When establishing a business, every business owner is required to report their income to the tax authority, specifically to three different entities - income tax, value-added tax (VAT), and national insurance.
Typically, business reports to VAT will be as an "Osek" or "Osek Murshe," which is liable for VAT on their transactions (income) and can offset this tax against the VAT paid on expenses related to their taxable transactions.
Such reporting can be complex for a small business, and therefore entrepreneurs and small businesses are entitled, in certain cases, to relief from the complexity involved in dealing with VAT, through the establishment of an "Osek Patur" instead of an "Osek Murshe". An individual may request to be considered an "Osek Patur" if their annual business turnover does not exceed 107,692 ₪ (as of 2023) and also if they initially apply as such, offering a simpler and less burdensome approach to dealing with the tax authority.
At the heart of this system is the exemption from collecting VAT from customers, a relief that saves small business owners the complexity and administrative responsibility involved in collecting VAT and reporting it to the tax authority every month or two. In this way, the exempt business can also offer lower prices to private customers (since it does not collect an additional amount for VAT, being exempt from it) and is also exempt from monthly VAT reporting. However, this exemption comes with certain limitations. An "Osek Patur" cannot offset the VAT paid on expenses related to the business, even if these are recurring expenses or even initial business establishment expenses.
Eligibility for this status depends on the annual turnover of the business, which must remain below the specified threshold, focusing on the business's total income rather than its profit. This criterion ensures that exemption will indeed be given to businesses operating on a truly small scale.
It is important to emphasize that despite the VAT exemption, "Osek Patur" are still required to file other reports to the tax authority, and they must report to the VAT authorities annually, a less demanding requirement compared to the monthly or bi-monthly reporting expected from businesses. Hence, the exemption is definitely limited to VAT. Business owners are still required to meet income tax and national insurance payments, as well as reporting to these authorities, and failure to comply with legal requirements can lead to significant costs and even criminal sanctions.