Value Added Tax (VAT) - All You Need to Know for Businesses

Are you truly ready for the upcoming VAT changes in 2026? New regulations pose challenges for many companies but also offer opportunities to optimize processes.

Those who know the details can avoid mistakes, save real money, and make workflows more efficient. That’s exactly what this guide is for: here you’ll find all the relevant information to confidently master VAT in 2026.

You can expect concise fundamentals, current tax rates, tips on input tax deduction, key obligations, special rules, insights into digitalization, common sources of error, and practical solutions. Read on so you’re perfectly prepared.

Fundamentals of VAT 2026

Value-added tax (VAT) is a central topic for every company. It affects almost all business transactions and is one of the state’s most important sources of revenue. There are repeatedly new regulations that affect companies. An example of this is the VAT changes at the turn of the year, which regularly bring adjustments to exemptions or tax rates. A solid understanding of the basics is therefore essential to avoid mistakes and seize opportunities.

What is VAT?

VAT is a tax on almost all supplies and services provided by businesses in Germany. It is often equated with value-added tax, and both terms are generally used synonymously in everyday language. Historically, VAT was introduced in the 1960s as an indirect tax and has since become one of the state’s most important sources of revenue.

For businesses, this means they must show VAT on their invoices, which is ultimately borne by the end consumer. A simple example: A product costs 100 euros net. With 19 percent VAT, the gross price is 119 euros. Statistically, over 50 percent of VAT revenue goes to the federal government, around 46 percent to the states, and about 2 percent to municipalities. VAT is therefore a crucial factor for public finances.

Systematic classification and how it works

VAT is considered a transaction, consumption, and shared tax. Businesses are the taxable persons; they remit VAT to the tax office. However, the actual burden is borne by the end customer, who pays the tax with the purchase price.

A central principle is the input tax deduction: companies may deduct the VAT (input tax) paid on incoming invoices from their own tax liability. Example: A retailer buys goods for 100 euros net plus 19 euros VAT and sells them for 200 euros net plus 38 euros VAT. They remit only the difference of 19 euros to the tax office. In the EU, VAT harmonization ensures comparable rules within the internal market and influences every company’s calculations and pricing.

Key terms and definitions

To handle the tax on supplies and services correctly, you should know the key terms:

• Input tax: The VAT a company pays on purchases and may deduct.

• VAT liability: Obligation to charge VAT on supplies/services.

• Exemption: Transactions for which no VAT is levied, e.g., medical services.

• Small business regulation: Exemption from VAT for low turnover (§19 UStG).

• VAT ID number: VAT identification number for intra-Community transactions.

• Reverse charge mechanism: Shift of tax liability, e.g., for services from abroad.

• VAT payable: Difference between VAT collected and input tax paid.

• UStG: Umsatzsteuergesetz (German VAT Act), the central legal basis.

With these terms, you’re equipped for an introduction to VAT.

VAT rates, exemptions and special rules

VAT continues to evolve and remains a central topic for businesses. Important innovations are coming in 2026 that affect not only the tax rates but also numerous special rules. Those who know the current rules can avoid mistakes and benefit from opportunities.

Current VAT rates 2026 in Germany and Europe

In 2026, the standard VAT rate in Germany remains 19 percent. A reduced rate of 7 percent applies to certain products and services. Examples include food, books, works of art, and local public transport within 50 kilometers.

In a European comparison, Germany is in the lower mid-range. While Hungary has the highest rate at 27 percent, Switzerland, for example, levies only 7.7 percent. Around 12 percent of all transactions in Germany fall under the reduced rate.

Country	Standard rate	Reduced rate
Germany	19%	7%
Hungary	27%	5%
Switzerland	7.7%	2.5%
France	20%	5.5%
Netherlands	21%	9%

From 2026 there is an important change for the hospitality sector: the tax rate for meals in restaurants will be raised back to 19 percent. You can find details in the Tax Amendment Act 2025 adopted.

Exemptions and exceptions

Not every service is subject to VAT. Typical exempt transactions include medical services, educational services, financial services, and the sale of real estate. In practice, this affects, for example, doctors, insurance brokers, or postal service providers.

A complete overview is provided in Annex 2 of the UStG. For many companies, it is crucial to know when the VAT obligation ceases. Those who generate exclusively exempt transactions do not show VAT on invoices and are usually also excluded from input tax deduction.

If you want to know how current exceptions and changes affect your business, it’s worth checking legislation regularly. That’s the only way to stay up to date on VAT.

Special rules: small businesses, reverse charge, intra-Community supplies

Small businesses benefit from a special rule under §19 UStG. Those who generated less than 22,000 euros in turnover in the previous year do not have to show VAT and may not claim input tax. The binding period is five years; switching should be carefully considered.

Under the reverse charge mechanism, the tax liability is shifted from the supplier to the recipient, which is relevant in the EU internal market and for certain services such as IT or construction services. Intra-Community supplies are tax-exempt if certain requirements are met, such as supplying a business with a valid VAT ID number in another EU country.

VAT is a complex area, especially for cross-border transactions. Mistakes here risk back payments.

Typical sources of error and practical tips

The most common errors with the tax on supplies and services arise from applying the wrong rates, for example with dairy products or local public transport. Incorrect invoices and cash register systems that are not adjusted in time also cause problems.

Practical tips:

• Regularly check whether the correct tax rate applies to your products or services.

• Use checklists for invoicing.

• Keep up to date with changes to VAT.

With a clear structure and ongoing monitoring, sources of error can be identified early and avoided.

VAT obligations and processes for businesses

VAT entails a variety of obligations for companies. Those who are unfamiliar with them can quickly make costly mistakes. It’s all the more important to have all processes under control—from registration to invoicing to documentation.

VAT advance return and VAT return

The VAT advance return is mandatory for almost all businesses. Exceptions apply only to small businesses. Deadlines depend on the amount of tax in the previous year: monthly, quarterly, or annually. Submission is electronic via the ELSTER portal.

Process of an advance return:

1. Record revenues and input tax

2. Calculate tax payable

3. Submit data online

4. Make payment on time

Those who miss the deadline must expect surcharges or interest. Punctuality and complete information are therefore essential for VAT.

Invoicing and mandatory information

A correct invoice is indispensable for VAT. Under §14 UStG, certain information must be included:

• Name and address of issuer and recipient

• Tax number or VAT ID number

• Issue date, invoice number

• Description of the service

• Net amount, tax rate, tax amount

For small-amount invoices under €250, simplified rules apply. Incorrect invoices often result in the loss of input tax deduction. Therefore, check every invoice carefully to avoid VAT issues.

Input tax deduction and documentation obligations

Input tax deduction is a central element of VAT. Companies may deduct the input tax shown on incoming invoices, provided the invoice is correct and the expense is business-related.

Exclusions apply to tax-exempt transactions or incorrect invoices. Documentation must be complete and traceable. Retention periods of ten years are mandatory. Those with documentation gaps risk losing the input tax deduction for VAT purposes.

Common mistakes and how to avoid them

Common mistakes with the tax on supplies and services include:

• Incorrect or missing mandatory details on invoices

• Late or incomplete advance returns

• Insufficient documentation

Checklists and digital tools help avoid errors. Automating relevant processes, for example with automated accounting processes, can significantly facilitate compliance with VAT obligations. This minimizes risks and optimizes your workflow.

Digitalization and automation of VAT processes

Digitalization is fundamentally changing the requirements for companies in the area of VAT. Anyone who wants to work efficiently in 2026 cannot avoid digital processes and automation. But which trends will shape the coming years, and how can companies benefit?

Trends and requirements 2026

From 2026, companies will face new challenges: the e-invoicing obligation will be introduced in Germany, and electronic transmission of tax data will become standard. VAT will thus become more transparent but also more complex. Automated interfaces between accounting and the tax authorities are in demand.

Digital solutions offer opportunities to reduce errors and accelerate processes. At the same time, the requirements for data protection and IT security are increasing. Companies must adapt their systems to keep pace with developments in the tax on supplies and services. Those who invest early secure efficiency and minimize risks.

Automation solutions for companies

Modern accounting software and cloud solutions are indispensable today when it comes to automating VAT. They enable automatic capture, verification, and archiving of invoices. Particularly useful is the integration of ERP and document management systems.

The advantages are clear: time savings, lower error rates, and up-to-date tax data. Many providers offer interfaces to tax and accounting software so that VAT is processed correctly and automatically. Learn more about the possibilities under automated invoice management.

Efficient document workflows with filehub

filehub significantly simplifies the automation of document and invoice workflows. The platform connects various software and web portals so that invoices and letters can be automatically retrieved and processed. This is a decisive advantage, especially for VAT.

With filehub, processes become faster and less error-prone because all data is processed in Germany in compliance with the GDPR. Thanks to the no-code approach, no IT skills are required. This allows invoices to be automatically transferred into the accounting workflow, and VAT is documented seamlessly.

VAT in an international context

VAT is gaining importance as markets become more international. Companies operating across borders face numerous regulatory challenges. Differences between countries, complex documentation requirements, and digital processes demand solid knowledge to avoid risks and make the most of opportunities.

VAT in the EU: harmonization and particulars

Within the EU, the VAT System Directive forms the legal basis for VAT. Nevertheless, tax rates and implementation details differ in each member state. The VAT identification number (VAT ID number) is essential for cross-border transactions. It enables tax-exempt intra-Community supplies, provided all requirements are met.

An example: A German company sells goods to a French trader. With a valid VAT ID and correct documentation, the supply can be made without VAT. Companies must always observe current regulations. A concise overview is provided by Current developments in VAT 2025/2026.

VAT outside the EU

For exports to third countries such as Switzerland or the USA, different rules apply to VAT. Import VAT is levied upon import into the respective country. For services and digital products, there are often differing requirements that vary from country to country.

A practical example: If a company exports machinery to Switzerland, no German VAT is due on the supply, but import VAT is due in Switzerland. Risks such as double taxation or missing exemptions make careful planning indispensable.

International compliance and documentation obligations

For VAT in foreign business, correct invoicing is crucial. Documentation requirements such as the “Gelangensbestätigung” serve as proof of tax exemption for intra-Community supplies. Working with tax advisors and customs authorities helps avoid mistakes.

Those who disregard compliance requirements risk back payments or penalties. Companies should standardize processes, use digital archiving, and regularly inform themselves about new requirements to stay on the safe side with VAT.

Common mistakes, risks and practical tips

Typical mistakes with VAT happen faster than you think. Particularly common is the incorrect application of tax rates. Many companies mistakenly apply the standard rate instead of the reduced rate when selling food, dairy products, or local public transport services. Another classic: incorrect or incomplete invoices that do not include all mandatory information under §14 UStG.

Missed deadlines for the advance return or payment of VAT also regularly cause problems. Even more serious is the incorrect allocation of input tax and VAT, especially in mixed transactions. In international business, documentation is often underestimated—proofs such as the “Gelangensbestätigung” are mandatory here. According to statistics, errors in the area of VAT are found in over 60 percent of audits.

The most common VAT mistakes

Many companies underestimate the complexity of VAT. Common mistakes include:

• Wrong tax rate: e.g., for food or local public transport.

• Incomplete invoices: Missing information leads to loss of input tax deduction.

• Missed deadlines: Late advance return or payment.

• Incorrect allocation of input tax: Especially with mixed transactions.

• Insufficient documentation: Especially in international business.

Statistically, VAT is the area with the most audit findings. Auditors often criticize missing proofs or incorrect invoice details. Since the e-invoicing obligation starting in 2025, digital sources of error have become more relevant.

Risks in case of violations and tax audits

Anyone who makes mistakes with the tax on supplies and services risks serious consequences. Typical consequences include:

Violation	Consequence
Wrong tax rate	Back payments, interest
Missing evidence	Loss of input tax
Missed deadline	Late filing penalty
Tax evasion	Criminal proceedings, fine

During a tax audit, VAT-related issues are examined in particular detail. Auditors frequently criticize documentation for intra-Community supplies. Those who are unprepared must expect back payments and fines. A current trend: tax offices are increasingly checking digital invoicing processes and expect complete, auditable records for VAT.

Practical tips for companies

How can you avoid mistakes in VAT? Here are some proven tips:

• Train your team regularly on current requirements.

• Use checklists for invoices and advance returns.

• Use digital tools and automation to minimize sources of error. Specialized solutions for finance departments help make VAT-relevant processes secure.

• Work closely with tax advisors, especially for international business.

• Prepare early for legal changes and seek information from official sources.

With professional organization and digitalization, you can handle the tax on supplies and services efficiently and in compliance with the law.

You now have the most important facts about VAT 2026 under control and know how new obligations, digitalization, and automation will change your day-to-day business. Especially for complex processes such as invoicing or input tax deduction, it pays to rely on smart solutions—not only to save time and nerves, but also to avoid mistakes. With filehub, you can easily automate your document workflows and confidently meet the new requirements. Give it a try and try filehub.one for free now—so you’re perfectly prepared for the next challenges!