2. What is an “Exempt Dealer” and Who is Entitled to Register as an Exempt Dealer:
An exempt dealer is a dealer who is not required to pay VAT at the rate of the turnover of his transactions (excluding real estate transactions) and therefore does not collect VAT from his customers (i.e. the exempt dealer is not required to add VAT to the transaction price).
On the other hand, the exempt dealer is not entitled to a refund of VAT in respect of his inputs – that is, he will not receive from the Tax Authority the VAT he paid for the products or services he acquired for the purpose of his business activity.
Pay attention! At the beginning of the 2000s, the definition of a “small dealer” and a “small exempt dealer” was abolished, and today the relevant definitions are defined as a authorized dealer and an exempt dealer.
If so, who is entitled to register as an exempt dealer?
– As of 2014, the annual turnover ceiling for registration as an exempt dealer is NIS 100,000, meaning that only a dealer whose annual turnover is less than NIS 100,000 may be registered as an exempt dealer.
– In addition, dealers in certain areas may not register as exempt dealers even if they meet the annual turnover ceiling. These are freelancers such as an architect, technician, certain consultants, assessors), doctor, psychologist, veterinarian, certain school owners. In addition, a registered company and cooperative society may not be registered as an exempt dealer.
3. Who Should Register as an “Exempt Dealer”:
Registration as an “exempt business” is usually suitable for those who intend to run a small business, and for those who work primarily with private customers (as opposed to working with an authorized dealer), and therefore can offer an attractive price that does not include VAT.
In addition, these are usually businesses that do not have a significant investment in infrastructure or furniture and equipment (since they are not allowed to offset VAT in respect of their inputs).
On the other hand, a person whose main income derives from the sale or provision of services to authorized dealers may prefer to register as an authorized dealer, since the business owners will not absorb the VAT (as opposed to a private individual), and on the other hand the dealer can offset his inputs.
Our office is well prepared to assist you in examining the considerations for examining VAT registration while providing a comprehensive explanation of each of the various considerations and applying the above to your specific and unique case.
4. Additional Emphasis on Activity as an Exempt Dealer:
- Exempt dealer is a status that is relevant only for VAT purposes, whereas the activity of the exempted dealer reported to the other tax authorities (such as income tax and National Insurance) is not different in principle from that of an authorized dealer only by this definition. (However, it should be noted that there may be differences in the conduct of income tax [for example, in terms of bookkeeping instructions], and in the conduct of National Insurance – deriving from the revenue cycle).
- An exempt dealer is required to file a report once a year to the Value Added Tax Authority in the “Exempt Dealer Declaration” form, instead of a one-monthly or bi-monthly report as required by a authorized dealer.
- As stated, an exempt dealer is not entitled to VAT refunds for his inputs, however, the VAT he paid for his inputs will be added to his expenses for income tax purposes (as opposed to an authorized dealer). In other words, in the dealership, the VAT exemption constitutes an expense for income tax purposes.
- If the turnover of the exempted dealer exceeds the maximum turnover in the law, he must pay VAT on the turnover that exceeded the exempt turnover from the month in which he passed the maximum annual turnover. It should be emphasized that there is no “retroactive” amendment from the beginning of the tax year – only from that month forward.
5. Reports on Bookkeeping and Current Reports to the Tax Authorities of an Exempt Dealer:
The ledgers that a exempt dealer needs to manage:
- Managing a transaction invoice book (note that these are not tax invoices – which only authorized dealers can produce).
- Managing a receipt book (original with two copies) or alternatively a daily redemption book. The details that appear on the receipt are: the number of the receipt, the name of the taxpayer and his address, the identity card number, date, name and address of the payer, the amount of the receipt, the nature of the receipt (cash, check, repayment time check (ZF), name of the bank). The original will be delivered to the customer, one copy will be filed in a foreign documentation file (see below) and a second copy will remain in the bound register.
- Managing book receipts and payments in the book involves or using accounting software recognized by the Tax Authority.
- Management of external documentation. All tax invoices/receipts from suppliers in respect of the various expenses and a copy of the receipts will be filed in the external documentation file.
- Management of additional booklets according to the nature of the activity (eg, there are exempt dealers who are required to keep an order book).
Reports and current payments to the authorities:
- Payment of two-month advances to the Income Tax Authority (in accordance with the income tax requirements) Note: the exemption dealer’s turnover is low. Therefore in most cases after offsetting, expenses will not be taxed and can be required from the tax authority not to pay advances.
- Payment of a monthly deposit to the National Insurance Institute.
Annual and multi-year reports and payments to the authorities:
- Submission of an annual report to the Income Tax Authority.
- Submission of an annual declaration to the VAT authorities on the volume of transactions during the past year.
- Submission of a capital declaration in accordance with an income tax requirement (once every few years).
6. Opening Files in the Authorities to the Exempt Dealer:
Exempt dealer opening VAT file:
- The documents that must be brought to our office for the purpose of opening an exempt VAT file are:
- Photocopy of a rental contract (if you work from home, make sure that the address on the ID card is up-to-date and prepare a written statement that the business is conducted from home)
- A cancelled check of your bank account (optional).
- Certificate of vocational training if there is.
Upon completion of registration, you will receive an exemption certificate. The exemption number you will receive is the dealer’s ID number.
Opening an income tax file:
The income tax file must be opened immediately upon the start of a business activity and at the same time as the opening of a VAT file. The income tax file must be opened by a tax assessor close to the business. When opening an income tax file, there is no difference between an exempt dealer and an authorized dealer.
In order to open an income tax file, a file must be filled in our office with the Income Tax Authority and attached with a photocopy of an identity card. The income tax number is also the identity card number of the taxpayer.
A few days later, the IRS sends a letter confirming the opening of the file and specifying the accounting method in which you are charged and the business branch to which you are associated.
After opening the file, you must contact the Income Tax Authority with a request for approval of a full exemption from withholding tax and a bookkeeping permit.
Our office handles, of course, the opening of the file with the Income Tax Authority and all the procedures involved.
Opening a file in the National Insurance Institute:
With the start of a business activity, a file should be opened as an independent in the National Insurance Institute, and this duty should not be ignored.
It should be noted that only an insured who meets the definition of an independent employee (see definition below) and who has opened files at the National Insurance Institute is entitled to certain benefits.
In order to meet the definition of an independent employee in terms of the National Insurance Law, one of the following conditions must be met:
A. A person who work at least 20 hours per week on average.
B. A person whose average monthly income from his occupation exceeds 50% of the average wage in the economy.
C. A person who engages in his occupation 12 hours a week and his income exceeds 15% of the average wage in the economy.
For the purpose of opening a file at the National Insurance Institute, a special form must be filled out and delivered to the offices of the National Insurance Institute closest to the place of residence of the assessee.
After a few weeks, you are expected to receive a booklet of advances from the National Insurance Institute which can be paid by standing order, on the website of the National Insurance Institute or every month through a voucher at the bank. This is when the amount determined for payment derives from the taxpayer’s declaration in the form submitted with regard to his expected income.
These payments constitute only an advance, as the final calculation for the tax year will be made after submission of the annual report to the Income Tax Authority.
In the event that the income tax and VAT files are opened by our office, we will send the file opening forms in VAT and income tax directly to the Tax Authority offices.