KVED for individual entrepreneurs: what do entrepreneurs need to know?

When registering a business, every entrepreneur needs to choose his or her KVED. But what does this abbreviation mean, why is it necessary, and how to choose it correctly?

What is KVED in simple terms?

KVED stands for the Classification of Types of Economic Activity. In essence, it is a large reference book with a list of types of business activities. The document is available in full on the website of the State Statistics Service (SSS) and is regulated by Order No. 457.

The main purpose of the classifier is to define the type of economic activity and assign it a corresponding code. The KVED is used by the State Statistics Service to collect statistical data and by tax authorities.

How many KVEDs can a sole proprietor choose?

There are no regulatory restrictions on the number of KVEDs for entrepreneurs. Therefore, you can choose any number of them when registering a business. Subsequently, the sole proprietor can change, supplement or remove them. However, from this list, only one KVED should indicate the main type of business. And this number must be the first in the application for initial registration.

The KVED code and the main type of activity that belongs to it must be indicated in the application for state registration of a sole proprietorship in Form 1. Next, the entrepreneur chooses secondary economic activities and indicates them in the application for the simplified taxation system. The entire list of codes will then be entered into the USR database.

Choosing a KVED for a sole proprietorship

Before registering as a sole proprietor, you need to clearly define the types of activities and make a full analysis of your project:

• from which area the main income will come,

• a specific line of business,

• availability of additional services for secondary types of business,

• type of sales or service market,

• whether this type of activity is allowed for sole proprietor ships.

Thus, it will be easier for an entrepreneur to choose the codes and engage in the type of activity specified in the registration documents. Otherwise, if you do not have a KVED or do not carry out business under the registered codes, you may receive sanctions from the tax authorities.

What to expect if you do not specify the KVED?

Registration of the KVED allows a sole proprietorship to conduct business activities that are subject to the appropriate taxation. If you work under other codes that are not specified in the registration documents, this will have the following consequences:

1. For entrepreneurs on the general taxation system: income received as a result of activities under an unregistered code will be taxed as if it were an ordinary individual. In this case, it is necessary to pay 18% personal income tax and 1.5% military duty and reflect this in the tax return. The peculiarity of this situation is that the tax will be paid on the full income of the entrepreneur, not on the profit less expenses.

2. There may be several consequences for sole proprietors on the simplified taxation system:

• first, you have to pay 15% tax. The taxpayer's group will not matter;

• second, a sole proprietor may be deprived of the right to continue to be on the simplified taxation system. It will be transferred to the general regime from the 1st day of the next month;

• third, the tax authorities may cancel the registration of a sole proprietorship. The reason for this may be that the entrepreneur did not switch to the general system in time (clause 299.10 of the Tax Code).

In the latter case, in order to cancel an entrepreneur's registration as a sole proprietor, it is necessary to draw up an audit report and reflect the violations committed in it. And such a person will be able to return to the simplified taxation system only four quarters after the current tax decision.

Therefore, the tax authorities may revoke the simplified taxation system for a sole proprietorship for operating under the KVED without registration.

How to change and add a sole proprietor's KVED?

An individual entrepreneur has the right to change or add to the list of codes at any time. To do this, you need to fill out an application in Form 1 and submit it to the state registrar.

The application must state:

• all information about the entrepreneur,

• change the types of economic activity;

• indicate the new KVED.

At the same time, a new application for the use of the simplified taxation system must be submitted to the tax authorities and the relevant changes must be indicated in it. The new KVEDs must be indicated in paragraph 8 of the document.

For entrepreneurs of Groups 1 and 2, the deadline for submitting an application is the 20th day of the month following the changes. For Group 3, this deadline coincides with the submission of the tax return for the reporting period in which the changes occurred (Article 298 of the Tax Code).

How to add a KVED code for a sole proprietorship online?

An individual entrepreneur can do this online. To do this, you need to:

1. Create an account on the Diia website or, if you already have a profile, log in.

2. Select the tab "Making changes about the sole proprietor" in the menu.

3. Go to the block with the types of economic activity and click on the "Edit" button.

4. Delete outdated numbers from the list of codes and add new ones. When you enter the first digits, the system will automatically provide answers. Check the box next to each option and save the information.

If the entrepreneur is a taxpayer, the system will automatically transfer the new data to the Register of Single Tax Payers. Therefore, you will need to select the tax office where the sole proprietor is registered from the list.

To verify the data and sign them, you must use a QES — an electronic signature. Within 24 hours, new information is entered into the registration documents. After its successful processing and transfer to the Unified State Register, a notification will be sent to the person's e-mail.

Is it possible to register as a sole proprietor under the simplified taxation system with prohibited KVEDs?

The tax authorities do not advise doing so. Even though there is no formal ban on registering prohibited codes, a 15% fine may be imposed for carrying out such activities. In addition, the entrepreneur may be deprived of the right to continue using the simplified taxation system.

However, in practice, if the registration form contains prohibited activities for this group of sole proprietors in the list of KVEDs, the tax authorities will simply refuse to register.

Which KVEDs are prohibited for sole proprietor ships?

Regardless of the taxation system, all entrepreneurs are prohibited from such activities:

1. Operation and construction of roads and highways.

2. Activities related to the sale of scrap metal.

3. Providing services in the financial sector.

4. Organization of higher and secondary education.

5. Activities in the field of radio and television broadcasting.

The following types of activities are prohibited for simplified taxpayers belonging to 1-3 taxpayer groups (clause 291.5 of the Tax Code):

• currency exchange,

• gambling,

• land lease,

• audit,

• mining of precious metals,

• mining,

• brokerage services, etc.

Classification of economic activities for retail and wholesale trade

This question is often asked by Group 1 entrepreneurs who are not allowed to conduct wholesale trade. However, many people are confused about the difference between these two concepts. Therefore, it is important to remember that retail and wholesale trade do not differ in the quantity of goods sold. In retail trade, an entrepreneur sells goods to the end consumer, while in wholesale trade, an agreement is formed with the client on the supply of a batch of products, which is then sold to the end consumer.

In this regard, a sole proprietorship on the single tax does not have to indicate the KVED for wholesale activities. Entrepreneurs of other groups can choose code 47 — retail trade, code 46 — wholesale trade.

Thus, in order not to violate the law and comply with the procedure for conducting business, it is necessary to choose and specify the KVED correctly to avoid fines and sanctions from the tax authorities.