Tax planning for business in Ukraine

Every year, there is a growing trend for business managers to be trained in financial literacy. This allows each owner to build his or her own points of control to:

• manage the company;
• promptly respond to the vectors of business movement;
• identify risks and prevent them;
• manage directly the financial result, not just profit making.

When a business owner has an understanding of finances, the relationship between income and expenses, and their impact on the financial result, he/she sets additional requirements to employees who:

• have a direct impact on the company’s profits (sales and marketing department);
• handle information related to financial accounting (financial department/economist department or accounting department).

If the company’s turnover does not allow for having an in-house financier/economist and an accountant, often the manager delegates the current planning and forecasting function to an accountant. However, such delegation is often a mistake. 

Why? You can hardly meet an accountant who has a planning, forecasting and “ownership” mindset regarding financial performance management. This employee should have experience as a chief accountant (in a company with a wide range of diverse operations), accordingly, the pay request for this employee will be high. If you simply delegate the planning function to a rank-and-file accountant:

• you won’t get any plans, as the accountant will be primarily concerned with the timely filing of statements, so as not to miss the deadlines established by law;

or

• you will get “raw” data (without analytics and variable optimization suggestions).

Due to the above-mentioned situation, many companies prefer outsourcing this area. Our employees can help you with tax planning (both current and strategic).

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How does tax planning for business work in practice?

Let’s tell you about one of our recent cases in terms of current tax planning. We were contacted by the owner of a logistics company – a small business with an annual turnover of 20 million UAH, and the number of employees up to 30 people.

The client’s “pain” was as follows: the owner learns about the amount of income tax and VAT after the close of the reporting period, i.e. post factum, when they had to pay taxes. In 2021 the company was declaring monthly UAH 30-50 thousand of VAT, after the introduction of martial law these amounts increased to UAH 130-180 thousand, while the margin for services has not increased. The tax burden of profit tax increased by 1.7%. The client does not understand why the taxes have grown so sharply? And he can’t get an accountant to determine the reasons for such an increase.

The solution we offered to the client:

1. A spot audit of the company’s operations.

The results of the audit showed no deviations in the correctness of business operations. On this basis, it is worth excluding the option of overstatement of tax liabilities due to technical or accounting errors.

2. A comparative analysis of the financial indicators for the 6 months of 2021 and 2022. The results of the analysis revealed the following:

• revenues for the 6 months of 2022 (UAH 12.6 mln.) increased by 2 times compared to the 6 months of 2021 (UAH 5.3 mln.);
• the cost of services in 2022 decreased by 2%, which is 250 thousand UAH of costs in monetary terms;
• administrative and sales expenditures in 2022 decreased by 5 % (UAH 540 thousand in monetary equivalent) 
• decrease of tax credit (input VAT from suppliers).

3. The reasons that influenced the sharp increase in the VAT and income tax burden:

• The decrease in the cost of transportation was caused by the fact that the company began to use more of its own transport for transportation. The cost of transportation with its own transport is cheaper than the services of a hired carrier, as it includes only the cost of fuel, driver’s salary, car repair and depreciation;
• The decrease in costs in 2022 resulted in an increase in the sales plan per manager. The workload of sales managers doubled, while their salary level remained the same;
• The decrease of services cost and expenses of the company led to the growth of financial result with simultaneous increase of tax burden by 1.7% (in money equivalent of UAH 190 thousand);
• With the introduction of the martial law, a VAT exemption was introduced for fuel, which resulted in the fuel being taxed at the rate of 7% instead of 20% (we lose 13% of the tax credit, in monetary equivalent of UAH 40-50 thousand per month);
•  20 providers of hired transportation services switched to a 2% preferential tax system, which resulted in suspension of their VAT payer status (they lose UAH 80-100 thousand tax credit monthly).

4. Tax optimization methods for the current reporting period:

• increase in the sales value of transportation by own transport by 13% (to level out the tax credit);
• development of a payment calendar, for operative cash flow management in order to obtain the tax credit promptly;
• development of a policy of bonuses for employees in order to improve the quality of personnel work and to optimize the profit tax;
• search for an alternative to VAT non-paying customers.

5. The Excel model of tax planning for the year based on the sales plan and expenses.

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Information (data) that is required to create a tax planning model

If your company does not apply the principles of budgeting (short-term and long-term income and expense plans), an expert tax planning accountant will not serve as a panacea for you.

An income and expense plan is a framework that allows the owner to set clear goals for employees, and an expert accountant to develop tax optimization mechanisms to achieve the desired financial result.

Tax planning requires:

• information about the company, its business goals;
• plan of income and expenses of the company (annual, broken down by each month);
• a list of suppliers with information about their status as VAT payers;
• access to the accounting base with the user rights in “view” mode (it is desirable for understanding of operations conducted within the company);
• other information that is needed in the process of work.

The client’s benefit from the use of current planning is the ability to:

• manage profits and taxes, which they are “ready” to pay to the budget;
• understand the cost and price of their own services;
• understand tax aspects in choosing suppliers;
• understand cash flow management (payments to suppliers are made on the right day and amount, not intuitively);
• develop a tax planning calculation model in Excel format (which can be further adapted to any accounting system);
• understand when it is necessary to move to the application of strategic planning (change of taxation system, types of activities, the composition of the founders, changes in the internal organizational structure).

If you are an owner of a developing business in Ukraine and you want to get such a management tool as tax planning (scheme) of your business, don’t hesitate to contact us.

The cost of current or strategic planning here.

The cost of accounting support here.

The cost of business support services here.