VAT for sole proprietors: who will be affected by the reform and when will it start
Introduction of VAT for sole proprietors with an annual income exceeding UAH 1 million – one from the IMF's conditions. Without its implementation, Ukraine risks not receiving the next tranche of aid. But for businesses, this could turn into the most significant change in recent years. There are 1.7 million sole proprietors operating in the country. According to preliminary estimates, up to a million of them could automatically become VAT payers – meaning their administrative burden would increase significantly, and they would effectively lose the advantages of the simplified system.
The goal of the changes is to increase revenues to the Ukrainian budget so that Ukraine becomes less dependent on aid from international partners; to introduce a transparent tax system and limit the scheme where sole proprietors are used for artificial business fragmentation.
For small businesses, this is not about "another tax." It's about a new reality: more complex accounting, the risk of invoices being blocked, full-fledged bookkeeping, and additional costs. Some entrepreneurs will be forced to raise prices, optimize, or cease operations.
Who exactly will be affected by this reform, how exactly will taxes increase, what will the economy lose, and will such a decision really be made by the government – we investigated LIGA.net
How will this affect sole proprietors
For most small entrepreneurs, i.e., those with an annual turnover of UAH 1 million per year or UAH 83,300 per month, VAT will not just be an increase in fiscal pressure. It will be a fundamentally new level of administrative burden. They will have to keep VAT records, full accounting reports, register tax invoices, bear the risks of their blocking, etc. They will also have to hire accountants and incur additional costs.
The simplified system will lose its key advantage – the simplicity and low cost of administration. This was stated in a comment LIGA.net says Taras Marsholok from the Center for Public Finance and Public Administration Analysis at the KSE Institute.
"Some sole proprietors will be forced to raise prices, some will have to split their businesses or move into the cash segment, and some will simply close down," he said. According to Marshalko's forecast, small services, small retail, and creative industries will be the most vulnerable, as they lack the resilience to cover new costs.
VAT will be included in the price of goods, says Tetiana Yashchenko, a partner at the Expatpro law firm. "This will be passed on to the population, which will definitely lead to an increase in the cost of goods and services," she says.
However, it will not be possible to quickly implement changes and administer the tax in a new way. It will be necessary to adopt amendments to the Tax Code and significantly increase the IT infrastructure of the current electronic VAT administration system, explains Mykola Klimenko, head of the accounting support practice at the Juscutum law firm. After all, the number of registered VAT payers is likely to quadruple.
There are currently 250,000 of them. Up to 1 million sole proprietors out of the current 1.7 million may fall under the new VAT payment criterion.
How taxes will increase
Currently, sole proprietors in Ukraine operate under either the general or simplified taxation system. Most choose the simplified system due to its simpler reporting and lower taxes.
There are three groups on the simplified system:
Group 1 — entrepreneurs with an annual income limit of UAH 1.3 million. They pay a single tax (ST) of UAH 302.8/month, a military levy of UAH 800/month, and a single social contribution (SSC) of UAH 1,760/month.
Group 2 is a small business with an annual income limit of UAH 6.67 million. Monthly payments include a single tax of up to UAH 1,600/month, a military levy of UAH 800/month, and a unified social tax of UAH 1,760/month.
Group 3 is the most common among IT and freelance professionals, where a percentage of income is paid. The annual limit is UAH 9.33 million. Quarterly, the single tax is paid at 5% of income or 3% + VAT if the entrepreneur is a VAT payer, the military levy is 1% of income, and the unified social tax is a minimum of UAH 1,760/month.
The simplified system also provides for the possibility of being a VAT payer: within the third group, you can choose the model of 3% of turnover + VAT.
If the IMF's condition is approved, then sole proprietors will have to add VAT to their existing fiscal payments – approximately 20% of net income. For sole proprietors with an income of $2,000, this means a threefold increase in taxes: from an effective rate of 7% to 20-22%. This was stated on their Facebook page wrote Anatoliy Amelin, co-founder and director of economic programs at the Ukrainian Institute for the Future.
"A sole proprietor with an income of two million a year currently pays about 140,000 hryvnias. After the reform, it will be 380,000-430,000," Amelin wrote.
What will be the consequences
In an ideal model, the effect of introducing VAT limits for sole proprietors is estimated at approximately UAH 18 billion per year, which is about 8% of domestic VAT revenues. But this calculation does not take into account potential risks, says Taras Marshalko from the KSE Institute.
The positive effect can be negated by even 15% of the turnover of sole proprietors of groups II-III going into the shadows. In this case, the direct losses of the single tax and the unified social tax alone could amount to UAH 12.7 billion, according to Marshalok.
Why will they go into the shadows? Working "in the open" will become more expensive. "For small businesses, this means not just an increase in tax payments, but a significant increase in the cost of operating in the legal field," Marshalok believes.
We should also expect an increase in demand for "optimization." The threshold of UAH 1 million is very low, so the idea of "not exceeding a million" and "splitting into two or three sole proprietorships" will become widespread. This was stated by Ihor Yasko, managing partner of the Winner law firm.
Another consequence is the administrative burden and the risk of burying some small businesses under inspections. VAT automatically entails the risks of blocking tax invoices and the need for communication with the tax authorities. "For a small sole proprietor who does not have an accountant or a lawyer, any mistake or delay can turn into a tax debt, fines, and the need to sue the state," adds Yasko.
Will such a decision be made
Despite the fact that the introduction of VAT for sole proprietors is a requirement of the IMF, without which Ukraine will not be able to receive further assistance from international partners, the decision may still not be made.
"It was just announced at the faction meeting that the issue of sole proprietors and VAT is currently not being discussed at all and has been removed from the agenda," – wrote People's Deputy Ihor Fris from the Servant of the People faction wrote on his Facebook page. There are no votes among MPs for this, he adds, the state will look for other sources to fill the budget.
The KSE Institute also calls this decision unlikely. Such a step contradicts the logic of the simplified system and, without changes to the basic model, is almost guaranteed to create shock effects for small businesses. The IMF, however, emphasizes the expansion of the tax base.
"A realistic scenario is not a strict VAT limit of UAH 1 million, but a phased reform of the simplified taxation system with an increase in the threshold to UAH 3-4 million and parallel optimization of government spending," says Taras Marshalko from the KSE Institute.
However, there is another opinion: the inclusion of VAT for sole proprietors in the list of IMF conditions means a very high probability of its implementation. For the government, this is not only a matter of tax policy but also of macro-financial stability. This is the opinion of Ihor Yasko, managing partner of the Winner law firm.
"It is unlikely that the VAT for all sole proprietors with a threshold of UAH 1 million will be fully launched in 2026, and there are already suggestions that this step will be tied to a broader tax reform after 2026," says Yasko. He believes that a political decision will still be made, but when VAT will be switched on for everyone is an open question.
"For practical purposes, this means that it's worth calculating models with VAT now, preparing options for transitioning to the general system, to another jurisdiction, to another work format, and building communication with clients regarding possible price increases," Yasko concludes.
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