Optimizing the VAT registration threshold for sole proprietors: fiscal effects for the budget and implications for shadow economy reduction

Анотація

Introduction. Optimizing the mandatory value added tax (VAT) registration threshold for sole proprietors has become a systemic policy issue under conditions of a wartime economy, post-war recovery, and increasing demands for tax neutrality. The prolonged maintenance of a nominally unchanged VAT threshold alongside the indexation of simplified taxation limits has created an institutional asymmetry that fuels tax arbitrage practices, including business fragmentation, artificial turnover suppression, and the construction of chains of non-VAT payers. Under such conditions, the debate over the VAT threshold is fundamentally a debate about incentive design and supply chain traceability rather than merely about turnover size. Purpose. The article aims to substantiate the rationale for optimizing the mandatory VAT registration threshold for sole proprietors in interaction with the simplified taxation system and to estimate the order of magnitude of potential net fiscal effects for the budget, taking into account behavioral adaptation and the risk of shadowing. Methodology. The study is grounded in institutional and behavioral approaches to tax incentive analysis, scenario modeling, and comparative assessment of alternative thresholds. To approximate net VAT revenues, a transparent economic-mathematical parameterization model α–τ–ρ is applied, in which additional net VAT receipts depend on the aggregate turnover of the above-threshold segment, the share of domestic B2C sales (α), the effective net VAT rate as a function of value-added share (τ), and the compliance level after behavioral adjustment (ρ). Estimates are performed for two alternative thresholds (UAH 1 million and UAH 4 million / ≈ EUR 85,000) and two turnover bases (minimum and average) under three scenarios (conservative, baseline, and optimistic). Results. The findings indicate a substantial increase in the fiscal significance of sole proprietors during 2016–2024, particularly due to a fivefold rise in single tax revenues, which reinforces the importance of recalibrating incentives between the simplified regime and VAT without triggering shadow economic responses. Scenario calculations demonstrate that the potential increase in net VAT revenues is significant; however, its range depends primarily not on the threshold level itself but on parameters α and ρ, reflecting the structure of domestic final consumption and the capacity of tax administration to prevent fragmentation and shadow migration. The study substantiates that universal threshold adjustments without targeted action against avoidance schemes raise compliance costs for bona fide small businesses and may intensify adaptive fragmentation below new thresholds. A risk-based enforcement model is proposed, incorporating scoring of persistent “legal entity–sole proprietor” relationships, transactional transit patterns, operational capacity assessment, and a sanction framework proportionate to fiscal damage with shared liability between scheme beneficiaries and executors.

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