Author: Kerttu Eiskop
There have been various statements in the media about possible legislative amendments on taxation. One of them concerns a rise in the threshold for registration as a VAT payer. It’s only speculation whether the change will go through and where the line will be drawn – and who will be affected on what scale – but it has nevertheless spawned discussion in the business community.
The state’s budget strategy for 2017-2020, released in April of this year, specifies that the threshold for registering as a VAT payer will be raised from the current 16,000 euros to 40,000 euros. The purpose given for the change is to reduce the administrative burden on micro-enterprises and increase their competitiveness. The new threshold would be expected to come into force in 2018.
The threshold to rise to 40,000 euros
The change means that only companies whose turnover exceeds 40,000 euros in one calendar year will be required to register as VAT payers as of 2018. The turnover can be more than twice as high as it is right now before a company incurs that responsibility. At the same time, the possible change in the limit on distance sales[1] is not covered by the budget strategy, which means that a lower, 35,000 euro limit, will remain in place for companies who engage in distance sales to Estonia.
Under the currently valid VAT Act, companies can also apply for registration as VAT payers in the case of a turnover lower than the threshold – i.e. voluntarily. On the condition that the provision remains unchanged in the course of the future change, there is no risk of additional VAT expense for companies who bear start-up costs or make investments – they will continue to enjoy the right, after having registered as VAT payers, to deduct input VAT on business related expenses.
Companies must provide thorough documentation of their operations
Still, the rise in the threshold may make it harder to register voluntarily as a VAT payer, considering that the company will be required to substantiate, among other things, that it is engaged in business. Already, in the case of current practice, there are tax administrators who, in the case of applicants whose turnover is below 16,000 euros, examine the requirement of business activities with an excessive amount of rigour. Companies may be asked for documents not ordinarily prepared upon first going into business (e.g. preliminary agreements, business plan). Thus the higher threshold may complicate the proof issue even more, and more companies will face the additional administrative burden in the future, including companies who exceed the current level and who in today’s situation would be required to register as VAT payers.
Newly-established companies and small companies whose sales turnover outstrips purchases and whose customers are mainly individuals will be certain to benefit from the rise in the threshold. For the latter, the VAT added to the purchase price is an additional expense. At the same time, the exemption on registering as a VAT payer means a certain decrease in administrative burden which will only be welcomed by small or newly established companies.
Considering that there is currently no detailed information besides a couple of sentences in the published state’s strategy, it is hard to predict potential additional problems in practice or the final benefit or cost for the companies and state. It should also be taken into account that the government has to apply for permission from the European Commission to change the threshold. Thus, for such an amendment to actually come into force, there are still a number of legal hurdles and only time will tell whether it happens by 2018 or not. Still, companies just starting out and also small businesses should definitely think whether registering as VAT payer is beneficial for their business, regardless on possible changes; or will an increase in the VAT registration threshold would grant a benefit.
Should you have any additional questions about the VAT registration thresholds, contact Grant Thornton Baltic tax adviser Kerttu Kuusemäe at kerttu.kuusemae@ee.gt.com or 626 4500.
[1] Distance sales means transfer of goods to a non-VAT payer in another member state, whereas the goods are transported by the seller to the member state of the buyer’s location.