Accrual vs. cash-basis VAT: the difference explained
Under accrual-basis taxation, VAT becomes due as soon as you have provided your service, regardless of whether your customer has already paid. Under cash-basis taxation, you only pay the VAT once the money has actually been received. Cash-basis taxation is an exception that you must apply for at the tax office; since 1 January 2024, it has been available up to a prior-year turnover of 800,000 euros.
What is accrual-basis taxation?
In Germany, accrual-basis taxation is the standard case. It is also referred to as taxation based on agreed consideration. VAT arises at the end of the advance return period in which you made the supply or provided the service (§ 13(1) no. 1(a) UStG, the German VAT Act).
What counts, then, is the time of the supply, not the invoice date and not the receipt of payment. An example: you complete a project in March and issue the invoice with a 30-day payment term. If you file monthly, you pay the VAT with the advance return for March, i.e. by 10 April. Your customer, however, does not pay until the end of April. During this time, you advance the VAT out of your own pocket.
If a receivable ultimately defaults, you can correct the VAT you have paid under § 17 UStG. Until then, however, the money is tied up.
What is cash-basis taxation?
Under cash-basis taxation, i.e. taxation based on consideration received, VAT only arises at the end of the advance return period in which you received the payment (§ 13(1) no. 1(b) UStG). In the example above, your customer pays at the end of April, so you only declare the VAT with the advance return for April.
This means you do not have to pay in advance. Especially for young and small businesses with long payment terms, this protects liquidity.
Accrual-basis and cash-basis taxation compared
| Accrual-basis taxation | Cash-basis taxation | |
|---|---|---|
| Legal basis | § 16(1), § 13(1) no. 1(a) UStG | § 20, § 13(1) no. 1(b) UStG |
| VAT arises | when the service is provided | when payment is received |
| Application required | no, standard case | yes, the tax office must approve it |
| Who may use it | all businesses | only those who meet one of the conditions of § 20 UStG |
| Liquidity | VAT is partly pre-financed | VAT due only after payment |
| Effort | reconciliation with service dates | reconciliation with incoming payments |
Who may apply for cash-basis taxation?
On application, the tax office may approve cash-basis taxation if one of the following conditions under § 20 sentence 1 UStG is met:
- Your total turnover in the previous calendar year did not exceed 800,000 euros.
- You are exempt from the obligation to keep books and prepare regular financial statements under § 148 AO (German Fiscal Code).
- You generate turnover from an activity as a member of a liberal profession within the meaning of § 18(1) no. 1 EStG (German Income Tax Act).
- You are a legal entity under public law that does not keep books voluntarily and is not required to keep books.
The turnover threshold of 800,000 euros has applied since 1 January 2024. Older guides often still cite lower figures such as 500,000 euros, which no longer apply.
The conditions are of equal standing. Anyone who meets one of them can submit the application. Whether cash-basis taxation makes sense in your case, for example with voluntary bookkeeping or mixed activities, is best clarified with your tax adviser.
How to apply for cash-basis taxation
When setting up your business, you apply for cash-basis taxation directly in the tax registration questionnaire, which you submit to the tax office via ELSTER. It contains a dedicated field for calculating tax based on consideration received.
If you are already in business, an informal application to the competent tax office referring to § 20 UStG is sufficient. State your tax number, the reason (for example, prior-year turnover below 800,000 euros) and the desired start date. The tax office decides on the application and notifies you of its approval.
When switching from one method to the other, the tax office makes sure that turnover is neither recorded twice nor left untaxed. Invoices on which you already paid VAT before the switch are therefore not taxed again when payment is received.
What happens if you exceed the threshold?
What counts is always the total turnover of the previous year. If you exceed 800,000 euros in a given year and no other condition of § 20 UStG applies, accrual-basis taxation applies again in the following year. Keep an eye on your turnover so that the switch does not take you by surprise.
Input tax: does the cash principle apply there too?
Cash-basis taxation concerns the VAT on your own turnover. You generally deduct input tax from incoming invoices under § 15 UStG as soon as the service has been provided to you and you hold a proper invoice. For down payments, the payment is what counts. This can give cash-basis taxpayers an additional liquidity advantage.
Practical tip
If you meet the conditions, applying for cash-basis taxation is usually worthwhile right from the start of your business. You then only pay the VAT after your customer has paid. This requires you to match incoming payments to invoices accurately. Invoicing software with a payment status helps here. If you create your advance VAT return in faktoora, you check the information before sending it to the tax office.
You can read more about the basics in the article Who is liable for VAT?.
Note: This article is for general information purposes only and does not replace tax advice.
Frequently asked questions
What is the difference between accrual-basis and cash-basis taxation?
Under accrual-basis taxation, VAT arises when the service is provided; under cash-basis taxation, only when payment is received. Accrual-basis taxation is the standard case; cash-basis taxation must be applied for.
Up to what turnover is cash-basis taxation permitted?
Since 1 January 2024, up to a total turnover of 800,000 euros in the previous year (§ 20 sentence 1 no. 1 UStG). Freelancers can apply for cash-basis taxation regardless of this threshold.
Cash-basis or accrual-basis taxation: which is better?
Cash-basis taxation is usually more favourable for liquidity because you do not pre-finance any VAT. Which method suits your business, however, also depends on your bookkeeping.
How do I apply for cash-basis taxation?
When setting up your business, in the tax registration questionnaire; later, informally at the competent tax office with reference to § 20 UStG.
As a small business, do I have to use accrual-basis or cash-basis taxation?
As long as you use the small business scheme under § 19 UStG, you neither show nor pay any VAT. The question only arises once you switch to standard taxation.