Opening a VAT file is one of the first actions that anyone starting to operate as a business is required to perform. Although it is seemingly a bureaucratic procedure, behind opening the file stand laws, definitions and requirements aimed at regulating tax collection and distinguishing between different types of business operators. A good understanding of what VAT is, who is required to register as a business operator for tax payment purposes, what the file opening process includes and how often one needs to report and pay, will enable proper and correct opening of business activity from day one.
What is VAT?
VAT is a value added tax imposed on consumption. In other words, it is a tax that is added to every transaction of selling a product or providing a service in Israel. The business operator collects the VAT from the customer and transfers it to the state, minus the VAT that they themselves paid on their business expenses. In this way, VAT is imposed at every stage in the production and service chain, but in practice it is the end consumer who bears the tax burden.
VAT is derived from the value of the transaction and is usually a fixed percentage according to law. Authorized businesses are required to add VAT to the price they charge and issue a tax invoice. Additionally, they are permitted to deduct input VAT that they incurred for their business activity. The mechanism is designed so that a business acts as an intermediary in tax collection, not as someone who pays it from their own pocket.
Who needs to pay VAT and open a file?
Every business defined as an authorized business operator is required to open a VAT file and begin collecting and transferring VAT as part of routine activity. An exempt operator, on the other hand, is required to open a VAT file, but does not collect VAT from its customers and does not transfer ongoing VAT. However, it is required to declare its annual business turnover and comply with the exemption threshold set by law.
In addition to self-employed individuals, limited companies are also required to open a VAT file from the moment they begin business activity. The law also applies to service providers and manufacturers, as well as to small or new businesses. It is important to understand that the obligation does not depend on profits, but on the mere existence of business activity subject to tax.
How do you open a VAT file?
The process of opening a VAT file is done through business details: business name, field of activity, details of the business owner or shareholders, address, and additional details indicating the start of activity. The file can be opened online or by physically visiting the regional VAT office. During the opening, personal documents such as an identity card and bank account details are submitted for refunds or charges.
After opening the file, the business receives confirmation of its registration as an exempt operator or authorized operator. An authorized operator will also receive approval to issue tax invoices, while an exempt operator will receive approval to issue receipts only. From this point on, the obligation begins to operate under the rules: collection or non-collection of VAT, record keeping, retention of receipts and timely submission of reports.
How often do you need to pay VAT?
An authorized business operator is required to report and pay VAT once a month or every two months, according to tax authority guidelines and their transaction volume. The report includes details of the VAT collected from customers versus the VAT paid on business expenses, and the difference is transferred to the state. Reports are submitted online through the personal area on the tax authority website.
An exempt operator is not required to pay VAT during the year, but is required to submit an exempt operator declaration once a year, usually at the beginning of the fiscal year. This declaration is intended to verify that the business indeed meets the turnover threshold defined by law and that it does not need to transition to the status of an authorized operator.
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