1

I live in Germany and have been asking myself this for quite some time.

When I hire and pay a craftsman in Germany, I pay taxes. These taxes are paid by the craftsman to the state. At the end of the year, however, I can deduct the craftsman's services from the taxes. So the money comes back to me.

So why do I pay these taxes? Or am I missing something?

Excerpt from the simplified German tax return

Household-related services and craftsmen's services

Tax reduction for expenses for

44:
Employment in private households subject to social insurance contributions; household-related services, help in one's own household; Nursing and care services in the household, expenses for services included in home accommodation costs, which are not covered by social insurance. are comparable to a domestic help (unless already included in line 43); the amount shown in line 43 as a reimbursement for domestic nursing care is not included in line 43. and care costs (§ 37 SGB XI) / daily care allowance

45:
craftsmen's services for renovation, maintenance and modernisation measures in one's own household (excluding publicly subsidised measures benefiting from subsidised loans or tax-free grants), e.g. KfW Bank, state-owned promotional banks or municipalities)

  • Are you getting a dollar for dollar tax credit from the state, netting out your tax payment to the craftsman are you getting a deduction, meaning that only a portion of the tax paid comes off your taxes? – Bob Baerker Jan 22 at 14:04
  • @BobBaerker: no it is not. To my knowledge this is a little "present" by our government to tackle widespread tax evasion in this area. – Daniel Jan 22 at 15:26
  • I would guess that it's a checks and balances issue. You pay the tax, the craftsman remits them and you request the deduction which then keeps the craftsman honest - assuming both of you are doing this on the books rather than under the table for cash. – Bob Baerker Jan 22 at 15:49
  • 1
    "At the end of the year, however, I can deduct the craftsman's services from the taxes." Unless you're getting credit, you aren't deducting from your taxes, you're deducting from your taxable income. – Acccumulation Jan 22 at 20:01
9

You are mixing up two different kind of taxes here.

What the craftsman pays and adds on his invoice is VAT. He adds this to every bill. The craftsman would have no way to know when and if you are eligible for any returns and if you reached the yearly cap (afaik ~6000€) already from other jobs.

You later deduct the total costs for work done from your income, lowering your income tax. Only work that is, not material - so make sure they are listed separately on the invoice.

These two taxes have no relation to each other whatsoever. The first is a cost position on the craftsman's bill. The second is a subsidy which only applies in specific conditions and how much you get back is dependent on your tax bracket.

Notice that there are some constrains on what and how much you can deduct. Link in German

So in conclusion as to why:

  1. The Craftsman could not determine if you where eligible for any tax deductions.
  2. The sum refunded is not the same as the sum in tax paid by the craftsman.
  3. The sum you get refunded can only be determined after the year is over and your full income is known.
  4. The intent is to fight "off the books" tax evasion for such jobs. As such you are creating a paper trail for the financial authorities to audit.
  • 2
    +1. It's more of an incentive to 1) employ people to do work for you and 2) actually pay taxes (the craftsman will have to pay both VAT and income tax on the money you pay him). – xyious Jan 22 at 16:58
5

In addition to @Daniel's answer:

I think the political reason is to combat black market work.

  • Prelimiary finding: It is a well-known phenomenon [in Germany, but probably not restricted to Germany] that pointing out that something can be deducted from taxes will induce people to spend money [I'm talking net spending].

  • There's a lot of black market work = tax evasion in the sector of "household-related/craftsman's services"

  • If you want to submit such a service for your income tax deduction, you need a proper bill. A proper bill means that the craftsman (in contrast to market work)

    1. does pay VAT (19 %)
    2. does pay income tax on the earnings
    3. in many cases also: does pay social security fees on the earnings.
  • Black market work usually is sold cheaper, maybe roughly: "we won't charge you the 19 % VAT" [and won't pay income tax and social security ourselves]. With that tax decuction rule, the trade off for the customer is between "saving" marginal income tax rate minus 19 % VAT (i.e. often not much) vs. not committing tax fraud plus the risk that there are no warranties on black market work.

  • If the customer wants a proper bill, the service provider will always produce it: otherwise the customer may tell customs that service provider offers black work (even for someone who doesn't evade taxes, being subject to a tax/customs control is a time consuming, stressing and possibly costly procedure [e.g. need a tax advisor around to understand what the tax/customs officers want exactly]. And of course, as a rule of thumb, such a control will always find something - possibly only honest mistakes, but it will for sure yield more hassle).

  • So, by leveraging the customer's power in terms of [no] black market work, there's usually net gain in terms of tax money: while customer's marginal income tax rate minus VAT on added value may be negative, there are also the craftsman's income tax plus their social security contributions. Social security in Germany is organized somewhat differently from taxes, but there are tax transfers into social security systems to make up for deficits.
    Plus, there may be a tipping point: if black market work becomes unusual, it may be possible to reach a point where it is not even considered as a possibility to suggest.*

  • These taxes/social security fees add up quite a bit over here. Of a gross bill for a service (negligible cost for material) provided by the employee of some service business of 100 €, 16 € are VAT. I.e. there are 84 € left to pay the service provider. If all of that were their gross wage, 1/3 goes for social security employer + employee fees (actually a bit more, because this doesn't include the mandatory professional accident insurance), so 56 € left. After income tax (13 €), the craftsman keeps a net of 43 €. That is, 57 % of the money went into taxes and social security.
    In other words:

    • as a customer who earns a similar wage to the crafsman and
    • without the possibility to deduct the service bill from my income tax,
    • if I can do the work as good as the craftsman
    • but need twice as long
    • if I have that time and the tools required to reach half professional speed

    it would be cheaper for me to do the work myself (totally legal).
    In the context of the question here, the tax decuction will shift the break-even work speed in favor of hiring the service provider - which again will lead to more tax/social security money collected.


* I don't think this likely in the case of the area listed here in the income tax declaration: these services are in an interesting continuum, where IMHO the threshold from where on to declare services as professional (and thus subject to tax and social security fees) is to some extent a political decision.
On the one hand, if I help my neighbour painting their flat or instead of granny "aunt neighbor" looks after the kids when they come home from school and the parents are still at work, that is a well-functioning neighbourhood and community sense and thus highly laudable. Also, if no money is exchanged (which would be highly unusual or even offending) it is not subject to taxation. Note, however, that such services are typically mutual. I.e., my neighbour will help me at some point, and aunt neighbour gets a big thank-you cake, her lawn mowed, the tap fixed when it is dripping or is driven to the doctor's when ill.
On the other hand, a professional nanny has to pay income tax and social security fees on the basis of their business, and of course so has the general gardening service, the plumber and the taxi driver.
If the neighbour's kid mows the lawn it can even legally be paid for that (as long as it below certain thresholds, neither tax nor social insurance fees are due) and so could aunt neighbour - she may have to pay income tax, but she wouldn't need to think about VAT, and for many people small additional side business earnings are exempt from social insurance fees). But if the painter helps their plumber neighbours painting, and then the plumber helps fixing the plumbing (without any money changing hands) - is that community sense or tax evasion (after all there's the Saldierungsverbot / ban on offsetting)?

  • 2
    I don't think "black work" is a common term in English. "Black market work" would be more common. – Acccumulation Jan 22 at 20:03

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