To be in the VAT system or not?

The very first decision to make after setting up an Ltd. or a trade company is whether to opt for the VAT system or not in the first year of business operations. Also, it is important to know that the limit for entering the VAT system is a revenue of €40.000,00 a year, which means that if you have been doing business for six months and have made revenues of €21.000,00, you will have to enter the VAT system next year.

Of course, there is no unique answer to which is better. Various types of businesses and the nature of the business itself influence this decision.

The first question is who are your buyers? If they are natural persons and you are providing a service, there are surely reasons for you not to enter the VAT system as your prices would be more favorable without the VAT amount, which means your earnings would be bigger.

In case your clients are other companies and you deliver your goods or services within the EU, things change because your clients can opt for a pre-tax and you can send your EU buyers, with a VAT ID, invoices without the VAT amount with a Reverse Charge.

The other important question is how much you plan to invest in the beginning. If the investment is substantial, the incoming VAT amount will consequently be increased. It would be advisable to enter the VAT system in that case as you would be able to claim a VAT refund and thus improve the money flow.

The worst thing an entrepreneur can do is to stay out of the VAT system for the first year and then make a big investment. Consequently, in the second year, it will be necessary to enter the VAT system by the rule of law. In that case, it is impossible to use pre-tax from the investment and VAT will later be charged for invoices and services deriving from the investment.

On the other hand, entering the VAT system imposes some obligations such as submitting monthly and quarterly VAT forms, but you do not need to worry about that as this is done by your accountant.

As with making any other business decisions this one should also be carefully considered. It is important to come up with a business plan and consult a professional in order to get the maximum within the established rules.

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