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25 June 2013

VAT מע״מ - the basics

VAT (value added tax) is a tax levied on business transactions, but borne by non-businesses, i.e. it is the private individual who ends up bearing the brunt of the tax.

As a general rule, VAT is charged at the standard rate, which is currently 18%. The business is required to hand over to the government any VAT collected from their customers, either on a monthly or bi-monthly basis.


Two types of trader

Every business is required to register with  the VAT authorities prior to commencing their first transaction.

The status of the trader is determined by their annual turnover, i.e. the amount they bill their customers. For these purposes, the year is concurrent with the tax year - 1 January to 31 December.

Any trader expecting to have turnover of less than NIS 77,993 (correct for 2013) in the tax year will be registered as an osek patur (עוסק פטור) - exempt trader. They do not (and are forbidden to) charge VAT on their invoices, and they cannot claim back VAT on their expenses.

The osek patur is required to report yearly - in January - regarding the previous year to confirm that they remained beneath the limit. Once the limit is exceeded, they will need to upgrade their status to that of an osek morshe.

All other traders become an osek morshe (עוסק מורשה) - a registered trader. They charge VAT on all of their income, and can claim back VAT incurred on business expenses. There are situations on which the VAT rate is zero, e.g. fruit & vegetables, tourism and services provided to non-Israelis in certain circumstances. It is critical that you get advice on these matters if you think they may be applicable to you.

 
Reporting

The reporting for an osek morshe is either every month or every two months. The report must be made (and any tax owing must be paid) by the 15th of the month following the period-end. This deadline is extended until 6:30pm on the 19th if you are reporting online.

The report summarises all income earned in the period and the VAT that is being claimed.

The requirement to report does of course entail bookkeeping. Again, there are rules about how this must be done, whether by hand or on the computer.

For the largest businesses (measured by turnover or employees), a detailed report must be filed electronically. This report details every invoice (both income and expense) and includes the ID number of the customer/supplier.

Late filing carries a fine of more than NIS 200 (even if a single day late), so be warned!

 
Invoicing

The osek morshe is required to issue tax invoices (חשבונית מס) to customers, and can only claim back VAT against a tax invoice. The format of the tax invoice must meet strict rules, so you must get approval from an accountant before printing.

Invoices should be written in Hebrew, even if the customer does not speak the language. By all means send a translated version, but there must be a Hebrew version to show the authorities.

 
The tax-point

The date on which you become obligated  to issue a tax invoice is known as the tax-point.

As a rule, the tax point is when the goods reach the customer or when the service is provided. As such, the tax point is invariably before payment is received.

However, many service providers are allowed to make their tax-point only when payment is received (this means the date the monies hit the bank - not when a post-dated cheque is received). Examples of such professions are accountants, lawyers, translators & medical professionals.

Again, professional advice should be sought prior to commencement of business.

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