VAT for Sole Proprietors: Threat, Opportunity or Postponement?

In recent months, VAT for sole proprietors has become one of the most widely discussed issues in the business community. The government is looking for additional sources of budget revenue (the Ministry of Finance expects approximately UAH 40.1 billion in additional receipts), while entrepreneurs are trying to understand what these changes would mean for them in practice.

On the one hand, the idea seems logical: if a business generates substantial turnover, taxation rules should be more consistent. On the other hand, is small business ready for an additional burden right now?

Introducing mandatory VAT for sole proprietors is a postponed threat that, under the banner of European integration, creates serious risks for small businesses. It is part of the National Revenue Strategy until 2030, driven by IMF requirements, which the government has currently postponed but not cancelled.

Ukraine's simplified taxation system has existed since the late 1990s. It was introduced to make life easier for small businesses: less bureaucracy, straightforward taxes and simplified reporting. This is precisely why the system became popular among entrepreneurs.

For a long time, sole proprietors paying the single tax were not required to pay VAT. They could register voluntarily if doing so was beneficial for working with partners or customers. However, there was no mandatory requirement.

The situation changed at the end of 2025. The Ministry of Finance published a draft law under which, starting from 1 January 2027, sole proprietors under the simplified taxation system (single tax payers in Groups 1–3, excluding e-residents) with annual turnover exceeding UAH 1 million would be required to register for VAT. Later, a softer approach began to be discussed: raising the threshold to UAH 4 million and postponing implementation until 2028. This is where the proposal sparked a wave of criticism, with opponents arguing that the UAH 1 million threshold was too low and the additional costs for small entrepreneurs would be excessive.

The government's main argument is understandable — the budget needs money. Moreover, this is also a requirement from creditors: the IMF has explicitly stated that international partners cannot indefinitely cover Ukraine's budget deficit if the country does not expand its own tax base. In addition, the government wants to create more equal tax conditions for companies and sole proprietors with similar sales volumes.

Indeed, large businesses currently operate under VAT rules, while some entrepreneurs using the simplified taxation system do not. This creates a perception of an uneven playing field.

However, there is another side to the issue: UAH 1 million in turnover today is not the same as it was ten years ago. Due to inflation and rising prices, even a small business can reach this revenue level without generating excessive profits. That is why many experts argue that the threshold should be significantly higher, suggesting an increase to at least UAH 2–3 million, while some propose raising it to UAH 6 million with a gradual reduction in the future. These figures are based on EU experience: VAT registration thresholds in EU countries are approximately EUR 85,000–100,000 (around UAH 4–6 million). Therefore, Ukraine's proposed UAH 1 million threshold is below European standards and represents one of the strictest approaches to VAT regulation for small businesses in Europe.

Naturally, entrepreneurs and their representatives are concerned about the possible consequences. Some sole proprietors have become accustomed to operating without VAT: they do not need to establish accounting policies or maintain detailed accounting records. For a large company, this is standard practice, but for sole proprietors under the simplified taxation system, it means additional time and money spent on administration. They would have to hire accountants, spend time preparing tax returns and register VAT invoices.

The result could be a sharp increase in prices, as sole proprietors are unlikely to absorb the VAT cost by reducing their own income. Instead, they would incorporate it into the prices of goods and services, meaning consumers would ultimately pay. This would be particularly noticeable in retail, services and small-scale manufacturing.

There is another risk: some businesses may begin splitting their operations among several sole proprietors to avoid exceeding the threshold. In other words, instead of bringing economic activity out of the shadows, the country could see new schemes for circumventing the rules and a return to under-the-table wage payments.

Increasing budget revenue should not rely exclusively on raising the tax burden on transparent businesses. Measures to combat the shadow economy should focus on closing loopholes used by large retail chains rather than imposing punitive tax increases on every sole proprietor.

Introducing VAT for sole proprietors also has certain advantages. First, it could create fairer competition between different business structures. It is widely known that large companies, supermarkets, restaurant chains and importers frequently use "splitting" schemes — dividing their operations among dozens of sole proprietors — to avoid paying corporate income tax at the standard rate of 18% and VAT. The authorities want to close these loopholes. Second, the reform could make transactions within supply chains more transparent. Third, it would generate additional budget revenue, which is particularly important during the war.

For some entrepreneurs, mandatory VAT registration could also create new opportunities to cooperate with large companies. Such companies often prefer working with VAT-registered counterparties because they can claim input VAT credits. Furthermore, switching from a 5% single tax rate (without VAT) to a 3% single tax rate plus VAT would partially ease the overall tax burden.

This is where the main debate lies. Formally, the reform may be justified in principle, but the question is whether this is the right moment to introduce it. During the war, businesses are operating amid unstable demand, labour shortages, logistical difficulties and significant risks. Under these circumstances, any additional burden is felt particularly strongly.

That is why there are growing calls for any changes to be introduced gradually, with a higher turnover threshold and a sufficiently long transition period.

It would be better to begin by closing other gaps: tackling the shadow economy and illegal imports, as these problems currently cost the budget hundreds of billions of hryvnias. Only after the situation stabilises, regulatory oversight is improved and the effectiveness of other taxes is increased should the government return to the idea of "VAT for sole proprietors". In any case, small businesses need time to adapt, and the thresholds must reflect their actual financial capabilities so that an inability to meet tax obligations does not encourage businesses to resort to undeclared cash transactions.

As things stand, no final decision has been made, and several options are being discussed: a new turnover threshold, postponing implementation and introducing more flexible rules for small businesses.

It was precisely because of strong opposition from the business community and analytical organisations that the government reached a compromise in early 2026. The IMF agreed to remove this requirement from the list of non-negotiable "prior actions", reclassifying it as a "structural benchmark". Meanwhile, the Ministry of Finance raised the proposed threshold under the compromise from UAH 1 million to UAH 4 million. As of April 2026, this provision had become a subject of negotiations between the government and the IMF rather than a requirement for immediate implementation. The measure is likely to be introduced at a later stage, no earlier than 1 January 2027, allowing time for preparation.

And this is probably the right approach. Tax reform should not simply generate revenue for the budget — it should also avoid destroying the businesses that earn that money. The final decision will depend on finding the right balance between the needs of the state and the capabilities of entrepreneurs.

Translation into English was created with the help of artificial intelligence.