To the President of Ukraine
To the Prime Minister of Ukraine
To the Minister of Finance
To the Minister of Economy
To the Chairman of the Tax Committee of the Verkhovna Rada
Chairman of the Economic Committee of the Verkhovna Rada
Think tanks specializing in economic policy express their respect to you and address the following:
On December 18, the Ministry of Finance published a draft law that requires small businesses using the simplified taxation system to pay VAT.
The document published by the Ministry of Finance proposes to introduce VAT for all taxpayers using the simplified taxation system (groups 1, 2, and 3) if their annual income exceeds UAH 1 million.
The explanatory note to the draft law states that the benefits of implementing the draft law will amount to approximately: UAH 40.1 billion (revenue) – UAH 0.179 billion (government expenditure) = UAH 39.9 billion, and additional costs for businesses will amount to UAH 2.09 billion per year, with no fees for citizens.
No detailed calculation of additional budget revenues is provided. However, the amount indicated corresponds to the State Statistics Service’s data on the added value generated by sole proprietors in microbusinesses in the years preceding Russia’s full-scale invasion.
Think tanks have analyzed the draft law and its explanatory note and note that the calculations in the published explanatory note do not reflect current realities.
First, the additional costs of the household sector (citizens) have not been taken into account. Since VAT is a tax on final consumption, additional budget revenues are planned to be obtained at the expense of the end consumer, who will thus incur additional costs equal to the fiscal effect. The possible increase in public welfare as a result of such redistribution has not been proven and, in any case, is significantly less than the amount of the fiscal effect.
Second, the administrative costs in the Ministry of Finance’s ARV are calculated on the assumption (of unknown origin) that a business entity spends an additional 56 person-hours per year on VAT administration. This assumption is not valid because VAT payer status requires accounting, which is otherwise unnecessary for microbusinesses under their management model.
The World Bank’s Ukraine: 2024 Tax Compliance Cost Survey shows that Ukrainian businesses spent an average of only 74.4 days per year (595 person-hours) on tax administration.
A study of the state of tax administration in Ukraine, conducted by CASE Ukraine in 2025 based on a representative survey by Info Sapiens, shows that the actual average difference in labor costs for tax administration between single tax payers without VAT (but with hired employees) and with VAT is 140. 2 person-days per year – 20 times more than in the Ministry of Finance’s calculations.
Thirdly, the Ministry of Finance used the minimum wage to calculate costs in the ARV. However, accounting is skilled work, usually performed by an accountant who earns at least the average salary (but may work part-time).
The actual additional costs per entrepreneur (based on the average salary of a qualified accountant (UAH 26,000/month) and the required hours) = UAH 93,000 per year (according to WB data). For 660,000 entrepreneurs who, according to the Ministry of Finance’s estimates, will be affected by the new regulation, unproductive costs will amount to 61.4 (WB labor cost estimates, which do not take into account full accounting) or UAH 115.7 billion per year (labor cost estimates with full accounting – CASE, Info Sapiens). Given the large share of single taxpayers working in the retail sector, the inevitable increase in the cost of accounting services due to the shortage of such services that will arise if the bill is passed, as well as the losses from audits related to VAT administration, this estimate should be considered minimal.
Accordingly, the impact of the new draft law on public welfare is negative, as the potential fiscal effect (+40.1 billion UAH) does not even exceed the administrative costs (-61..-115 billion UAH), which are net social losses that directly reduce public welfare.
In addition to the adverse social effects described above, the implementation of the draft law will contribute to the shadowing of SMEs, stimulating “fragmentation,” “concealment of turnover,” etc.
The proposed instrument does not align with the reform’s declared goals (expanding the base, leveling the playing field, reducing abuse). The theoretical fiscal effect of UAH 28-40 billion will in practice be significantly lower due to mass shadowing, business closures, and the transition to informal employment. Local budgets will lose revenue from the single tax without compensation. Mandatory VAT registration for microbusinesses with a turnover of UAH 1 million makes legal activity unprofitable, especially in low-margin sectors, where the administrative burden increases 2–3 times and accounting costs can exceed net income.
The reform does not eliminate key evasion schemes (smuggling, gray imports, substitution of labor relations). It creates risks for employment and economic recovery in frontline regions.
Therefore, it seems appropriate to introduce a VAT registration threshold significantly higher than UAH 1 million, which should be economically justified. The EU’s special VAT regime sets this threshold at EUR 85,000-100,000, and the UK currently has the same threshold. The experience of Western Europe (thresholds of EUR 85,000-100,000) shows that a high threshold reduces administrative burdens, promotes self-employment, and reduces the informality of the economy (OECD recommendations). Given the significantly greater burden of VAT administration in Ukraine, the threshold for Ukraine should initially be higher than the EU thresholds (for example, UAH 6 million from 2027, followed by a gradual reduction to the EU level).
It is also worth noting that the largest tax minimization schemes, in particular, “gray imports,” ‘envelope’ salaries, and counterfeiting, remain untouched. Until these fundamental “loopholes” are closed, it would be a strategic mistake to complicate the work of hundreds of thousands of entrepreneurs significantly.
Analytical centers strongly recommend acting in a measured and phased manner: first, solve the systemic problems that cause the country’s budget to lose significant financial resources, in particular: informal employment (losses of UAH 200-265 billion per year), “gray imports” (UAH 105-120 billion per year), excise tax evasion (UAH 39-43 billion per year), and the disguise of hired employees as sole proprietors (UAH 16-19 billion per year) — and only then look for reserves in the simplified taxation system.
To minimize risks, it is recommended to: gradually lower the threshold (UAH 6 million from January 1, 2027, then to an amount equivalent to EUR 85,000); simplified administration (cash method, auto-fill declarations); a risk-based approach (VAT only for sectors with a high risk of B2B abuse, exceptions for B2C and frontline territories); compensation to communities and subsidies for accountants for sole proprietors.
To minimize these schemes, the following proven tools are used in countries around the world and need to be introduced in Ukraine:
Implement an anti-abuse rule in legislation regarding the abuse of the simplified taxation system (ATAD Directive EU 2016/1164 toolkit), with clear criteria for identifying “fragmentation.”
To minimize the “sole proprietorship instead of hiring” scheme, it is necessary to adopt draft law No. 13507, which establishes clear criteria for distinguishing between pseudo-employees and employees.
It is necessary to legislatively introduce qualitative OKRs/KPIs for the State Tax Service and the State Customs Service, aimed not at fulfilling plans but at reducing the tax gap.
It is essential to minimize schemes to conceal real turnover by introducing economic incentives for buyers to obtain fiscal receipts (e.g., budgetary receipt lotteries, financial incentives for consumers).
And most importantly, to achieve the stated goals of the Ministry of Finance—reducing the shadow economy— to minimize all of the above-described tax evasion schemes, it is necessary to create basic conditions in the country: ensuring the rule of law, rebooting with the decisive vote of international experts from the State Customs Service, State Tax Service, National Police, and Financial Monitoring Service.
It should also be noted that when calculating the impact on budgets, the Ministry of Finance of Ukraine did not take into account the losses of local budgets from the reduction of the single tax rate for those who will be forcibly transferred to VAT payer status from 5% to 3% (a loss of at least UAH 18 billion). The Ministry of Finance also did not account for the increase in expenditures for the State Tax Service due to the rise in the number of VAT payers from 248,900 to 876,900. To serve them, it will be necessary to significantly increase the number of tax employees responsible for VAT administration, unblocking tax invoices, and conducting appropriate control checks. It will also be necessary to increase the number of lawyers involved in the relevant court cases and court costs, which will amount to an additional UAH 3 billion or more. The Ministry of Finance also failed to take into account that due to the unpreparedness of 628,000 new VAT payers, most of whom did not even keep proper accounting records, the new regulation will lead to the mass blocking of their tax invoices and will affect tens of thousands of small entrepreneurs. The number of blocked tax invoices will reach hundreds of thousands (amounting to tens of billions of hryvnias), which will be their direct financial losses. Existing VAT payers will also suffer, as the time required to review the documents they submit for unblocking will be significantly increased.
Analytical centers propose to hold an expert meeting with the participation of specialists from the Ministry of Economy, the Ministry of Finance, relevant members of parliament, and analysts to agree on a unified calculation methodology, conduct a comprehensive calculation of impacts based on it, and accordingly determine the optimal threshold for transition to VAT and a set of measures to minimize “shadow” schemes.
Sincerely,
Center for Social and Economic Research – CASE Ukraine
Institute for Economic Research and Policy Consulting
Institute for Social and Economic Transformation
Ukrainian Institute of Legal Policy
ANTs Network for the Protection of National Interests
Institute for Tax Reform
Center for Public Expertise
Association of Tax Consultants
Institute for Economic Leadership
Advanter Group Analytical Center
Office of the Chief Economist of the Coalition of Business Communities for the Modernization of Ukraine
Institute of Finance and Law
Tax Group of the Economic Expert Platform