When considering registering a company for VAT, two situations may arise: mandatory registration or voluntary registration.
Mandatory registration for VAT
You are legally obliged to register a company for VAT if the sum of invoices issued exceeds the limit (threshold) of €30,000 over 12 months of operation.
Note: this does not refer to the fiscal year from 01.01. to 31.12., but to 12 consecutive months in which you achieved turnover greater than the limit.
Once that limit is exceeded, registration for VAT and payment of value-added tax becomes mandatory.
Voluntary registration
A company may decide on its own to enter the VAT system even before crossing the legal threshold. Below we explain when this is beneficial.
Who is most often not in the VAT system
If total turnover (sum of invoices issued) for a 12-month period is less than €30,000, there is no obligation to register a company for VAT.
The most common activities outside the VAT system are:
- Small crafts and service activities
- Intellectual services that do not exceed the limit
- Small entrepreneurs without significant investments — hair salons, shoemakers, intellectual services (accountants, lawyers)
As “small”, they are more competitive for clients who are not in the VAT system, since they are not required to invoice VAT.
Recommendation: If the business is engaged in retail or works with goods in any way — we recommend registering for VAT. The reason: in any case you pay VAT on incoming goods, and as an unregistered business you cannot use that input VAT.
When voluntary registration is most common
Voluntary registration makes sense in the following situations:
- A company at the start of operations estimates it will have large volume and turnover, so it registers voluntarily
- Resale of goods — in any case you pay VAT, so it is better to be in the system
- Contracting business over €30,000 where you know in advance you will exceed the legal threshold
- Total turnover is approaching the set limit — better to anticipate than to wait
- Activity related to the import of goods and services — the customs procedure requires registration
- Companies estimate they will have direct benefit (interest) from it
When does a company have an interest in being in the VAT system?
This situation most commonly happens at the beginning of operations, when a company does not have many issued invoices, but:
- Buys equipment to adapt the business premises
- Has significant costs for materials, rent and other investments
On all those invoices it pays input VAT, which it can use only if it is registered for VAT.
Dependence on the type of customers
Whether it is in your interest to be in the VAT system or not — depends also on your customers:
- If your customers are in the VAT system (other legal entities): it pays off to be registered, since you compensate the input VAT that you anyway pay on costs and investments
- If customers are not in the VAT system (individuals, healthcare institutions, government bodies): the VAT you invoice them represents an additional cost for them — so a lower nominal price without VAT can be your competitive advantage
A dilemma about VAT registration? Contact Finance Plus for an individual analysis — we will help you make a decision that suits your business model.
