The most common mistakes made by new entrepreneurs

At our company we often come across the same mistakes with new clients. Here are a few of them:

FAILURE TO REGISTER WHEN BUYING SERVICES FROM ABROAD

The most common mistake is that an entrepreneur fails to meet the registration obligation under Section 7a before receiving a service from an EU country. As a rule, this is advertising, whether from Google or Facebook. Before you receive the service itself, you are obliged to register for VAT, and you will be assigned a VAT ID (IČ DPH), in other words a VAT NUMBER.

Once you have been assigned the number, you can order the service; you give this number to your business partner, who will issue you an invoice with a reverse charge note. The invoice will therefore be issued without VAT. But your obligation does not end there: after receiving the service, you must file a VAT return by the 25th day of the month following the month in which you received the service, and pay tax of 20% on that service. If you fail to meet this obligation, you will be fined €30 for late registration and €30 to €60 for not filing the return, and on top of that the tax office may charge you late-payment interest.

“I will pay with my personal card, nobody will ever find out.” Many entrepreneurs think that if they pay with their own personal card, even though the purchase will be used for the business, they will avoid this obligation – and at the same time they do not include it in their costs. From the point of view of the state budget the amounts may be the same, but VAT is underpaid, and you are also depriving yourself of the chance to include these expenses in your tax-deductible expenses, which could reduce your income tax.

INCORRECTLY CALCULATED TURNOVER FOR MANDATORY VAT REGISTRATION

It often happens that an entrepreneur gets the method of calculating turnover for VAT registration wrong. Section 4(1) of the VAT Act, Act No. 222/2004 Coll., tells us that if you reach a turnover of €49,790 over 12 consecutive months, you must register for VAT by the 20th day of the month following the month in which you reached that turnover.

Most often, entrepreneurs assume that the turnover for the calculation is always reset to zero on 1 January and they start again from scratch, looking at the calendar year instead of 12 consecutive months. So, for example, you always need to monitor a period such as April 2021 to March 2022, or August 2022 to July 2023.

Another mistake is not realising that not every sale and not every item of revenue counts towards the turnover for VAT registration. It does not include exempt supplies, supplies abroad, supplies without consideration, the sale of assets and some others.

NEGATIVE CASH BALANCE – A CASH DESK IN THE RED

Many people still prefer cash these days, and that includes entrepreneurs.

The best way to picture a company’s cash desk is as a real wallet: when there is no money in it, you cannot pay with it, because there is nothing to pay with. However, especially at the start of their business, entrepreneurs often buy goods and services in cash out of their own funds without first putting that money into the company, and the result is a negative cash balance.

From an accounting point of view this is a huge mistake that needs to be resolved. Possible solutions include:

• Booking the goods or services already bought as paid by the shareholder, which creates a liability towards the shareholder – or the managing director
• It is better, however, to anticipate such a situation, in which case the shareholder can be given an advance from the account for such purchases.
• Withdrawing money from the account.

Another problem arises, as regards the right to deduct VAT, if the company is a VAT payer. Under the Commercial Code, a person becomes the owner of a thing once they have paid for it. But because the individual (shareholder/managing director) is not a VAT payer, and therefore not a taxable person when selling the thing to the company, the company has no right to deduct VAT under Sections 49 and 51.

This problem can be solved with an internal directive stating that the managing director/shareholder is authorised to buy goods and services in the name and on behalf of the company from a private account as well, or with a payment/credit card. In that case, the company becomes the owner at the time of payment and has a liability towards the managing director/shareholder.

ILLEGAL WORK – ILLEGAL EMPLOYMENT – WHAT SHOULD I DO IF I WANT TO EMPLOY SOMEONE?

Apart from the recruitment process itself and advertising the job on the relevant portals, an entrepreneur faces extensive paperwork connected with hiring the first employee. If you are going to hire your first employee, you have to register with the Social Insurance Agency (Sociálna poisťovňa) and the health insurance company, and with the tax office for tax on employment income.

The employee must be registered with the Social Insurance Agency before starting work, that is, before the employment begins. This registration is done through the Social Insurance Agency’s e-branch. As an employer, you must register with the agency itself by filling in the employer registration form and delivering it either in person or by post to a branch of the Social Insurance Agency. Once the employer has been registered, you will be given access to the e-branch.

If you miss the deadline, the Social Insurance Agency may fine you for each day of delay according to its schedule of penalties.

Higher fines, however, can be imposed by the labour inspectorate, which can impose a fine starting at €2,000 for even 1 day of delay.

You must register the employee with the health insurance company within 8 days of the start of the employment.

HOW CAN YOU AVOID MISTAKES LIKE THESE?

One way to avoid making mistakes out of ignorance is to have a reliable accountant who will help you with everything. Don’t hesitate to get in touch with us and we will take care of everything for you.