Small Business Scheme: What you need to know in 2026 

The small business scheme under the Value Added Tax Act (UStG) was reformed with effect from 1 January 2025. In this article, you will find out what consequences this change has had and continues to have for small businesses, when it makes sense for a small business to opt for standard taxation, and what a small business’s invoice should look like in 2026.

If you start small, it shouldn’t take much effort

Anyone setting up a business usually starts small, and in many cases with low turnover. However, there are also sole traders and the like who, by their very nature and in the long term, do not generate huge turnover or profits due to the scale of their business activities – for example, because they carry out their work on a part-time basis.

VAT legislation aims to take this into account and ease the burden on ‘small businesses’. For this reason, VAT legislation includes the so-called ‘small business scheme’: this is designed to reduce the administrative burden by exempting small businesses from paying VAT on their turnover and from having to submit VAT returns to the tax authorities.

This provision in the Value Added Tax Act (UStG) is not new, but the legal framework has changed with effect from 1 January 2025. This is reason enough to take a closer look at the changes now that some time has passed.

The small business scheme: What is it?

Collecting and accounting for VAT with the tax authorities is a rather time-consuming process, which places an additional burden on sole traders and small businesses in particular.

This is where the small business scheme comes into play: below a certain turnover threshold – not a profit threshold! – business owners or companies are not required to charge VAT on their supplies, meaning they do not have to pay it to the tax office and, as a result, are generally not required to submit a VAT return or an annual VAT return. 

Please note: There are exceptions here too! If a small business owner makes taxable intra-Community acquisitions or receives supplies under Section 13b of the German Value Added Tax Act (UStG) (reverse charge), the small business owner is also liable for VAT and must submit the relevant advance VAT returns and annual VAT returns.

Who is considered a small business owner under the law?

As previously mentioned, the status of a small business owner depends on a specific turnover threshold per calendar year. A change came into effect on 1 January 2025, when the statutory provisions were extended and amended.

Section 19(1) of the German Value Added Tax Act (UStG) now expressly states that the turnover of a business established in Germany is exempt from value added tax if the total turnover in the previous year did not exceed €25,000 and does not exceed €100,000 in the current year.

To provide a clearer overview, here is a comparison of the rules that applied up to 31 December 2024 and those that have applied since 1 January 2025.

Until 31 December 2024

• Turnover in the previous year: max. €22,000
• Current year: expected maximum of €50,000
• Value added tax was ‘not charged’
• Forecast for the current year is crucial
• Small business scheme generally applies at national level

Anyone operating within this framework was able to choose not to charge VAT. Anyone who met the criteria by the end of 2024 therefore had the choice of either charging VAT or not.

Since 1 January 2025

• Turnover in the previous year: max. €25,000
• Maximum of €100,000 for the current year
• Turnover is now exempt from VAT (Section 19(1) of the Value Added Tax Act)
• Whether the €100,000 threshold is actually exceeded is the decisive factor
• New EU small business scheme under Section 19a of the German Value Added Tax Act (UStG)

If we examine these aspects in detail, it becomes clear that there has been a change in the system. The turnover threshold up to the end of 2024 (€50,000) was a forecast; exceeding this threshold during the current year was not relevant for the application of the small business scheme.

That is precisely what has now changed: if the €100,000 threshold is exceeded during the current year, the small business scheme ceases to apply to the entire transaction that causes the threshold to be exceeded.

From the moment the threshold is exceeded, businesses or entrepreneurs must immediately charge VAT and subsequently pay it to the tax authorities.

Please note: It is therefore important to keep a close eye on the €100,000 threshold going forward if turnover continues to grow at this rate.

Another important change concerns start-ups: until now, when setting up a new business, the expected turnover for the current calendar year – which had to be determined on the basis of a forecast – had to be taken into account.

From 2025, new business founders will automatically be classified as small business owners without having to submit a forecast. Any turnover in the year of incorporation that exceeds the €25,000 threshold will result in the immediate termination of the small business scheme, and from that point onwards, the business will be subject to standard VAT treatment.

Please note: The change introduced on 1 January 2025 marked a genuine shift in the system: up until 31 December 2024, the arrangement was not a ‘tax exemption’; rather, VAT was not levied on small businesses. Since 1 January 2025, entrepreneurs and businesses have in fact been exempt from VAT until they reach the turnover thresholds. Since then, a small business owner is NOT PERMITTED to show VAT on their outgoing invoices as long as they remain a small business owner. If they do so anyway, they are generally liable for the incorrectly shown VAT.

How do you determine the relevant turnover thresholds?

The relevant turnover thresholds are determined on the basis of the fees actually received. Section 19(2) of the German Value Added Tax Act (UStG) stipulates that, for the purposes of calculating total turnover, the sum of the taxable transactions carried out by the trader in accordance with Section 1(1)(1) of the UStG is decisive.

Certain tax-exempt turnover, as well as turnover arising from the disposal of fixed assets held by a company, is therefore not taken into account when calculating the turnover thresholds.

Advantages and disadvantages of the small business scheme

The advantages of the small business scheme are obvious. Anyone who meets the criteria does not have to collect and pay tax and avoids the associated red tape involved in submitting advance VAT returns and annual VAT returns.

This advantage comes at a cost. This is because small business owners cannot claim input VAT. This means that it is not possible to claim a refund or offset VAT from purchase invoices (for goods, services, etc.).

In this respect, it is important – ideally with the help of external professional advice – to consider carefully whether to opt for the small business scheme or to choose the standard taxation option, as opting out of the small business scheme commits the business owner for at least five calendar years.

When does it make sense to opt out of the small business scheme?

As ever, even after 1 January 2025, it will still be possible to waive the tax exemption under Section 19(1) of the Value Added Tax Act (UStG) and opt for standard taxation (Section 19(3) of the UStG). This then entails the obligation to collect and pay tax and to submit the relevant returns.

Please note: This waiver is generally binding for five years, in order to prevent constant switching between the small business scheme and standard taxation.

The practical implication is that the business owner now issues invoices including VAT and pays this to the tax office. In return, so to speak, they are generally entitled to claim an input tax deduction under Section 15 of the German VAT Act (UStG), i.e. to offset the VAT received against the VAT paid.

Particularly in the case of substantial investments – for example, in connection with setting up a business – it may therefore make financial sense to opt for standard taxation. Furthermore, standard taxation is generally advisable if the business itself supplies goods and services predominantly to other businesses rather than to private customers.

What should a small business owner’s invoice look like?

Since 1 January 2025, the following mandatory details have applied to small business owners when issuing invoices:

• full name of the trader and the recipient of the service,
• the full address of the business owner and the recipient of the service,
• The business’s tax number, VAT registration number or small business registration number,
• Invoice date,
• Type / quantity or scope of the goods supplied or services provided,
• Total price excluding VAT, but with a reference to the small business scheme (e.g. ‘This service is provided under the VAT exemption for small businesses in accordance with Section 19 of the German VAT Act (UStG)’).

Please note: A small business owner is not required to issue e-invoices, but must be able to receive them!

Introduction of an EU cross-border scheme for small businesses

There is now also a small business scheme in place for cross-border trade within the EU: from the start of 2025, small businesses will be able to claim tax exemptions under certain conditions, including for cross-border transactions within the EU. The scheme applies to small businesses established in the EU whose total annual turnover across all EU Member States does not exceed 100,000 euros in both the previous year and the current year. The businesses must also comply with the national thresholds set by the Member State in which they wish to claim the exemption.

Note: A new registration procedure has been laid down in Section 19a of the German Value Added Tax Act (UStG). For further information, see: BZSt – European Small Business Scheme (EU-KU Scheme).

The small business scheme: yes or no? It’s a personal decision

The small business scheme is designed to ease the tax burden on small and sole trader businesses. In many cases, standard taxation makes sense even for businesses with lower turnover that fall below the turnover threshold for the small business scheme.

If opting for standard VAT treatment makes financial sense, it may also be advisable for small businesses and sole traders to choose this option voluntarily. However, as this decision is generally binding for five calendar years, it is advisable to consult a VAT specialist before making a final decision.

ACCONSIS acts as your tax adviser and is here to assist you with any queries regarding VAT.

You can find out why early planning is also important for other business and personal decisions in our article ‘Tax Planning 2026: Why many people are missing out on potential’.

FAQ – Answers to frequently asked questions about the small business scheme

Who will be considered a small business owner from 2025 onwards?

A small business is defined as one which achieved a total turnover of no more than 25,000 euros in the previous year and does not exceed the 100,000-euro threshold in the current year. If the threshold is exceeded in the current year, the small business scheme ceases to apply from that point onwards.

Is it possible to opt out of the small business scheme?

Yes. Since 1 January 2025, businesses have also been able to opt out of the tax exemption under Section 19 of the Value Added Tax Act (UStG) and opt for standard taxation. This may be particularly advisable in the case of substantial investments or where the majority of customers are business clients. The opt-out is generally binding for five years.

Do small business owners have to submit advance VAT returns?

Generally speaking, no. However, exceptions apply in particular to taxable intra-Community acquisitions or to supplies for which the small business owner is liable for VAT under Section 13b of the German VAT Act (UStG). In such cases, advance VAT returns and an annual VAT return may be required.

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