Questions regarding tax changes for small businesses have once again taken center stage in public discourse. One of the most contentious topics is the potential introduction of mandatory VAT registration for individual entrepreneurs (FOPs) with an annual income exceeding UAH 1 million, along with the associated risks.
These and other issues were discussed during the presentation of the monthly Monitoring of IMF Program Conditions and the Ukraine Facility Plan, attended by Andriy Yerashov, Head of the Analytical Center of the Union of Ukrainian Entrepreneurs (SUP).
The event was moderated by Hlib Vyshlinsky, Executive Director of the Center for Economic Strategy, and featured a special theme: “Does the IMF want to ‘kill’ Ukrainian FOPs?”
As a reminder, on November 26, Ukraine and the International Monetary Fund reached a staff-level agreement on a new four-year Extended Fund Facility (EFF) worth $8.1 billion. The “prior actions”— conditions for program approval — include several unpopular measures:
- Taxing income from digital platforms;
- Abolishing the €150 tax-exempt limit on international parcels;
- Introducing mandatory VAT registration for FOPs with an annual income exceeding UAH 1 million.
Whether these changes are economically justified or if they will create excessive pressure on small businesses were the key questions during the discussion.
VAT Administration: A Challenge for Small Business
Participants agreed that VAT administration remains complex regardless of the registration threshold. Mandatory registration could create severe difficulties for small businesses and, for many entrepreneurs, effectively paralyze their operations.
“VAT is not a tool for micro-businesses. Its administration requires qualified accountants, a deep understanding of tax accounting, and often, a readiness for litigation to unblock tax invoices. For small and medium-sized businesses, this means a sharp increase in administrative burden and costs,” noted Andriy Yerashov.
European Integration Must Be Based on EU Directives
If Ukraine declares a course toward European integration, it is crucial to align directly with EU Council Directive 2006/112/EC, which suggests a recommended VAT registration threshold of €85,000.
Analysis of available data indicates that raising the threshold in Ukraine could have a positive effect not only on potential new VAT payers but also on those already in the system. The complexity of VAT administration is currently one of the primary sources of trouble for SMEs.
Legislative Risks and Retroactive Application
During a meeting with the Ministry of Finance on December 25, a new VAT administration model was presented. However, it became clear that the Ministry had effectively abandoned the draft previously released for public discussion, as the proposed model requires significant revision. Key concerns include:
- Automatic determination of VAT payers in Q1 2027 based on 2026 income results;
- Mandatory registration starting from Q2 2027.
This approach risks the retroactive application of the law, which is strictly prohibited by current Ukrainian legislation.
Specific concern was raised regarding the so-called “automatic assignment of tax codes.” Due to different reporting periods, a systemic imbalance arises: current VAT payers are placed at a disadvantage compared to new entities. Effectively, tax credits can only be formed after an FOP’s quarterly report, leading to the freezing of working capital and the inability to utilize tax credits in a timely manner.
“The proposed changes are reminiscent of a situation where generators are suddenly banned for environmental reasons — without considering that business simply cannot operate without them,” added Andriy Yerashov.
Similarly with VAT: the system is being proposed without testing, without a pilot phase, and without preparation, even for existing VAT payers. Instead, a logical step would be to introduce a test mode to evaluate the system’s capacity and its real impact on business.
Andriy Yerashov emphasized: instead of mass implementation of complex administration, the focus should be on fighting abuses and business splitting. These phenomena exist in all sectors and require targeted work by analytical and law enforcement agencies, specifically the Bureau of Economic Security (BEB). A systematic approach to detecting abuses will create a level and fair playing field for business without additional pressure on honest entrepreneurs.
It is essential to test the system to assess its real capabilities, eliminate legislative imbalances, and focus on combating fraud. Only then can the discussion return to expanding the circle of VAT payers and making decisions that do not paralyze small and medium-sized businesses.