Start-ups: Anticipating VAT pitfalls from the very beginning of your business

In this article, we discuss some fundamental principles related to VAT that are important for start-ups — but not only for them.

VAT registration and acquisition tax

In the early years, start-ups often incur substantial expenses and investments without generating sufficient turnover (CHF 100,000 from taxable supplies) to trigger mandatory VAT registration in Switzerland.

It may seem, then, that VAT is not a concern. However, many start-ups purchase services - such as R&D, marketing, or consulting - from foreign providers. These invoices usually arrive in Switzerland without VAT, since the supplier is foreign and not subject to Swiss VAT.

In such cases, Swiss businesses that are not VAT-registered must still declare and pay acquisition tax (or reverse charge mechanism) if the total amount of foreign services reaches CHF 10,000 per year.

Depending on the volume of foreign services acquired over the past five years (the statute of limitations for tax claims), the sums to be regularised can be significant if not declared voluntarily. Moreover, since the company is not VAT-registered, it cannot deduct this tax. The VAT due on such acquisitions tax (currently 8.1%) must be paid in full to the Swiss Federal Tax Administration (SFTA), creating a potentially serious financial risk.

Voluntary VAT registration even without revenue

The VAT environment in which a start-up evolves is often a crucial issue - but one that is frequently overlooked. Yet, a proactive approach can provide significant benefits and help reduce VAT burdens, particularly during the R&D phase, when costs are high and revenue is limited or non-existent.

Voluntary VAT registration can allow a company to:

• partially or fully deduct input VAT on expenses and investments incurred during the R&D phase;
• reduce the impact of acquisition tax on services subject to this tax; and
• deduct VAT on imported goods (e.g., components, raw materials, parts).

Conversely, public grants or equivalent subsidies received by the start-up may negatively affect its right to deduct input tax.

Voluntary registration cannot be applied retroactively for past tax periods. It is therefore essential to understand the full scope of the company’s activities, the origin of its costs, its funding sources, and any potential revenue to make the right decision from the outset.

VAT and R&D – the line can be thin

Beyond the financial thresholds, VAT registration also fundamentally depends on whether the company carries out an entrepreneurial activity. The main objective must be to provide goods or services in exchange for remuneration. While generating profits is not mandatory, the intention to make a profit is generally sufficient. Recognising entrepreneurial activity is essential for VAT registration.

If this qualification is not formally confirmed by the SFTA at the time of registration, it must still be assessed in advance, or the company risks a subsequent requalification. A partial or full requalification can result in several consequences, including the SFTA denying the right to deduct input tax declared in VAT returns.

This situation can be especially problematic for start-ups engaged in multi-year R&D projects or those that generally incur costs without generating revenue. There is a real risk that the SFTA could challenge the entrepreneurial nature of such activities if expenses do not appear to lead to corresponding income.

The SFTA’s three phases of research

In this context, the SFTA distinguishes between three phases of research in its administrative guidance:

• Fundamental research (also known as basic or pure research): This is purely theoretical and focuses on expanding scientific, general, or human knowledge—often in unexplored areas - without aiming at specific applications.
• Application-oriented fundamental research: This transitional phase lies between basic and applied research. It generally aims to identify potential economic, technical, medical, social, or cultural benefits, although these are still under development.
• Applied research: This phase aims to develop technology and solutions to solve specific problems. It focuses on concrete applications and use cases across various sectors (economic, technical, medical, social, or cultural). Applied research is the practical side of research.

Documentation and risk

From a VAT perspective, pure research that lacks a specific application goal does not entitle the company to input tax deduction – unlike applied research. In effect, the SFTA does not recognise an entrepreneurial activity in phase 1, unless there is a clear intent or plan to proceed with phases 2 and 3.

These two later phases are essential to bringing a project to life: defining objectives, identifying commercialisation strategies, and planning to generate taxable revenue. They are therefore decisive in demonstrating the entrepreneurial nature of the start-up’s activity from the outset.

In practice, fundamental research forms the basis for applied research and technological development. However, it is not always easy to prove the intent to apply results – especially when a project is abandoned or halted during phase 1 or 2.

The SFTA may be inclined to classify a company that accumulates expenses over several years without generating revenue as engaged purely in fundamental research. If so, it could challenge the legitimacy of the company’s VAT registration and request reimbursement of input VAT previously refunded.

Recommendation

It is essential to conduct a preliminary VAT assessment of the start-up’s environment to identify implications and explore available options. The objective is to implement sound practices and optimise resources for efficient VAT management – an area that presents not only risks but also significant opportunities for financial savings.

Article written by Vanessa Cilio