Individuals, who plan to start their own business, are faced the choice of the taxation system. Simplified system is attractive by its name and low rates, but contains many restrictions. General taxation system on the contrary provides for only one tax rate, but it several times exceeds the rate of the unified tax. Which of these two systems is more profitable − depends on many factors.Details of the general taxation system are in the following.
Every citizen can carry out business activity, which is not prohibited by the law. This right is established in Art.42 of the Constitution of Ukraine. The list of activities, on which individual − entrepreneur (hereinafter – IE) on the general taxation system does not have right, is defined in Art.4 of the Law of Ukraine “On Entrepreneurship” of 07.02.1991, № 698-ХІІ. These are specific activities related to distribution of narcotic drugs and psychotropic substances; protection of certain especially important objects of state ownership right; conducting of criminalistical examination as well as forensic, forensic psychiatric examinations; production of certain types of gasoline, bioethanol.
Taxation of incomes obtained from carrying out of economic activities of IE, except for those who have chosen a simplified taxation system, is regulated by Art.177 of the Tax Code of Ukraine (hereinafter − TCU).
The profit of IE, received during the calendar year, should be taxable at personal income tax (hereinafter − PIT) at the rate of 18%.
At the same time the subject to taxation is a net taxable income, i.e. the difference between the total taxable income (earnings in cash and in kind) and documented expenses associated with IE business activities (para.177.2 TCU). In other words, the cash method is used to determine the total taxable income, and to determine the expenses should be taken into account only those associated with obtaining income and confirmed by relevant documentation of their payment.
The list of expenses directly related to the receipt of income is contained in para. 177.4 of TCU. According to it, IE on the general taxation system is entitled to include the following in the expenses:
- the cost of purchased goods (raw commodities, materials);
- the labour payment expenses for individuals who are in labor relationship with the employer;
- amounts of paid unified social contribution (hereinafter – USC);
- other expenses relating to the implementation of economic activity (expenses of hired employees, for communication services, advertising, payment of rent, repair and maintenance of property used for economic activities, transportation of finished products (goods), transportation and forwarding and other services related to the transportation of products (goods), the cost of purchased services directly associated with the production of goods, execution of works, provision of services; payment for cash management services).
There are not included in the list of allowable expenses the amounts of paid taxes and duties (except the amount of USC) and expenses for acquisition of licenses and other special permits, which are issued by public authorities for the implementation of economic activity.
IE could be not registered by the payer of value added tax (hereinafter − VAT), if the total amount of income from transactions for the supply of goods and services, which are the subject to VAT, carried out by him/her, in aggregate does not exceed UAH 1 million (excluding VAT) for the last 12 calendar months. In case of exceeding the limit of million, IE is obliged to register as the VAT payer in the supervisory authority at the place of residence (Art.181 TCU).
But if IE considers it appropriate to become a VAT payer before reaching this limit, it has the right to voluntarily register as a VAT payer according to the rules established by Art.183 of TCU. The amounts of VAT included in the price of purchased or sold goods (works, services) are not included in the expenses and income of IE registered as a VAT payer.
As you can see, TCU does not restrict the individuals, who plan to start their own business, in the choice of the taxation system.
