VAT מע״מ - the basics

VAT (value added tax) is a tax levied on business transactions, but borne by non-businesses, i.e. it is the private individual who ends up bearing the brunt of the tax.

As a general rule, VAT is charged at the standard rate, which is currently 18%. The business is required to hand over to the government any VAT collected from their customers, either on a monthly or bi-monthly basis.

Two types of trader

Every business is required to register with  the VAT authorities prior to commencing their first transaction.

The status of the trader is determined by their annual turnover, i.e. the amount they bill their customers. For these purposes, the year is concurrent with the tax year - 1 January to 31 December.

Any trader expecting to have turnover of less than NIS 77,993 (correct for 2013) in the tax year will be registered as an osek patur (עוסק פטור) - exempt trader. They do not (and are forbidden to) charge VAT on their invoices, and they cannot claim back VAT on their expenses.

The osek patur is required to report yearly - in January - regarding the previous year to confirm that they remained beneath the limit. Once the limit is exceeded, they will need to upgrade their status to that of an osek morshe.

All other traders become an osek morshe (עוסק מורשה) - a registered trader. They charge VAT on all of their income, and can claim back VAT incurred on business expenses. There are situations on which the VAT rate is zero, e.g. fruit & vegetables, tourism and services provided to non-Israelis in certain circumstances. It is critical that you get advice on these matters if you think they may be applicable to you.

 

Reporting

The reporting for an osek morshe is either every month or every two months. The report must be made (and any tax owing must be paid) by the 15th of the month following the period-end. This deadline is extended until 6:30pm on the 19th if you are reporting online.

The report summarises all income earned in the period and the VAT that is being claimed.

The requirement to report does of course entail bookkeeping. Again, there are rules about how this must be done, whether by hand or on the computer.

For the largest businesses (measured by turnover or employees), a detailed report must be filed electronically. This report details every invoice (both income and expense) and includes the ID number of the customer/supplier.

Late filing carries a fine of more than NIS 200 (even if a single day late), so be warned!

 

Invoicing

The osek morshe is required to issue tax invoices (חשבונית מס) to customers, and can only claim back VAT against a tax invoice. The format of the tax invoice must meet strict rules, so you must get approval from an accountant before printing.

Invoices should be written in Hebrew, even if the customer does not speak the language. By all means send a translated version, but there must be a Hebrew version to show the authorities.

 

The tax-point

The date on which you become obligated  to issue a tax invoice is known as the tax-point.

As a rule, the tax point is when the goods reach the customer or when the service is provided. As such, the tax point is invariably before payment is received.

However, many service providers are allowed to make their tax-point only when payment is received (this means the date the monies hit the bank - not when a post-dated cheque is received). Examples of such professions are accountants, lawyers, translators & medical professionals.

Again, professional advice should be sought prior to commencement of business.

How and when to file your tax return

The deadline for filing your 2012 tax return is Sunday 30th June.

As previously discussed, the tax year in Israel runs from 1 January to 31 December, i.e. concurrent with the calendar year.

Tax returns cover the year in question, and obviously cannot be filed until the start of the next year.

The tax return itself is just three pages long, and contains - apart from identifying information - all of your income, claims to deductions and credits and tax deducted at source.

Each field is given a three-digit code and these often appear on supporting documentation.

In the vast majority of cases, the tax return must be filed electronically, either via the Internet or directly onto the tax computer by an agent. To file on the internet: www.misim.gov.il/sh1301 (requires registration).

However, the electronic filing is only the first stage - you also need to physically sign on the tax return, attach appendixes and other supporting documentation and hand the return into a tax office. Only then is the tax return considered filed. 

Supporting documentation will include profit and loss accounts, forms 106 (summary of salaries), summaries of amounts paid into various insurances, receipts of donations made etc.

You should always take a copy of what you file, it has been known to happen that papers get lost in the tax offices!

 

Filing deadlines

The law requires you to file your tax return by 30 April (if not filing electronically) or 31 May (for electronic filing) following the end of the tax year. However in many years these dates are extended by a month as it is difficult to get all the necessary paperwork in time (this has happened for 2012 ).

That being said, there are arrangements with accountants whereby, provided that the accountant meets certain criteria (percentage of their clients' returns filed by given dates), their remaining (eligible) clients will automatically get filing extensions to 31 August and 30 November. It is possible to get an extension beyond this date, but this will be at the discretion of the tax office.

Filing your tax return late has two main implications - hefty fines (over NIS 1,000 for each month late) and, perhaps more importantly, no possibility of extensions in the next two years, even if the accountant meets their target.

Finally, a note of caution. Although the filing deadlines are reasonably generous, interest and linkage (הצמדה) accrues on your tax balance from 1 January (i.e. the day after the tax year ends), regardless of when you file your return.

Are you receiving all the tax credits that you are entitled to?

In a previous post, I explained that tax credits reduce your gross tax liability in order to get to your final tax bill. As such, it is important to ensure that your tax is calculated to take into account everything that you are entitled to.

It should be pointed out that these credits are for calculation purposes only, so you will not get a refund if you have excess credits.

The calculation of credits fall into two broad categories - the points-based system and the expense-based system.

The points-based system awards you a certain number of credit points (נקודות זיכוי) depending on your personal circumstances. These are awarded, in most cases, regardless of income level.

The expense-based system grants credits as a percentage of certain expenditures during the tax year. These are often subject to income-based limits.

Below are some of the more common situations that might entitle you to credits. 

Points-based

A credit-point is worth NIS 218 per month (correct for 2013).

1. Any tax-resident (see this post for definition) is entitled to 2.25 points. Women are entitled to an extra 0.5 points.

2. An oleh chadash gets points for the first 42 months after Aliyah as follows:

3 points per month for months 1-18.

2 points per month for months 19-30.

1 point per month for months 31-42.

The points can be frozen during army services or higher education.

3. Children award their parents with credit-points. The parent must have custody over the child in order to be eligible.

Mothers and single-parent fathers get points for each child as follows:

0.5 points in the year the child is born.

2 points in the years that the child turns 1 to 5.

1 point in the years that the child turns 6-17.

0.5 points in the year that the child turns 18.

Fathers in other situations get points for each child as follows:

1 point in the year the child is born.

2 points in the years that the child turns 1 or 2.

1 point in the year that the child turns 3.

4. A single parent who has minor children gets 1 point.

5. A remarried person gets 1 point if they are paying alimony to their former spouse.

6. A parent paying child support gets 1 point.

7. A child who is not fully functioning entitles the parent to claim 2 points. The criteria are not well defined in law and the authorities have therefore set their own criteria before allowing these points. If you think this may apply to you, contact an accountant who can give you further advice.

8. A soldier who has completed his/her army service is entitled to extra points for 36 months after the completion of their service. A male who served at least 23 months, and a female who served at least 22 months are entitled to 2 points per month. Anyone who served fewer months is entitled to a single point only.

9. Receipt of a degree (1st, 2nd or 3rd) or academic qualification entitles the receiver to extra tax credits. The credits start from the year after receipt of the degree. The exact number of credits depends on the type of qualification received. These credits are available for up to three years - the exact number depends on the qualification and the number of years studied.

It should be added that one of the current budget proposals is to repeal these credits with effect if the 2014 tax year.

Expense-based credits

1. Payments made into a life insurance policy (e.g. for your mortgage) entitles you to a credit of up to 25% of the premiums paid.

2. Payments made into certain types of pension plan entitles you to a credit of up to 35% of the premiums paid.

The overall limit if credits allowed also considers the payments to both life insurance and pension.

3. Donations made to charities (which must be recognised for tax purposes under section 46 of the Income Tax law) entitle you to a 35% credit. A minimum of NIS 180 if donations need to be made over the tax year on order to be eligible. The maximum donations for which you can get credit is 30% of your taxable income. Any excess can be carried forward for up to three years.

Finally, residents of certain towns and villages in Israel are eligible to extra credits. The credit is calculated as a percentage of the annual income, subject to certain limits. The percentages and limits depend on the particular town or village - and can potentially change each year.

There are also a few other situations in which credits may be awarded, but these are rare - best to check with an accountant if you are unsure.