Typical mistakes that individual entrepreneurs make while doing business—checklist

Doing business for individual entrepreneurs is a great possibility and a serious responsibility. With the desire to launch their own businesses quickly, individual entrepreneurs often make mistakes that can result in unwanted tax inspections and fines.

In this article, we have gathered a checklist of the most common mistakes that individual entrepreneurs often make while doing business.

The incorrect choice of CEAs or a taxation system group

Registering one kind of activity and providing other services on the practice or trading products that don’t meet the specified ones in the registration is a mistake that can cause problems during the inspection:

Incomes from this activity will be taxed for the increased rate of the single tax—15 percent for the first and second groups (according to c. 293.4 TCU).
The Individual Entrepreneur will have to switch to the general tax system from the first day of the month that comes according to the tax period, in which this activity was carried out. (according to p. 7 c. 298.2.3 TCU).

The purpose of a payment does not meet the CEAs of the individual entrepreneur

If a mistake was made in the purpose of payment, during the inspection, the tax office may come to the conclusion that the entrepreneur was carrying out activities that were not registered in his register of types of activities. In such a situation, the status of a single taxpayer may be revoked. In addition, income received from unregistered activities is taxed at an increased rate of 15%.

The status of a single taxpayer was not provided during the registration

There is no need to submit a separate application to the tax authority during the registration of the individual entrepreneur to choose a simplified taxation system.
Instead, the desire to switch to the simplified system can be indicated immediately in an application to the state registrar during registration. Information about this is transmitted to the tax office automatically, without additional actions on the part of the individual entrepreneur.

Previously, it was necessary to submit two separate applications for this: one for state registration, and the other one for choosing a simplified system. Now it is enough just to indicate your desire in the application for registration of the individual entrepreneur.

However, before starting to receive income, it is important to check whether there is a corresponding entry in the Register of Single Tax Payers. If a technical error occurred or the tax authority refused such registration, and the entrepreneur started operating under the simplified taxation system, the only way out is to apply to the court with a request to recognize the taxpayer’s registration of the simplified system “retroactively”.

The individual entrepreneur is not registered as a VAT payer

If the entrepreneur was obliged to register as a VAT payer but did not submit a corresponding application, a fine is imposed on them. The size of the sanction is 10% of the amount of the tax liability determined by the controlling body.

In case of intentional violation, this amount increases to 25%. If the intentional violation is repeated within 1095 calendar days, the fine will be already 50%.

An inappropriate group of the taxation system

When registering the individual entrepreneur, some entrepreneurs choose the first or the second group of the single tax due to lower rates. However, these groups are not suitable for everyone.
If an entrepreneur plans to cooperate with foreign companies, receive payment in foreign currency, or work with individual entrepreneurs that are on the common taxation system, it is necessary to choose the third group of the single tax.

If the individual entrepreneur violates the conditions for staying in the selected single tax group, they lose the opportunity to switch to another single tax group. To do this, it is necessary to submit an application to the supervisory body at least 15 calendar days before the beginning of the new quarter (clause 298.1.5 of the TCU).

Exceeding the limit established for the individual entrepreneur of various groups of the simplified taxation system

Each group of the simplified taxation system has established restrictions on the volume of monetary turnover:

• for the 1st group—UAH 1,336,000 (167 minimum salaries);
• for the 2nd group—UAH 6,672,000 (834 minimum salaries);
• for the 3rd group—UAH 9,336,000 (1167 minimum salaries).

The entrepreneur needs to monitor carefully that these limits are not exceeded. If the turnover exceeds the permitted limits, it is necessary to submit an application for transfer to another group of the single tax or to change the taxation system to the general one.

Primary documents are absent

Each individual entrepreneur must keep primary documents that confirm their economic operations. In the absence of documents confirming the origin of the goods, the control authorities may make a decision to transfer the entrepreneur to the general taxation system retroactively.

The following are necessary for the individual entrepreneur in the general taxation system:

• an income and expense accounting book (must be kept in the paper or electronic form);
• primary documents that confirm income and expenses, in particular: invoices, reports of work performed/services provided, invoices, contracts with counterparties, payment orders, bank
• statements, receipts, cash orders, checks, and other settlement documents;
• documents confirming the payment of taxes (receipts, payment orders).

For individual entrepreneurs that are on the simplified taxation system without VAT (groups 1-3) the following are mandatory:

• an income accounting book (in electronic or paper form) – until 2021, it was mandatory, now its maintenance has been canceled, but it is advisable to keep your own income accounting to avoid misunderstandings with the tax office;
• primary documents that confirm receipt of income (invoices, acts of completed works/services rendered, checks, invoices);
• settlement documents (bank statements, cash orders, checks, receipts);
• contracts with counterparties (if it’s necessary).

In addition to the documents listed above, it is necessary to keep:

• tax invoices;
• documents for the purchase of goods, services, and fixed assets.

Duration of the document storage

According to c. 44.3 of the Tax Code of Ukraine, the individual entrepreneur is obliged to keep all primary documents related to economic activity for at least 1,095 days (3 years) after the end of the reporting period in which the corresponding document was drawn up. In case of inspections or appeals of documents, the storage period may be extended.

Even if the individual entrepreneur is on a simplified system and does not need to keep an income book, it is worth keeping the original documents to avoid questions from the tax office.

The use of accounting automation software (for example, Vchasno.Kasa software cash register) simplifies the process of saving documents.

Work without a software cash register/ cash register

An entrepreneur who is required by law to use a cash register must register a cash register before starting to sell goods or provide services. Retrospective fiscalization is not possible, and any delays in issuing a cash register may result in fines for improper use of a cash register.

A settlement operation was not fiscalized

If an entrepreneur using a software cash register created a fiscal check in electronic form and sent it to the phone number or email address specified by the buyer, such a settlement document is considered issued to the consumer. In case of non-compliance with this requirement, that is, if the fiscal check was not created in electronic form or was not sent to the buyer in a way convenient for him, liability is provided according to c. 1 art. 17 of Law No 265.

The individual entrepreneur does not officially register employees

If there are restrictions on employees for a payer of a single tax, then individual entrepreneurs in the general taxation system do not have such conditions.
Individual entrepreneurs who use hired labor without registration of labor relations can receive a fine in the amount of ten times the minimum wage for each employee (for the first violation) and in the amount of thirty times the minimum wage (for a repeated offense).

The individual entrepreneur did not register an employee with a disability

Article 17 of the Law of Ukraine “On the Basics of Social Protection of Persons with Disabilities in Ukraine” prohibits any form of discrimination in the labor field due to disability. In particular: refusal of employment, career growth, dismissal at the initiative of the employer or transfer to another position without the consent of the employee.

Exceptions are cases when the medical and social examination determines that the health condition of the employee prevents the performance of his duties, poses a threat to other employees, or may lead to the deterioration of the health condition of a person with a disability in case of continuing work or changing its nature, and volume.

The individual entrepreneur does not use the taxpayer’s electronic account

If an entrepreneur does his own accounting, using the taxpayer’s electronic account becomes not just a convenience, but a necessity. This tool allows you to track all relevant data in real-time, which helps avoid financial mistakes and fines.
An entrepreneur must regularly check the accrual of debt obligations, the timeliness of receiving reports, open notices or requests from the tax office, etc.

Problems with issuing checks

Mistakes in the preparation of calculations, an incorrectly indicated amount or a mistakenly issued check, incorrect entry of “business expenses” or “business contributions” in cash, and the absence of EPI data in the check—all this can lead to fines and attract the attention of tax authorities for inspections.

For instance, in the “Vchasno.Kasa” software, fiscal checks are automatically generated with all the necessary details. This and many other features of the service allow you to avoid errors related to issuing checks.

Reporting not submitted with zero income

“Zero” reporting must be submitted by taxpayers for the reporting period in which economic activity was not carried out. The submission is made within the terms established for the relevant reporting of a particular payer.

This requirement is regulated by Article 49.2 of the Tax Code of Ukraine, which states: “A taxpayer is required to submit tax returns for each reporting period for each tax of which they are the payers, regardless of whether they conducted economic activity in the reporting period or not.”

Appendix 4-DF (1-DF) was not submitted when paying to the individual entrepreneur’s account

If an entrepreneur did not file, submitted in violation of the deadlines, with inaccurate information, and if such inaccurate information or errors led to a decrease and/or increase in the tax liability of the taxpayer and/or to a change of the taxpayer, this entails the imposition of a fine in the amount of 1,020 hryvnias.

The use of different QESs

Another mistake is to use different electronic signatures (QESs) that were obtained from different qualified providers of electronic trust services (QPETS) to sign declarations, reports, etc.

If the entrepreneur uses different QESs each time, this can lead to delays in the acceptance of documents, conflicting data in the tax database, or even their rejection. In addition, it makes it difficult to trace the history of signatures and may raise suspicions on the part of regulatory authorities.

Incorrect payment of taxes to the wrong account

An error during the transfer of the agreed amount of the monetary obligation to the state budget is defined by law as an action, even if it is incorrect. Therefore, such actions, which do not contain signs of the taxpayer’s inactivity when paying the agreed amount of the monetary obligation, are not grounds for applying fines.

Receiving income on a personal card

Receipt of income on a personal card of the individual is a significant violation because to receive business income, the individual entrepreneur must use exclusively the account of the individual entrepreneur. In the event of an audit, the tax authorities may impose a fine of 100-150% of the amount that was not taxed.

Incorrect closing of the sole proprietorship

If the individual entrepreneur ceases its activity, this does not release it from the obligation to submit final reports and pay taxes. When closing a sole proprietorship, you should take care of all accounting formalities, and if it’s necessary, search for help from specialists.

Trust unverified sources of information

Instead of verifying the authenticity of innovations on the official websites of government bodies or consulting with professionals, entrepreneurs believe the loud headlines of articles in the media or Telegram channels.

To avoid any misunderstandings or problems—in case of doubt, contact accountants, tax consultants, or lawyers for clear explanations.