Organize as a business exempt or non-exempt from VAT?

One of the most popular decisions in starting a business relates to Value Added Tax (VAT). Most organizations providing goods and services must remit VAT to the government. Certain small businesses are exempt from VAT. Would it be wise for you to organize your business as exempt?

Common to both “Exempt” and “Non-Exempt” businesses is that both are liable for income taxes. As noted above, the only distinction between the two is the liability for VAT. Accordingly, the exempt business does not charge VAT to its customers. One the other hand, a non-exempt organization may reduce its VAT liability to the government by deducting the VAT it pays to its vendors. This benefit does not accrue to non-exempt organizations.

In order to be considered an “exempt organization”, two (2) conditions must be met:

  1. Annual business income may not exceed the 2014 statutory limit of 79,842 NIS; this amount increases annually based upon the Consumer Price Index.
  2. The proprietor is not included on the following list of providers of services at any level of income:
    • Independent contractors: Architects, engineers, technicians, psychologists, lawyers, accountants, Rabbinical court advocates, bookkeepers, consultants, etc.
    • Doctors, dentists, veterinarians, physical therapists, etc.
    • Owners of driving schools.
    • Real estate sellers and agents.
    • Car Rental service
    • Any incorporation

Is an exempt business required to file with the VAT authorities?

An exempt business is required to file an annual report of business activities to the VAT authority. If and when the business income exceeds the statutory ceiling, the organization loses its exemption and must file once every two months (bi-monthly). If the excess was due to extraordinary circumstances, the business pays VAT on the excess without changing its original exempt status. This one-time payment requires approval from the VAT authority.

Does the exempt business issue a tax qualifying receipt?

No. The business issues a standard non-qualifying receipt.

Also, even if you comply with the above conditions, it still may not be in your best interests to organize as an exempt business.

Other considerations speak to the decision concerning whether or not to organize as an exempt business. For example:

  • The level of investment capital needed for the business.
  • The cost of professional services.
  • Multi-year forecasts
  • Company image

In order to choose the best strategy in organizing your business, consult with our professionals. They will help you understand and balance the aforementioned considerations in addition to those circumstances affecting your individual needs.