In which case you will have to switch to VAT
Indirect taxes, such as value added tax, are a rather complex aspect of doing business. And the problem here relates not only to the additional tax burden on business, but also to the procedure of their administration and reporting.
In this publication, we will talk about popular VAT issues, which our Ukrainian and foreign Clients are usually faced with.
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General requirements for registration as a VAT payer and the registration procedure
The Tax Code defines 2 procedures for obtaining the status of a VAT payer: mandatory and voluntary. Voluntary does not provide for the fulfillment of too many requirements (except for the submission of the relevant application and meeting the deadlines for its submission). Therefore, in this publication, we will focus on the mandatory procedure faced by medium and large businesses.
A company or entrepreneur has to become a VAT payer if:
- A company receives more than one million hryvnia on its account as payment for goods / services / work;
- The funds were received within the last twelve calendar months.
The main exceptions to this rule are as follows:
- Single tax payers of Groups 1-3. For example, a single tax payer of Group 3 may become a VAT payer voluntarily, but the fact that the limit of UAH 10,000,000 is exceeded does not oblige it to register as a VAT payer.
- The transaction is not subject to VAT taxation. For example, delivery of software products is now exempt from value added tax, provided that a number of requirements to the method and purpose of delivery are met. By default, such transactions are not taken into account when calculating 1 million income.
If the tax payer meets the conditions of compulsory registration, it must submit an application and accompanying documents to the fiscal authority at the place of its registration. The time for such registration is given until the 10th day of the month following the month of income excess.
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Despite the relative simplicity of the registration procedure, it should be treated thoroughly. It is necessary to collect all the documents on the basis of which the funds were received in the last 12 months, namely:
- the bank statement;
- invoices, etc.
In case of failure to document an excess of one million, you won’t be able to register as a VAT payer.
It is a common situation when employees of the tax authority refuse to accept documents due to their improper execution or insufficiency. According to them, in this case, the registration will be refused.
In such cases, you can take the following actions:
- Provided that there is sufficient time to resubmit, you can take their advice and re-submit documents;
- But if you apply on the last day and there is a risk of not being able to apply in time, you must insist on accepting the documents. In the future, such submission of documents may play in favor of the taxpayer, as the tax code binds liability to failure to submit an application, rather than to its successful consideration.
To learn more information on liability related to value added tax, see one of the following sections of the publication.
What is the first event rule?
As we have mentioned above, the procedure of obligatory registration as a VAT payer has its time limits. At the same time, there are additional criteria that must be taken into account when determining the period. That is why it is common in our practice when, having misunderstood or not taking into account such criteria, taxpayers are late with the submission of applications for registration as VAT payers, and, accordingly, face the relevant penalties or restrictions.
The situation when the amount on the account exceeds 1 million is quite clear and is unlikely to cause misunderstandings. However, in cases when the services or work are performed on a postpaid basis, as a rule, the certificate of completion shall be signed first. This is where the so-called “rule of the first event”, which is not obvious at first glance, shall be applied.
According to the provisions of the Tax Code, the date from which tax liabilities arise is the following:
- The date of payment (i.e. the funds are credited to the creditor’s account);
- The date of signing of the acceptance and transfer certificate.
In this case, if these two events occurred on different days, the obligation arises from the date of the event that occurred earlier. Of course, there are exceptions to this rule, which are described in numerous tax consultations, but this is a general rule.
That is why, not knowing this requirement or not paying attention to it, it is very easy to miss the deadlines for filing for registration as a VAT payer.
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Payment of VAT by non-VAT payers - when necessary?
In some cases, VAT has to be paid even before the respective registration in a voluntary or mandatory manner. A typical example of this situation is the provision of services by a foreign company in Ukraine. In such a situation, the recipient of services must independently calculate tax liabilities for VAT, take them into account in the appropriate calculation and pay in due time.
In order to fall under this rule:
- The services must be provided on the customs territory of Ukraine (at the same time, tax authorities adapt this rule also for services provided by Ukrainian representative offices of foreign companies that are not registered as VAT payers);
- The services must be not exempt from VAT.
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What penalties are foreseen for violation of VAT regulations?
If you fail to meet the deadline for registration as a VAT payer, the first consequence will be the accrual of tax liabilities by the state tax authorities, but without the right to receive a tax credit for such obligations. In other words, you will pay VAT, but you can not count on compensation.
In addition to the impossibility to get VAT compensation, you will have also to pay a fine in the amount of 25 percent of the tax liability accrued by the tax authorities.
If you want to get legal assistance with tax optimization of your business or to make a head of the VAT calculation issues, don’t hesitate to call us.
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