To be or not to be a VAT payer?

Every entrepreneur has to work out whether it pays to be a VAT payer or not. It all depends on their target group of customers. If they are going to focus on B2B, i.e. selling services or goods between businesses, and will therefore mostly trade with VAT payers, it may be more advantageous for them to be a VAT payer as well. The difference in profit can be as much as 40% between making the right decision and making the wrong choice.

HOW DOES PAYING VAT WORK?

If we are VAT payers, we always look at our inputs and outputs. In other words, we look at everything we buy with VAT and at how much we sell for.

Let us illustrate this with an example:
as a company, in one month I had the following inputs (expenses):

• Bought goods for €1,000 + €200 VAT
• Paid €500 + €100 VAT for transport to a customer
• Paid rent of €200 + €40 VAT

Within one month, 2 situations can arise if I am a VAT payer:

• I sold no goods and had no sales, so I have an input VAT deduction of €340 (200+100+40)
• I sold goods and had sales of €3,000 + €600 VAT, so I have to pay VAT of €260 to the state (600-200-100-40).

REASONS FOR AND AGAINST BEING A VAT PAYER

Definitely be a VAT payer if:

• I buy goods or services from a VAT payer and sell them on to VAT payers
• I sell services only or almost exclusively to VAT payers
• A large part of my inputs includes VAT and I also sell to VAT payers

It is worth considering if:

• My customers are split roughly equally, and I have both VAT payers and non-payers

Definitely do not become a VAT payer if:

• I sell services to non-VAT payers and end customers

It is also worth considering that if you are planning high investments at the start of your business, such as renovating premises, buying machinery and equipment, buying motor vehicles or a larger stock of goods, the dilemma of whether or not to be a VAT payer will shift more towards being a VAT payer.

We must not forget that if we sell to end customers or to non-VAT payers, they always look at the price they will pay and do not care whether you are a VAT payer or not.

Let us compare your profit if you are or are not a VAT payer, and if you buy and sell services to both VAT payers and non-VAT payers.

Example:

You buy goods from a supplier for €1,200 (€1,000 goods and €200 VAT). If you are not a VAT payer, €1,200 goes into your costs; if you are a VAT payer, €1,000 goes into your costs and you have €200 of VAT.

You then sell the goods to an individual for €2,400. If you are not a VAT payer, €2,400 goes into your revenue; if you are a VAT payer, €2,000 goes into your revenue and €400 is VAT.

The profit will be as follows:

• As a non-payer it is simple: I sold for €2,400 and bought for €1,200, so the profit is €1,200.
• As a VAT payer I also sold for €2,400, but I have to pay €400 to the state, and I bought for €1,200, but I can deduct €200 from my liability. So my profit is €1,000.

In such a case, it does not pay for me to be a VAT payer. Of course, this is an extreme case, and you cannot decide on this basis alone whether or not to be a VAT payer; the calculation itself should also include wage costs and much else. Most entrepreneurs have a combination of customers and suppliers who are both VAT payers and non-payers.