VAT for Sole Proprietors from 2027: Tax Reform or a Risk for Small Business?

Ukrainian sole proprietors have operated for years under a tax compromise. The simplified taxation system allowed millions of entrepreneurs to run their businesses without complex VAT reporting, with predictable tax burdens and minimal administrative bureaucracy. This model has been the foundation of small business development in Ukraine.

However, it is becoming increasingly clear that this balance may change.

As of the end of 2025, the Ministry of Finance has developed a draft law that would introduce mandatory VAT registration starting January 1, 2027, for sole proprietors operating under the simplified tax system whose annual turnover exceeds UAH 1 million. It is important to emphasize that this is still a draft law under discussion and may be significantly revised. Nevertheless, its very existence signals a clear direction in tax policy — expanding the VAT base has become a strategic objective.

This initiative did not emerge in isolation. It fits into Ukraine’s broader course toward harmonizing its tax system with European standards and fulfilling commitments to international financial partners. In the European Union, VAT is a core tax applied to a broad economic base, while exemptions and special regimes are strictly regulated to prevent market distortions. In Ukraine, by contrast, a significant share of economic activity has long been conducted through sole proprietors without VAT, creating competitive imbalances and opportunities for larger businesses to optimize taxation.

The proposed threshold of UAH 1 million per year has become the central point of debate. At the beginning of 2026, this amount corresponds to approximately €23,000–24,000. For comparison, in Poland the mandatory VAT registration threshold is PLN 240,000 (roughly equivalent to nearly UAH 3 million), while EU Directive rules allow member states to set thresholds of up to €85,000. In this context, the Ukrainian proposal appears considerably stricter than most European approaches. This is why experts are already discussing the possibility of increasing the threshold or introducing a gradual transition mechanism.

Yet the issue goes beyond the threshold itself. VAT is a complex tax in terms of administration. It requires proper accounting of input tax credits, detailed reporting, compliance with invoice registration procedures, and professional accounting support. For microbusinesses operating on low margins and often lacking developed infrastructure, this would mean a substantial increase in operational costs. In many sectors, passing on an additional 20% VAT to end consumers may be difficult due to limited purchasing power. As a result, some entrepreneurs may face a difficult choice: raise prices, reduce profits, or discontinue operations altogether.

On the other hand, expanding the VAT base could help level the competitive playing field between small and large businesses, reduce the use of sole proprietors as tax optimization tools, and increase budget revenues — particularly critical in a time of war and elevated defense spending. From a strategic perspective, alignment with European tax standards is unavoidable.

Thus, the real question is no longer whether changes will occur, but how they will be implemented. If the transition is gradual, accompanied by a reconsideration of the threshold, digitalization of VAT administration, and careful consideration of Ukraine’s economic realities, the reform could strengthen transparency and systemic consistency. If introduced mechanically, without adaptation to the structure of small businesses, it risks suppressing entrepreneurial activity rather than reducing informality.

Although 2027 may seem distant, for business planning it is already within the strategic horizon. Sole proprietors should begin assessing their turnover levels, business models, and potential scenarios for operating within a VAT framework well in advance.