Tax Authority demands immediate VAT transfer, preventing expense offsetting | Yehuda Sharoni

The Tax Authority is currently initiating a business process that will require business owners and independent contractors to immediately transfer the VAT they collect from their customers. Conversely, this action will prevent the possibility of offsetting VAT on other expenses.

The move is expected to create liquidity difficulties for many businesses that are currently required to transfer VAT to the tax authorities within 60 days. Roi Cohen, President of LAHAV (Chamber of Independent Organizations and Businesses in Israel), has issued sharp criticism against the Tax Authority and appealed to Minister of Finance Bezalel Smotrich and Tax Authority Director Shay Aharonovich with a demand to stop the reform immediately.

"This is an unprecedented, predatory action aimed at businesses in Israel. A business may be required to finance from its own pocket the time gaps between payment and receiving the refund for input VAT, and to lend the state money it does not have, interest-free. It is unacceptable that a reform with such significant consequences for the cash flow and working capital of hundreds of thousands of independent contractors should be promoted without a professional and in-depth dialogue with the public," Cohen stated.

The new move causes not only a problem with current cash flow but also harms input tax. Today, a business is not required to transfer the full VAT to the state and is entitled to deduct the VAT paid on business expenses. If the state collects the full VAT in real-time while input tax deduction is carried out only later, it will cause significant damage to businesses.

According to a check by LAHAV, OECD countries offer safety nets to protect independent contractors and small businesses. In Israel, after three years of war and the coronavirus crisis, not only are there no safety nets, but additional decrees are being imposed. Cohen noted: "Is it not enough for us that business owners have committed suicide and families have to deal alone with acute problems of insolvency? Children who go out to work prematurely to help the family economy — this is a scandal, and we will not agree to this."

The President of LAHAV added that for a small business, this is not an accounting issue but a matter of missing funds for salaries, suppliers, rent, and current expenses. In 2024, about 27% of businesses that needed financing encountered a cash problem. The cost of financing is especially high for small businesses: the average interest rate for a micro-business (1-4 employees) stood at 7.88%, compared to 5.95% for a large business. Accelerating the exit of money from the business's till will force it to cover the shortfall through expensive credit.

The organization's leaders intend to mobilize, even before the elections, the heads of the parties seeking the trust of independent contractors to launch a struggle to cancel this decree. "We have stopped being the state's suckers, we will no longer turn the other cheek," the organization says.