesn't it?“

And everything else can then be added gradually. After all, documentation like this is a living, breathing thing. I have the annual review, and perhaps an interim review as well. I can also expand on it if I say: „I’m going to build a text compliance management system on top of the procedural documentation.“ There are, of course, all sorts of possibilities. A process like this evolves. But the important thing is simply to get started. And to really tackle the sensitive areas first, because the deadline is in two weeks’ time.

Paul Liese: Yes. To be very specific, once again, for our viewers or their clients. Firstly: send information to clients or – as you’ve done – organise a webinar and invite the clients to attend. Secondly: Ask clients to check which systems they’re using, where tax rates need to be adjusted, and where there are interfaces through which data flows from A to B.

Ultimately, the data will end up with you, your tax adviser and your financial accounting department if you handle the bookkeeping for your clients. This is something to bear in mind. You should then get in touch with the service providers at short notice. And document everything. What interfaces are there? What systems are in place? Which service provider do I use? When did I contact them? What was the outcome? Who might I have tried to bring into the company as an alternative to resolve the issue?

Lars Rinkewitz: Exactly. That’s good. As consultants, we are of course also on hand to help. We deal with many clients who all face the same difficulties. So we’re well placed to offer sound advice in this area. Here at ECOVIS, we make sure we don’t leave our clients to cope on their own. And the reputable system providers and manufacturers who look after the till and the IT systems naturally don’t leave their customers to cope on their own either. The important thing is simply to recognise the urgency of the situation, take action now and draw up a structured plan.

Of course, in the end, everything might all come together with the tax adviser who does the bookkeeping. That’s where the odd mistake or two gets spotted and corrected. But if I have to do any rework, it’s always much more time-consuming, costly and risky – because things can sometimes slip through the net – than if I prepare properly from the outset and get it right first time.

Paul Liese: I think it’s going to be quite a challenge when, in November this year, we try to work out what changes were made to the interface back in June.

Lars Rinkewitz: Yes, definitely. And we have the VAT reduction coming into effect on 1 July, followed by another VAT change – namely the increase on 1 January 2021. We should make the most of the experience we’ve all gained from the previous VAT increase; we need to sort things out in good time – not just book an appointment for the next couple of weeks, but make one straight away for December, so that we’re prepared in good time. So let’s gather experience now – both in terms of adapting systems and processes and in terms of documentation – then draw lessons from it and apply them at the end of the year, when the whole process starts all over again.

Paul Liese: That’s how we’ll do it. I’d like to thank you very much for your feedback and the information you’ve provided on this topic.

Lars Rinkewitz: I’d be delighted.

Paul Liese: As ECOVIS, you are, of course, available to your clients whenever they have specific questions for you. And, no doubt, to anyone else who isn’t yet a client of yours, too.

Lars Rinkewitz: That’s right.

Paul Liese: We’re here to help. We look forward to your feedback. On that note, we wish you every success with the transition. Take it in your stride and don’t panic – there’s no reason to. We wish you all the best and hope you stay well!

Lars Rinkewitz: I would like to echo those good wishes.