VAT for entrepreneurs: Is it necessary to be a taxpayer, and how does it complicate reporting?

When an Individual Entrepreneur Becomes a VAT Payer

A VAT payer is an entrepreneur or legal entity registered as a value-added tax payer and is required to pay this tax on the sale of goods or services, meaning that an individual entrepreneur can become a VAT payer voluntarily or mandatorily if their turnover significantly exceeds the threshold.

How and When to Register as a VAT Payer

• In the case of mandatory registration, if the entrepreneur's taxable operations exceed 1 million hryvnias over the past 12 months, the law requires them to register as a VAT payer. This threshold can pose an unexpected challenge for small businesses, especially when all income is not accounted for, leading entrepreneurs to face the necessity of registering on time to avoid penalties;
• Voluntary registration allows individual entrepreneurs to register as VAT payers even if their income does not exceed the million hryvnia threshold. This can be beneficial for those working with other VAT payers and wishing to utilize tax credits—the ability to reclaim part of the VAT paid on purchases of goods or services.

In the case of mandatory registration, if the entrepreneur's taxable operations exceed 1 million hryvnias over the past 12 months, the law requires them to register as a VAT payer.

"However, if you have chosen the 'single tax + VAT' option on your own, which is rare since everyone tries to avoid paying extra taxes, you become a VAT payer. There are situations where entrepreneurs opt for a simplified system, paying a percentage of turnover simply because they do not want to pay 20% VAT and deal with the complex administration of this tax," commented Oleksandra Tomashevska.

Andrei Shabelnikov, managing partner of EvrikaLaw, agrees, noting that the status of a VAT payer "somewhat complicates reporting" since it requires filing VAT declarations.

Value-added tax is an indirect tax included in the price of goods (works, services) and paid by the buyer, but its accounting and transfer to the state budget are carried out by the seller, namely—the tax agent.

Tax Payer and Tax Agent: How to Avoid Sanctions

Taxation experts point out that value-added tax is an indirect tax included in the price of goods (works, services) and paid by the buyer, but its accounting and transfer to the state budget are the responsibility of the seller, specifically—the tax agent. This can lead to complications.

A VAT payer is playing in the major league. I wouldn't even advise doing this alone. There should be a specialist who knows the process of registering tax invoices and is well-versed in declarations.

Oleksandra Tomashevska emphasizes that a taxpayer and a tax agent are different entities under the Tax Code. Often, entrepreneurs are unaware they owe significant amounts in taxes to the state.

"A taxpayer pays for themselves. A tax agent is an entity, regardless of its organizational and legal status and tax regime, that is obligated to calculate, withhold, and pay tax on personal income to the budget. You may not be a VAT payer but could be responsible for paying taxes on behalf of others in certain circumstances. Therefore, I, like many other consultants, advise entrepreneurs against ordering services abroad from websites or platforms. There is a risk that, while not being a VAT payer, you could become a tax agent for another entity. I know some advertising budgets through social networks, contextual advertising, or foreign services reach hundreds of thousands of dollars annually. An entrepreneur may not even realize they owe VAT to the state—a tax they are not liable for. This is where the complexity lies. Therefore, first and foremost, when discussing literacy, ensure that not only are you not a VAT-paying entity but also that you are not ordering services from individuals for whom you would be a tax agent. This can easily happen, for example, in the case of ordering transportation services or freight forwarding. Therefore, it is crucial to be well-versed in tax legislation and determine the place of supply. I emphasize that you can be a payer for yourself and also a tax agent concerning certain services. Taxes are no joke. Tax authorities have no heart," explained Tomashevska.

Without Tax and With It: The Advantages and Disadvantages of Paying VAT

An individual entrepreneur who is not registered as a VAT payer does not charge this tax on their services or goods, and most often, these are entrepreneurs under a simplified taxation system (mainly groups 1, 2, or 3). They have fewer tax obligations but may miss out on tax credits and sometimes lose business opportunities, especially when dealing with VAT payers.

A VAT payer can reclaim the tax paid at the procurement stage. This is beneficial for businesses purchasing goods or services with VAT.

The status of a VAT payer can have both advantages and disadvantages. Among the benefits:

• Tax credit: a VAT payer can reclaim tax paid at the procurement stage. This is useful for businesses acquiring goods or services with VAT;
• Benefits when collaborating with VAT payers. Business partners who are also VAT payers may prefer to work with other VAT payers, as this reduces their tax expenses.

"VAT-paying individual entrepreneurs must submit reports monthly or quarterly, monitor the registration of tax invoices, which adds administrative burden. There is also an additional tax: VAT is charged on goods or services, which can increase the final price for clients and make your offers less competitive," noted the lawyer.

Thus, the main requirements for VAT payers regarding accounting include:

• Preparation and registration of tax invoices in the Unified Register of Tax Invoices (URTI);
• Monthly or quarterly submission of VAT declarations.

This means more time spent on accounting or additional costs for a bookkeeper, warn experts.

Playing in the Major League: Should VAT Payers Submit Their Reports Independently

According to tax consultant Oleksandra Tomashevska, the status of a VAT payer necessitates hiring an expert accountant.

"A VAT payer is playing in the major league. I wouldn't even advise doing this alone. There should be a specialist who knows the process of registering tax invoices and understands declarations. VAT reporting is very complicated. Unlike the declaration for the single tax, no entrepreneur can do this independently unless they are an expert in accounting and taxation. Therefore, as soon as you enter the realm of working with VAT, you need to hire a specialist who will handle this tax. Yes, administrative costs will increase, but you won't fall under the many sanctions in this area. VAT penalties account for 80% of all penalties imposed by the tax authority. Only 20% pertains to all others, such as profit tax, personal income tax, and so on. I have yet to see an entrepreneur submit their declaration independently and without mistakes. Therefore, if you want to play in the major league, do not do it alone. A VAT-paying individual entrepreneur is like a hallmark of requirements for accounting, responsibility, sanctions, and the workload on accounting functions," explained the expert.

Becoming a VAT payer is a significant decision, as it primarily depends on the nature of the business and turnover.

Fatima Gyulalieva, a lawyer, agrees with Oleksandra Tomashevska, stating that the decision to become a VAT payer is significant, as it depends primarily on the nature of the business and turnover.

"If your income exceeds 1 million hryvnias, or if you work with VAT-paying partners, registration may be advisable. At the same time, if your business is focused on the end consumer, additional tax expenses may reduce your competitiveness," summarized lawyer Fatima Gyulalieva.