On Tuesday, 24 May 2022, the Ecofin Council met in Brussels, where one of the topics discussed was the possibility for the Czech Republic to apply an increased threshold for compulsory VAT registration. The Council decision approved the Czech Republic's request last year for the possibility to increase the VAT exemption turnover threshold to EUR 85,000 earlier than from 1 January 2025, as foreseen in the amendment to the European VAT Directive.
"The EU Council has granted our request for an exemption to apply the previously higher threshold for mandatory VAT registration," Finance Minister Zbyněk Stanjura said. "The Czech legislation increasing this annual threshold to CZK 2 million has already passed the inter-ministerial comment procedure and will now be discussed by the government. According to our proposal, the threshold for the use of the flat-rate tax will also increase to twice as much from next year."
The current turnover threshold for mandatory VAT registration is CZK 1 million. The annual threshold is based on the EUR 35,000 negotiated when the Czech Republic joined the EU in 2004 and has remained unchanged for 18 years despite significant price increases. The Ministry of Finance expects that approximately 105,000 taxpayers will be newly exempted from VAT. Up to 80,000 of them could actually opt out of the VAT system.
What will be the practical impact of this measure? For existing taxpayers who fall below the magic threshold of CZK 2 million there will be a "paradise on earth" (in the petitioner's imagination). When the measure comes into force, taxpayers will cancel their registrations in droves and switch to non-taxpayers. Or is the reality different?
In my opinion, registration will be cancelled mainly by payers who are providers of goods and services to end customers. That is, craftsmen, landlords, traders, etc. They should then keep a close eye on whether they exceed the increased threshold again.
The reason for increasing the turnover threshold for compulsory taxpayer registration is to simplify the obligations of taxpayers. Abolition of the obligation to keep VAT records, issue tax documents, submit monthly tax returns, control reports, etc.
This is undoubtedly a laudable reason. But along with these positives come negatives. Once again, a chasm will open between taxpayers and non-taxpayers, between entities that exceed the turnover threshold by CZK 1 and those that are under it by CZK 1. And that crucial CZK 2 difference is very deceptive. In conjunction with the abolition of electronic sales registration, this measure will lead some tax subjects to try to conceal part of their sales in order not to exceed the increased turnover threshold.
Let me put forward my personal opinion. Wouldn't it be easier to remove the limit for compulsory registration altogether? And to set up the VAT system in such a way that every taxpayer is automatically a VAT payer? And at the same consider whether it would not be more practical to simplify the agenda that accompanies VAT. For example, abolish the obligation to process and submit control reports up to a turnover of CZK 1 million. A further simplification could be to use the exemption enshrined in Article 252 of the Directive, which allows Member States to set a tax period for taxpayers of up to one year. Sweden, for example, has negotiated this derogation so that small and medium-sized enterprises that carry out taxable transactions only in Sweden can apply a simplified regime where they file their tax return three months after the end of the annual tax period for direct taxes.
Wouldn't it be easier to level the playing field for all taxable persons while at the same time simplifying the obligations that accompany value added tax?
Personally, I'm all for it.