Accordingly, there is a legal obligation to register for VAT and to submit VAT returns if, in the ordinary course of business, taxable goods or services are supplied.
Some businesses provide both VAT-liable and VAT-exempt services, making it essential to determine when VAT liability applies. This consideration is not limited to private enterprises but may also apply to other entities.
It may seem obvious that a business would seek to minimise its VAT liability. In some cases, this may be achieved by establishing that a particular supply is not subject to VAT or by structuring operations to optimise output VAT.
This is frequently seen, for example, in relation to exemptions on transfers of real property, municipal subsidy models, or cross-border trade arrangements.
However, it is not uncommon for businesses to be interested in becoming VAT-liable at an early stage. While this may seem counterintuitive, one must bear in mind that VAT can also represent liquidity flowing into the business. This may be particularly relevant during the establishment phase, when turnover is still limited. Unlike tax deductions, VAT input deductions can generally be claimed if one intends to establish a VAT-liable business and incurs VAT-bearing expenses in that process.
In practice, this can apply to investments in VAT-liable real property or machinery well before VAT-liable turnover is generated. In such scenarios, substantial VAT refunds may be obtained before the first invoice is issued to a customer.
Thus, VAT liability can translate into cash flow for startups. It is not uncommon for VAT disputes to focus on businesses seeking to be recognised as VAT-liable to receive VAT refunds.
In other circumstances, however, there may be a clear interest in keeping an entity entirely outside the VAT system – for example, in the case of a holding company, a non-profit organisation, a foundation, or an association.
Please feel free to contact us for advice on VAT liability – whether the matter concerns ordinary, straightforward VAT issues or requires more in-depth and specialised counsel.
