VAT for sole proprietors from 2027: how not to lose your business

The discussion on introducing VAT for sole proprietors with “large” turnovers is moving from rumours to concrete bills: the Ministry of Finance proposes raising the mandatory VAT registration threshold to UAH 4 million in annual revenue from 1 January 2027, so there is little time to prepare, but the overall logic of the reforms is already visible.

What will change from 2027
The key innovation is a new unified threshold for mandatory VAT registration: UAH 4,000,000 in annual revenue instead of the current UAH 1 million. This threshold is planned to be the same for both sole proprietors and legal entities, regardless of whether they are on the simplified or the general tax system. If an entrepreneur (individual or company) exceeds the UAH 4 million limit over a 12‑month period, they must become a VAT payer and work under the general VAT rules. The scenario “I am on the single tax, so VAT does not concern me” will no longer work; the simplified regime will cease to be a “shield” from VAT for high‑turnover businesses.

Automatic registration and a “soft start”
The “soft start” of VAT provides for automatic registration of sole proprietors as VAT payers based on their 2025–2026 tax returns, without any application from the entrepreneur, so attempts to artificially understate turnover may fail. The first quarter of 2027 is expected to be a transition period, and from the second quarter symbolic fines of UAH 1 for initial violations will gradually be replaced by full penalties under the Tax Code.

Who exactly will be affected: sole proprietors and groups
Despite headlines about “VAT for all sole proprietors”, this is not about total taxation but about entrepreneurs whose turnover exceeds the set threshold. Under the current logic of the National Revenue Strategy and Ministry of Finance drafts, those most at risk are sole proprietors in the second and third groups working in trade, B2B services, IT and other high‑margin sectors. At the same time, sole proprietors with annual turnover up to UAH 4 million will retain the right to work without VAT while paying the single tax at 5% (this approach is reflected in the bill’s explanatory notes and expert reviews). For those who exceed the threshold and become VAT payers, a shift to a 3% single tax rate plus 20% VAT is envisaged, which significantly changes the business economics.

Why the state and the IMF insist on VAT for sole proprietors
The state is pushing VAT for sole proprietors at the IMF’s insistence and to level the playing field: large sole‑proprietor businesses on the simplified regime can currently operate without mandatory VAT, while companies with the same turnover must pay it. The government expects additional tens of billions of hryvnias in annual revenue and wants to shut down schemes that “split” businesses into many sole proprietors and use the simplified regime in large B2B chains.

Pros and cons of the new thresholds for small business
For microbusinesses, the new UAH 4 million threshold is more a relief than a threat. Today the formal VAT threshold is UAH 1 million, so after the reform a large share of microbusinesses will fall outside mandatory VAT registration altogether. This matches the Ministry of Finance’s rhetoric of protecting the smallest players and focusing on sole proprietors whose turnover is closer to that of medium‑sized businesses. For mid‑sized sole proprietors the situation is more complex: on the one hand, VAT means extra bookkeeping, reporting, cash‑flow gaps and the need for professional accounting support; on the other hand, VAT payer status can become a competitive advantage when dealing with large clients who themselves are VAT payers and are interested in input tax credits.

Automation and control: why “schemes” will work worse
The VAT reform for sole proprietors comes as part of a broader digitalisation package: fiscal cash registers, bank monitoring and the tax authority’s e‑services will allow the tax office to see turnovers almost in real time and detect when the UAH 4 million threshold is exceeded. Against this background, schemes such as splitting a business into several sole proprietors, mixing personal and business funds or understating revenue become much riskier, as data from cash registers, banks and tax returns will be consolidated and may lead to VAT assessments and broader audits.

What will change for tax rates and regimes
Introducing VAT for part of the sole‑proprietor segment fits into the overall reform of the simplified tax system for 2025–2027. Planned changes include merging the second and third groups into a single regime, differentiated tax rates depending on turnover and activity type, and automating sole‑proprietor registration through banks. In this context, the 5% single tax without VAT is expected to remain for those who stay below UAH 4 million, while VAT payers will work under a 3% single tax rate plus 20% VAT. For sole proprietors working with VAT‑payer clients, this is partly offset by the ability to claim input VAT, but for mostly B2C businesses, adjusting prices and margins will be critical.

Strategy for sole proprietors: prepare for VAT or “fit into the limit”
Entrepreneurs with turnover around UAH 4 million face a choice: artificially restrain growth to avoid VAT, or accept the new rules and build a more mature financial model that factors in VAT. For sole proprietors with projected turnover of UAH 4–8/10 million, it is often more advantageous to prepare in advance to become VAT payers: review prices and costs, consider incorporation as a company and, where possible, pass part of the VAT burden on to counterparties or offset it through efficiency gains.

What sole proprietors should do now
Although the formal start of the changes is set for 2027, the preparation phase has effectively already begun. A practical checklist includes: analysing turnover for 2024–2025 and forecasts for 2026–2027 to see whether you will cross the UAH 4 million line; cleaning up your bookkeeping, separating personal and business transactions and using transparent payment tools (merchant acquiring, a dedicated business account, fiscal cash registers); modelling “with VAT” and “without VAT” scenarios to understand how prices, net income and relationships with clients and suppliers will change; and assessing whether moving to a limited liability company with full accounting support is a natural next step for you. Seeing VAT for sole proprietors as “the end of the simplified regime” is the wrong perspective: this is more about differentiation, where microbusinesses up to UAH 4 million keep a simple regime without VAT, while higher‑turnover entrepreneurs gradually move into a more formalised but predictable tax framework.

If you have questions or issues related to the new VAT rules for sole proprietors, assessing the risk of crossing the UAH 4 million threshold, choosing between the simplified regime and working with VAT or planning your business structure for the 2025–2027 reform, you should seek tailored advice that reflects the specifics of your activity.

Author – Yuliia Popadyn, attorney in tax and housing law at the law firm “Legal Company ‘WINNER’.