VAT Exemption — Who is Entitled and How to Apply?

What is VAT Exemption and Who is it Relevant For?

VAT exemption is an opportunity for certain business owners to be exempt from the obligation to register for VAT and periodic reporting to Value Added Tax. In other words — you do not need to report VAT on your sales, and conversely, you also cannot claim VAT refunds on business expenses.

This exemption exists to ease the burden on small businesses with relatively low transaction volumes. Instead of investing resources in managing complex VAT, they can focus on their business operations.

The primary target audience for VAT exemption includes:

• Exempt business owners — self-employed individuals with sales volumes below a certain threshold
• Self-employed professionals in specific fields — such as consulting, professional services, and healthcare treatments
• Owners of micro-businesses — with relatively low annual income
• Small companies — under certain conditions
• Nonprofit organizations and public entities — under specific conditions

If you are an employee only, the subject of VAT exemption is not relevant to you — you do not pay or claim VAT yourself at all.

VAT Threshold — What Exactly Is It?

A VAT threshold is the amount of annual income above which you are required to register for VAT. If your income is below the threshold, you may remain exempt from VAT.

The threshold changes annually according to tax authority regulations. In 2026, the current threshold stands at a specific amount, but it may change. This is why it is advisable to check the updated threshold yourself or consult with your accountant.

Important to understand: this threshold applies only to income from the sale of goods and services, not to all your income. If you receive income from salaried employment on the side, it is not counted for the purpose of calculating the VAT threshold.

If you are approaching the threshold or crossing it, this is the right time to contact your accountant — because registering for VAT changes your entire accounting reporting structure.

How to Request a VAT Exemption — Step by Step

The process of requesting a VAT exemption is actually quite short and relatively simple, but you must do it at the right time and in the correct manner.

1. Initial eligibility check — Verify whether you meet the criteria: income below the threshold, type of business that qualifies for exemption. If you are unsure, this is a good time to ask your accountant.
2. Document preparation — You will need to submit an income report from the previous tax year, a business proprietor certificate (if you have one), and any relevant documents proving the scope of your transactions.
3. Filing a request with the tax authority — The request is submitted through the tax authority's website or through a physical form. Nowadays, most requests are submitted digitally through the tax portal.
4. Waiting for approval — The tax authority will typically respond within a few weeks. If they have additional questions, they will contact you.
5. Receiving approval — If approved, you will receive a confirmation letter and your new registration details. From that point forward, you are exempt from VAT.

Practical tip: do not wait until the last minute before the tax year. If you believe you are an exempt business owner from VAT, it is better to reach out early in the year. This prevents confusion and reporting errors.

What You Need to Know About Reporting and Tax When You Are VAT Exempt

If you are exempt from VAT, it does not mean you are exempt from all taxes. On the contrary — you are still required to report your income and pay regular income tax.

The key point: when you are a VAT-exempt business owner, your accounting reporting is simpler. You do not need to report VAT in each period (monthly or quarterly), and you cannot claim VAT refunds on expenses. This simplifies your books, but it also means you do not receive the benefit of VAT refunds.

Your reporting obligations as a VAT-exempt business owner:

• Filing an annual report to the tax authority with a summary of income and expenses
• Payment of advance tax payments on income (if you are obligated to pay them)
• Reporting to social security on your income
• Maintaining proper accounting books (even if you are VAT exempt)

Common mistake: Some business owners think that VAT exemption means they do not need to file an annual report. This is not correct. You still need to file an annual report; it will just be simpler without VAT reporting.

Common Mistakes and How to Avoid Them

• Crossing the VAT threshold without knowing — Some business owners increase their income beyond the threshold and then realize they need to register for VAT. This creates reporting chaos. Solution: Monitor your income in real-time and set yourself a reminder when you approach the threshold.
• Filing an exemption request at the wrong time — If you file the request in the middle of a tax year, it can create reporting issues. It's better to plan this in advance, before the tax year begins.
• Misunderstanding the implications for VAT refunds — When you're exempt from VAT, you cannot claim VAT refunds on business expenses. Some business owners find themselves paying VAT on purchases and unable to recover it. This can be expensive. Before deciding to remain exempt, calculate your expenses.
• Forgetting to update the Tax Authority about changes — If your situation changes (for example, you transfer the business to a limited company), you need to inform the Tax Authority. Failure to update can lead to reporting problems later.
• Not maintaining organized books — Even when you're exempt from VAT, you must keep accounting books organized. The Tax Authority may still request them. Disorganized books can lead to an investigation.

When Should You Consult an Accountant?

If you are considering VAT exemption or have already submitted a request, there are several situations where it is advisable to consult an accountant immediately.

First-time VAT exemption request: If you are a new business owner or have not yet submitted a request, an accountant can help you understand whether you are truly eligible and how to submit the request correctly. This saves time and prevents errors.

You are approaching the VAT threshold: If your income is approaching the threshold, this is the time to speak with someone who can help you plan your next step. If you exceed the threshold, your reporting obligations will change fundamentally.

You believe you need to register for VAT: If you have received a notice from the tax authority or think you are required to register, do not wait. An accountant can help you understand the implications and begin the process correctly.

You are unsure what you are entitled to: Just as you have been reading this guide to understand, an accountant can give you a complete picture of your situation — not just regarding VAT exemption, but all aspects of your tax obligations.

Ben Or Kook Accountants assist business owners and self-employed individuals at precisely these stages. If you are in Petach Tikva, Ramat Gan or anywhere in Israel, we can help you understand your entitlements and plan your next steps.

Comparison Table — VAT Exemption vs. VAT Registration

To better understand the differences, here is a table comparing the two situations:

As you can see, the choice between VAT exemption and VAT registration depends mainly on your income volume and the scope of your expenses. If you have many expenses with VAT, VAT registration may be more profitable. If your expenses are low, VAT exemption may be simpler.