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Wondering whether being VAT-registered is worthwhile or whether you should remain exempt? The answer is not obvious. For a freelancer working from home, VAT is often an unnecessary cost, but for a transport or trading company it may underpin financial liquidity. Do not fall into the trap of apparent savings. Learn the advantages and disadvantages of both options before submitting VAT-R.
What distinguishes a VAT-registered business from a VAT-exempt one?
The difference concerns charging tax on sales and the right to deduct it on purchases.
An active VAT taxpayer adds a rate, usually 23%, to its services, acting as an intermediary for the tax authorities, but in return recovers VAT on cost invoices. Generally, the economic cost of these purchases is the net amount, although the gross amount is usually paid and VAT recovered through settlement.
A VAT-exempt entrepreneur does not remit the tax to the tax office or add it to service prices. This makes them cheaper for private customers, but they lose the deduction privilege: every business purchase costs them the full gross amount.
Who must be VAT-registered?
Article 113(13) of the VAT Act lists industries and activities excluded from the turnover-based exemption, requiring active VAT registration regardless of sales volume.
These include providers of legal and advisory services, except agricultural advice. The obligation also covers trade in specific goods. For example, you must register for VAT if you plan to sell:
- precious metal products (the jewellery industry),
- goods subject to excise duty (with exceptions such as electricity),
- new means of transport,
- building land,
- motor vehicle and motorcycle parts,
- electronic equipment, cosmetics and chemicals (under certain conditions for online sales).
Failure to register by submitting VAT-R exposes you to severe fiscal penal sanctions and the obligation to pay outstanding tax with interest.
Before submitting VAT-R, consult experts about your business model. TaxCoach’s tax specialists will analyse your business profile and indicate whether VAT registration is worthwhile.
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Who qualifies for a VAT exemption?
If you are not subject to a statutory obligation, you can use the turnover-based VAT exemption. It is available to entrepreneurs whose total sales value excluding VAT did not exceed PLN 240,000 in either the previous or current tax year. This threshold determines when VAT-R must be submitted.
When must you register for VAT?
Once the PLN 240,000 threshold is exceeded, the exemption expires automatically. The entire transaction that causes the threshold to be exceeded is already subject to VAT. You must therefore prepare to account for tax and submit VAT-R no later than before the day of that transaction.
Important! The PLN 240,000 threshold applies to entrepreneurs operating throughout the year, from 1 January to 31 December. If you start a business during the year, it is calculated proportionally to your period of activity, so the first-year threshold may be lower than PLN 240,000. Losing entitlement to the VAT exemption requires submitting VAT-R and adapting accounting systems to issue invoices with tax charged. |
When is VAT registration worthwhile?
When assessing whether VAT registration pays, primarily consider your customer structure and planned expenses. So when should you register?
If you mainly work with other businesses (B2B)
When your customers are other VAT-paying businesses, an invoice including tax, for example PLN 1,000 net plus PLN 230 VAT, is usually financially neutral for them. The counterparty deducts that PLN 230 from its tax liability, so the actual cost of your service remains the net amount. VAT registration in B2B gives you a powerful advantage: the right to deduct VAT on business-related purchases, such as fuel, leasing, equipment, telecommunications or software, subject to any restrictions.
When you plan substantial investment in business development
Planning to buy expensive equipment, machinery, a delivery vehicle or specialist software? Remaining exempt means financing the full gross investment value. Although this amount is a tax-deductible cost, you will not recover tax from the tax office. An active taxpayer’s situation is different. Buying a machine for PLN 100,000 net, or PLN 123,000 gross, gives you the right to recover PLN 23,000 VAT, provided the purchase relates to taxable sales and no statutory deduction restrictions apply.
If your sales are taxed below 23%
In industries with preferential rates, such as 5% or 8%, or exports at 0%, VAT registration often means input tax exceeds output tax, enabling a VAT refund. Since most business costs carry the standard 23% rate, a continuing input tax surplus arises. The tax office refunds the difference directly to your account, which may improve business liquidity.
What are the disadvantages of VAT registration?
When examining the advantages and disadvantages, remember that despite measurable financial benefits, active taxpayer status is not always the best choice. The biggest drawback is losing competitiveness with individual customers (B2C). Consumers care not about the net amount but what they ultimately pay for a service.
Example: a photo session for an individual customer A VAT-exempt photographer charges PLN 3,000, which they keep. A VAT-registered photographer wanting the same net earnings must invoice PLN 3,000 net plus 23% VAT, or PLN 3,690 gross. They are almost PLN 700 more expensive to the customer despite earning the same as their competitor. If your industry mainly serves retail customers, this is a textbook case of when VAT registration is not worthwhile, unless the turnover threshold requires it. |
Another disadvantage is administration. VAT registration requires:
- submitting JPK_V7 within statutory deadlines, usually increasing accounting service costs;
- accepting that some counterparty payments may go to a VAT account and be unavailable as ordinary cash, although they can be used for taxes and ZUS contributions, among other things;
- strictly monitoring deadlines and invoice accuracy.
Remember the risk of losing liquidity too. If you issue invoices with deferred payment terms, the tax office requires output VAT by the 25th of the following month. The fact that the counterparty has not yet transferred the money does not matter.
If this article interested you, explore our tax advisory services and read how we can help you:
Summary
FAQ – frequently asked questions
1. How much must you earn to register for VAT?
There is no minimum earnings threshold for VAT registration. You can register as an active VAT taxpayer even with no revenue or from the first zloty earned. Registration is voluntary unless you perform activities excluding the exemption under Article 113(13) of the VAT Act.
2. Can a lump-sum taxpayer be VAT-registered?
Absolutely. Income taxation is separate from VAT status. You can pay lump-sum tax on recorded revenue while being an active VAT taxpayer, adding 23% VAT to invoices and deducting it on purchases.
3. Can a VAT-exempt taxpayer issue an invoice?
A VAT-exempt taxpayer can issue an invoice and, in some situations, must issue one at the buyer’s request within the statutory deadline. The difference is that it contains no tax rate or amount (the rate field often shows ZW, meaning exempt). The invoice must state the legal basis for exemption, such as Article 113 of the VAT Act for the turnover-based exemption. For a business buyer, it is a tax-deductible cost at the gross amount but confers no right to deduct VAT because none is included.
4. If I buy a car as a VAT-exempt business, can I recognise it as a cost?
Not paying VAT does not remove your right to recognise business expenditure as tax-deductible costs, unless you pay lump-sum tax, where costs are not deductible at all. Buying a car on a VAT invoice as an exempt taxpayer does not allow you to deduct the 23% tax. However, generally the full gross invoice amount becomes your cost. The VAT paid may therefore indirectly reduce income tax as part of the cost, but will not be directly refunded.
Sources:
Act of 11 March 2004 on Tax on Goods and Services: https://sip.lex.pl/akty-prawne/dzu-dziennik-ustaw/podatek-od-towarow-i-uslug-17086198
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