FOPs are being prepared for rates up to 10% and VAT — it might become more profitable for businesses to replace people with AI

A major restructuring of the simplified tax system is being prepared in Ukraine. For some FOPs in the service sector, the single tax may increase to 10%, some types of activities are going to be removed from the second group, and from 2028 entrepreneurs with turnover above a new threshold will be required to register as VAT payers.

The changes are not being introduced tomorrow. But their schedule is already fixed in July's memorandum of Ukraine with the IMF.

For some FOPs, the rate may increase from 5% to 10%

In 2027, the authorities plan to revise the second and third groups of the single tax. Some types of activities will be excluded from the second group and transferred to the third. For third-group entrepreneurs providing services, differentiated single tax rates are provided — up to 10%.

Currently, a third-group FOP without VAT pays 5% single tax and an additional 1% military levy on income. Therefore, for some entrepreneurs, the single tax rate itself could potentially double. Which services exactly will fall under the maximum 10% has not yet been determined.

VAT for simplified taxpayers will come into effect from 2028

Another major change is planned from January 1, 2028. FOPs on the simplified system with turnover above the established threshold will have to become VAT payers.

The authorities have committed to adopt the law by the end of April 2027. The exact threshold has not yet been set: it should be raised compared to the current one, but it cannot exceed the maximum provided for by EU rules for small businesses — 85 thousand euros of annual turnover.

Therefore, it is still too early to say that Ukraine has already decided to set the threshold exactly at 85 thousand euros. This is an upper limit, not an approved Ukrainian amount.

The authorities want to close the "employee as FOP" scheme

A separate part of the reform is aimed against companies that, instead of regular employment, register workers as entrepreneurs. By the end of 2026, the authorities intend to limit business splitting, transitions between tax regimes, and the use of the simplified system for providing services to a current or former employer.

The state's logic is clear: if a person actually works as a staff employee, taxes should be paid as from labor relations, not according to the cheaper FOP scheme.

But some businesses may choose not staff, but artificial intelligence

The reform may have a side effect that is not in the tax plans. If FOP services become more expensive, businesses will compare the cost of a person with the cost of automation even more carefully.

And the choice will not necessarily look like "FOP or official employee". For some companies, it will look different: hire a person, keep a contractor, or completely remove this work from the staffing schedule and hand it over to artificial intelligence.

This especially concerns professions where a significant part of the work is already done on a computer: editors and copywriters, translators, support operators, marketers, analysts, data processing specialists, and some programmers.

The higher the taxes and the cost of supporting a person, the lower the economic threshold after which automation becomes more profitable. Therefore, the state's attempt to make the use of FOPs less attractive may lead not only to people transitioning to official employment, but also accelerate the reduction of some jobs.

The bottom line

The coming year for most FOPs will proceed under current rules. But the direction of the reform is already clear: the state is gradually reducing the advantages of the simplified system, intensifying the fight against the use of FOPs instead of employees, and expanding the application of VAT.

For entrepreneurs in the service sector, 2027 will be the most sensitive year, when rates up to 10% may appear. The next stage is 2028 and mandatory VAT after exceeding the new threshold.

And for employers, there is another incentive to recalculate the economics of hiring. If the cost of maintaining an employee or contractor increases, some businesses may solve the tax problem in the most radical way — simply reducing the number of people whose work can be automated.