An analysis of the Ministry of Finance’s draft law on VAT for sole proprietors by Volodymyr Dubrovskyi, Senior Economist at CASE Ukraine.
Key points:
What the Ministry of Finance says:
– The rule applies to 660,000 single tax payers with 2024 turnover exceeding 1 million UAH;
– They will have to “pay an additional” ≈ 40 billion UAH to the budget;
– Business costs for VAT administration — ≈ 2 billion UAH;
– Citizens will allegedly “lose nothing.”
But the problem is that this is a methodologically flawed assessment. Because VAT is a tax on final consumption, and therefore these 40 billion UAH are not a “benefit,” but losses for citizens due to rising prices (or losses for businesses if they are forced to partially “absorb this cost”). The fiscal effect is essentially a transfer of money from private pockets to the state.
The biggest flaw lies in the assessment of administration.
The Ministry of Finance based its calculation on the assumption that an entrepreneur will spend only 56 man-hours per year (!) on VAT. This does not correspond to reality, if only because VAT requires accounting.
Data from a CASE Ukraine study (2025):
the difference in labor costs for tax administration between sole proprietors on the single tax without VAT and with VAT is 140.2 person-days per year
— that is 20 times more than the Ministry of Finance’s estimate.
Additionally:
– the likelihood of an audit for a single-tax payer with VAT is three times higher than without it;
– one in three VAT payers was audited;
– nearly one in two audits resulted in a fine or penalty;
– there is a separate issue of blocked tax invoices, which often cannot be resolved without a qualified accountant (and sometimes even a lawyer).
How much will this actually cost?
If VAT administration requires, on average, one accountant for every two microbusinesses, then all new VAT payers will need approximately 330,000 accountants—a number simply not available in the labor market.
Based on an average salary of 27,000 UAH/month, the total administrative costs for businesses would amount to at least 107 billion UAH per year—that is, a net loss of social welfare.
And this is consistent with market practice: accounting services for a sole proprietor subject to VAT under the single tax regime cost from 10,000 UAH per month.
Consequences for the market:
– In retail, the markup is 20–30%, meaning that from a turnover of 1 million UAH, the business retains only 200–300 thousand UAH, from which rent, electricity, and other expenses must still be paid;
A microbusiness of this scale cannot afford an accountant, so either:
– even smaller “survival businesses” will remain,
– or businesses will start hiding their income.
This will strengthen the market power of large chains, put pressure on suppliers, and contribute to rising prices—as is happening in EU countries where simplified tax regimes are absent or limited and low VAT thresholds are in place.
But a realistic scenario could be even worse:
– microbusinesses will start closing en masse,
– go underground or “buy their way out” of tax obligations,
– and highly skilled freelancers will more actively seek work abroad, where, for similar taxes, there is better government quality and less interaction with tax authorities.
What can be done instead?
A logical solution would be to set the VAT registration threshold at the upper limit of the simplified system:
if not Group 3 (≈10 million UAH), then at least Group 2 (≈7 million UAH).
In the EU, the threshold is 85,000 euros/year (and 100,000 euros for cross-border transactions), but for Ukraine it should be higher, because our VAT administration system is one of the most burdensome, and the more complex the administration, the higher the threshold should be.
The current threshold in Ukraine was set in 2015, and if we index it to the growth of the minimum wage—as is done for the fixed single tax and the unified social tax—it comes out to roughly the same 7 million UAH.
❗️If we consider not “fiscal revenues” but actual social losses, the option to “leave things as they are” looks much more attractive than the proposed “reform.”
Read the full article