VAT for Sole Proprietors: IMF Requirement and Possible Consequences for Business

The discussion on introducing mandatory VAT payments for sole proprietors (FOPs) has gone beyond a purely tax issue and has become one of the key topics in Ukraine’s cooperation with the IMF. The Fund sees this change as a way to broaden the tax base, strengthen the fight against tax evasion, and bring the system closer to a more “mature” model of business taxation, while for entrepreneurs it looks like a threat to the simplified tax regime.

Why the IMF is interested in FOPs at all.  The IMF is interested in FOPs because it aims for balanced public finances and a transparent, efficient tax system. In Ukraine, FOPs of groups 2–3 are used both as an entrepreneurship tool and as an optimization scheme for large businesses that transfer employees to FOP contracts. This “grey” area has attracted the IMF’s attention, and among the prior actions under the new program, Ukraine committed to broadening the tax base by introducing VAT for part of the FOPs and taxing income from digital platforms. The idea is that a significant share of economic activity is hidden within high‑turnover FOPs and falls out of the full cycle of VAT and income taxation.

Essence of the requirement: what the IMF expects.  The first public signals concerned the introduction of mandatory VAT for FOPs whose annual turnover exceeds approximately UAH 1 million. According to statements by politicians and media reports, the publication of a government bill with such a provision, its registration in the Verkhovna Rada, and its adoption within specified timeframes were defined by the IMF as key prior steps for unlocking more than USD 8 billion in financing.

The basic idea is as follows:

• FOPs with an annual turnover of over UAH 1 million are required to register as VAT payers.
• The VAT rate is 20%, as for other taxpayers.
• The requirement is planned to take effect not immediately, but from 2027, so that businesses have time to adapt.

The IMF insists on clear criteria for determining employment relationships so that employers cannot disguise employees as FOPs when there is in fact an employment relationship. In addition, it is proposed to broaden the tax base by taxing income from online platforms and reducing customs “loopholes”.

What is already known about Ukraine’s position.  The Ukrainian government and parliament have found themselves caught between two fires: on the one hand, the critical need for financing from the IMF and other donors, and on the other, the risk of a serious blow to small businesses. According to media reports and industry publications, the government is trying to soften the IMF’s initial requirements, in particular regarding the turnover threshold and the strictness of the approach.

There are several avenues for maneuver:

• Increasing the turnover threshold (for example, significantly above UAH 1 million) so that the obligation covers only genuinely “medium‑sized” businesses rather than small entrepreneurs.
• Introducing simplified VAT administration regimes for FOPs (for example, special reporting forms, less frequent filing of VAT returns).
• Phasing in the reform by defining a transition period so that businesses have time to change their operating model, contract structures, and pricing.

At the same time, some sources already report that the Ukrainian side is trying to exclude or dilute as much as possible the most stringent obligations on mandatory VAT for FOPs from the final text of the updated Memorandum. However, until the document is published, it remains unclear how successful these negotiations will be.

How this could change the work of FOPs.  The introduction of mandatory VAT for FOPs with a certain level of turnover is not just “an additional tax” but a complete change in the logic of how they run their business.

First, this means:

• keeping detailed records of transactions,
• registering tax invoices,
• filing monthly VAT returns.

FOPs that currently operate under the single tax regime (5% of turnover plus the military levy) will in fact be forced either to raise prices by passing the 20% VAT on to the client or to reduce their margin. For those who sell goods or services to business clients that are VAT payers, the situation may be relatively neutral, since their counterparties will be able to claim this VAT as input tax. But for those who work with the end consumer (B2C), the hit to demand or profitability may be significant.

Second, part of the FOPs will face a choice:

• switch to the general tax system with VAT and operate as “small businesses” in the classical sense;
• change their business model (reduce turnover, split the business, go into the shadow economy);
• close their FOP and take up employment as hired workers.

Business associations and experts warn that a strict introduction of VAT with a low turnover threshold may lead to mass closure of FOPs, increased informality, and a reduction in self‑employment. In contrast, the IMF and some reform advocates expect that this will eliminate purely tax‑optimization schemes and incentivize more transparent employment.

Impact on the labour market and “FOP‑employment”.  A separate dimension is the labour market. In parallel with VAT for sole proprietors (FOPs), the IMF insists on introducing criteria that would allow supervisory authorities to qualify the relationship between a company and a FOP as an employment relationship. If these criteria are clear and strict, the classic “staff on FOPs” model (especially in IT, marketing, creative industries, logistics) will become significantly more expensive and risky for businesses.

For many specialists this means:

• higher chances of being formally employed on staff (with all social guarantees, but also with higher tax withholdings),
• a reduction in formal “entrepreneurial” freedom,
• a potential decrease in net take‑home income in case of transition to the classical salary model.

At the same time, the state expects to receive:

• higher revenues from social security contributions (ESV), personal income tax (PIT) and the military levy,
• more level playing field between “white” employers and those who massively use “FOP schemes”.

Are there alternatives to a hard‑line scenario.  The question is not whether there will be tighter control over FOPs, but what exactly it will look like. Several possible softer‑approach options are being discussed in expert circles:

• Raising the turnover threshold to a level that cuts off small entrepreneurs but covers genuinely “medium‑sized” businesses operating through FOPs.
• Introducing an automatic VAT model (when a part of receipts is blocked as a notional VAT without complex paperwork), although this requires separate agreements with the IMF and substantial legislative changes.
• A lengthy transition period with the possibility of voluntary registration and certain incentives for those who become VAT payers earlier (for example, preferential rates or simplified reporting at the start).

Whether the IMF will agree to this depends on how convincingly Ukraine can demonstrate that even a softer option will bring a real expansion of the tax base and will not amount to a mere imitation of reform.

What FOPs should do now.  Even though the final parameters of the reform have not yet been fixed, the idea of VAT for part of the sole proprietors (FOPs) and a revision of the model of their use by businesses is unlikely to disappear from the agenda. Therefore, FOPs with a relatively high turnover should already now:

• Assess the structure of their income and expenses, understand to what extent their business will be able to “absorb” 20% VAT and whether there is an opportunity to pass the tax on to the client.
• Review the model of cooperation with key counterparties (B2B or B2C, residents or non‑residents, VAT payers or not).
• Consider alternative forms of organising their activity: transition to an LLC, combined models, a partial shift to an employment format for key projects.

In any case, the reform required by the IMF will force a rethinking of the role of FOP status: from a universal tool for everyone, it is gradually turning into a form of activity more suitable for genuinely small businesses and the self‑employed, rather than for replacing full‑fledged companies and staff positions.

If you have questions or issues related to the structure of your business, the choice of the optimal tax regime, the risks of introducing VAT for FOPs, or planning changes in your business model, it is worth seeking an individual consultation with a specialist who will help you adapt to the new requirements and minimise tax and legal risks.

Author: Ihor Yasko, Managing Partner at JSC “WINNER Law Firm”, PhD in Law.