VAT or turnover tax: which is better for your business
The turnover tax is not always the cheaper option. If you import goods and sell to VAT-registered companies, the VAT regime often leaves more profit. A comparison with worked numbers and an interactive calculator.
There is a clear practical rule: if your business imports goods, works at a moderate margin and sells to other companies, supermarket chains or VAT-registered businesses, then working with VAT is often the better option.
This is one of those topics where good bookkeeping, timely accounting services and tax advice affect profit directly. That is especially true if you are just starting out and still choosing a tax regime — the comparison belongs at the very beginning.
Why the misconception arises
The turnover tax looks simpler to many. It seems that if there is no VAT on the sale, the overall tax burden must be smaller too. But with imports there is an important difference: VAT paid at customs stays in costs and in the cost price under the turnover tax, while under the VAT regime it becomes creditable, subject to the conditions set by law.
A simple example: the same goods under two regimes
Suppose the goods are imported for 100 dollars. A 10% customs duty is paid — 10 dollars — and then 20% VAT is charged on 110 dollars — 22 dollars.
$100
Goods cost
$10
Customs duty: 10%
$22
Import VAT: 20%
From this point the two tax regimes start working by different logic.
Turnover tax
The 22 dollars of import VAT are not creditable and go into the cost price: the cost price becomes 132 dollars. Selling at 150 dollars:
150 × 10% = 15
132 × 9.5% = 12.54
15 − 12.54 = 2.46
VAT + profit tax
The 22 dollars of import VAT are creditable, so the cost price stays at 110 dollars. 30 dollars of VAT is added on top of the 150-dollar net price, and the difference payable is 8 dollars.
150 − 110 = 40
40 × 18% = 7.20
40 − 7.20 = 32.80
Under the turnover tax the minimum threshold is 150 × 1% = 1.50. Since 2.46 is larger, the tax is 2.46 dollars and the net profit is 15.54 dollars. Under the VAT regime the net profit is 32.80 dollars — 17.26 dollars more per item.
The difference is 17.26 dollars in favour of the VAT regime. The reason is simple: under the turnover tax the import VAT stayed in the cost price, while under the VAT regime it was credited.
Scenario 1: you sell to other businesses
This is the B2B case: you sell to shops, distributors, supermarket chains or other VAT-registered companies. The buyer can usually credit the VAT shown on your invoice, so for them it is not a final extra cost.
| Margin | Price excl. VAT | Profit: VAT | Profit: turnover tax | Better |
|---|---|---|---|---|
| 30% | 143.00 | 27.06 | 9.24 | VAT |
| 50% | 165.00 | 45.10 | 29.04 | VAT |
| 100% | 220.00 | 90.20 | 78.54 | VAT |
| 150% | 275.00 | 135.30 | 128.04 | VAT |
| 200% | 330.00 | 180.40 | 177.54 | VAT |
| ≈ 232.5% | 365 | 209.72 | 209.72 | Equal |
| 250% | 385.00 | 225.50 | 227.04 | Turnover |
| 300% | 440.00 | 270.60 | 276 | Turnover |
| 400% | 550.00 | 360.80 | 375.54 | Turnover |
| 500% | 660.00 | 451.00 | 474.54 | Turnover |
| 600% | 770 | 541 | 573.54 | Turnover |
Margin is the difference between the sale price and the 110-dollar cost price, relative to that same cost price.
Which regime wins at which margin
Up to 232.5% the VAT regime is better; above that, the turnover tax.
Shall we run the numbers for your business?
Compare your real cost price, price and tax regimes with a specialist
Scenario 2: the same final price
If the market does not let you raise the final price, you no longer add VAT on top of what the buyer pays — you absorb it inside the same price. This is typical of B2C sales to end customers.
| Margin | Final price | Profit: VAT | Profit: turnover tax | Better |
|---|---|---|---|---|
| 0.5% | 132.66 | 0.45 | −0.67 | VAT |
| 1% | 133.32 | 0.90 | −0.01 | VAT |
| 2% | 134.64 | 1.80 | 1.29 | VAT |
| 2.5% | 135.30 | 2.26 | 1.95 | VAT |
| 3% | 135.96 | 2.71 | 2.60 | VAT |
| ≈ 3.26% | 136.30 | 2.94 | 2.94 | Equal |
| 4% | 137.28 | 3.61 | 3.91 | Turnover |
| 5% | 138.60 | 4.51 | 5.21 | Turnover |
| 7% | 141.24 | 6 | 7.66 | Turnover |
| 10% | 145.20 | 9.02 | 11.22 | Turnover |
| 20% | 158.40 | 18 | 23 | Turnover |
Which regime wins at which margin
At the same final price the VAT advantage ends at about 3.26%.
Run the numbers for your own goods
Enter the figures for a single item. The calculator compares net profit under both regimes and finds the break-even point.
The calculation is approximate: the duty rate depends on the commodity code.
Which business suits which regime
VAT is often better if you:
- import goods,
- sell to other VAT-registered businesses,
- can add VAT on top of the net price,
- work at a low or medium margin.
The turnover tax is often better if you:
- sell to end customers,
- face a fixed final price set by the market,
- cannot add VAT on top of the price,
- work at a high markup.
What a good accountant should do
Registering the business is only the first step. Proper bookkeeping should help you work out:
- who your main buyer is,
- whether you can add VAT on top of the price,
- what the real cost price is,
- what average margin you will be working at,
- which regime leaves more net profit.
This often calls not for a bookkeeper alone but for accounting advice that also looks at the business as a financial model. Many companies lose money not from a lack of sales but from choosing the wrong tax regime at the very start.
Frequently asked questions
No. If you sell to other VAT-registered companies and work at a moderate margin, the VAT regime is often better.
Mainly when your buyers can credit the VAT shown on the invoice and you can credit the VAT paid at import.
Only at a very low margin. In our worked example the cut-off is around 3.26%.
The best moment is before registering the business, or at the very start, while you can still choose the tax regime and pricing model correctly.
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