Under the Invoice System that was launched on October 1, 2023, only a taxable business registered as an issuer of qualified invoices can issue qualified invoices.

Normally, sole proprietors with sales of ¥10 million or less are exempt from tax by default. However, because they are currently unable to issue qualified invoices under the Invoice System, many are considering whether to apply to register as a taxable business capable of issuing them.

In this article, we will discuss the impact of the Invoice System on sole proprietors, including the risks of not registering, as well as the benefits and drawbacks of registering.

What’s in this article?

• Sole proprietors can register as a qualified invoice issuer
  
• The Invoice System and sole proprietors with annual sales of ¥10 million or more
  
• Benefits and drawbacks for sole proprietors registering in the Invoice System
  
• When does consumption tax liability start for registered sole proprietors?
  
• Factors for sole proprietors to consider regarding the Invoice System
  

Sole proprietors can register as a qualified invoice issuer

Beginning with the launch of the Invoice System, qualified invoices must be issued and retained to receive a purchase tax credit. With the introduction of the Invoice System, any taxable business, whether a corporation or sole proprietor, may apply for registration to issue and provide qualified invoices. There is no need to incorporate the business to comply with the Invoice System.

A sole proprietor can apply for registration in the Invoice System by mailing the application form to the Invoice Registration Center of the tax office for their area, or by submitting an application through e-Tax. Note that paper applications for registration are only accepted by mail. You cannot submit the application in person at the tax office for your area.

The application form for registration can be downloaded from the National Tax Agency’s application for registration as an issuer of qualified invoices. Samples of application forms for sole proprietors and instructions for filling them out can be found on the National Tax Agency’s website, with one page showing examples for sole proprietors and another page on application procedures for domestic qualified invoice issuing businesses. Upon approval of registration under the Invoice System, the sole proprietor will be designated as an issuer of qualified invoices and an invoice registration number will be assigned.

Whether applying by mail or e-Tax, personal identification is necessary. Sole proprietors should prepare a copy of their My Number Card in advance.

As explained above, to register under the Invoice System, being a taxable business is a requirement. Sole proprietors with annual sales of ¥10 million or less are exempt from the obligation to pay consumption tax as they are tax-exempt businesses. Consequently, transitional measures, which are in place until September 30, 2029, have been established specifically for these exempt business entities. These measures allow tax-exempt businesses to register and become taxable businesses under the Invoice System, making them authorized to issue qualified invoices.

The Invoice System and sole proprietors with annual sales of ¥10 million or more

Sole proprietors with annual taxable sales exceeding ¥10 million are taxable businesses and are thus eligible to be designated as qualified invoice issuers under the Invoice System. Sole proprietors with annual sales of ¥10 million or more may be impacted by the Invoice System in several ways, such as:

• A requirement to register in the Invoice System as an issuer of qualified invoices.
  
• A potential increase in administrative workload due to complex accounting tasks, necessitating a review of workflows and systems.
  
• You will not be able to use purchase tax credits for transactions with businesses that take advantage of their tax-exempt status, and this may increase your tax burden if you transact with mostly these types of businesses.
  

Benefits and drawbacks for sole proprietors registering in the Invoice System

As explained above, when a sole proprietor who was previously exempt from the obligation to pay consumption tax registers as an issuer of qualified invoices, they will become a taxable business under the Invoice System. Let’s look at the benefits and drawbacks for such sole proprietors when they register in the Invoice System.

Benefits for sole proprietors registering in the Invoice System

• Continued transactions with existing customers
  When a seller who is a sole proprietor issues a qualified invoice compliant with the Invoice System, the buyer can apply the purchase tax credit. This makes it easier for buyers to continue ordering work as before, and it also allows the seller to avoid the risk of price negotiations or discontinuation of transactions.

• Increased new orders
  Similarly, from the buyer’s perspective, a sole proprietor who is registered in the Invoice System is more likely to be chosen as the preferred vendor for new transactions.

• “Special accommodation of 20%” for previously tax-exempt businesses
  By registering in the Invoice System to issue qualified invoices, tax-exempt businesses become taxable, but they can apply a “special accommodation of 20%” from October 1, 2023 (when the Invoice System began) until September 30, 2026. This allows them to set their retail tax payable at 20% of their consumption tax amount during that period. For more details, refer to the National Tax Agency’s page on the special accommodation of 20%.

Drawbacks for sole proprietors registering in the Invoice System

• Consumption tax liability for those with annual sales of ¥10 million or less
  Registering for the Invoice System obligates sole proprietors to pay the consumption tax annually. Payment was previously exempted, so registration could reduce actual after-tax income. Additionally, this may increase the time and effort required for final tax returns and add burdens beyond core business activities.

• Adoption of qualified invoice procedures is required
  The Invoice System requires issuing, retaining, and recording qualified invoices, potentially increasing the accounting burden. However, once you have installed systems such as an automatic sales tax calculation, sending and retaining invoices and other activities can be done electronically, simplifying the process. Thus, while advance preparation is required to create qualified invoices that comply with the Invoice System, there are benefits—such as the ability to make better use of tools and features that can be customized to meet your needs and increase the efficiency of your business. To include the necessary sales tax information in your qualified invoices, tools such as Stripe Tax or Tax Rates provide a tax calculation function that can assist.

When does consumption tax liability start for registered sole proprietors?

The obligation to pay consumption tax arises when one becomes a taxable business. Thus, even if they have annual sales of ¥10 million or less, sole proprietors who are registered in the Invoice System are deemed taxable businesses and are obliged to pay the tax, starting on the day they are registered. They are generally required to submit the tax by the end of March of the following year for the taxable period from January 1 to December 31 (there will be a difference of one or more days if the last day of March falls on a weekend). Note that this period is different from the income tax payment period, which is from February 16 to March 15 each year. Make sure to be mindful of the respective tax payment dates.

Information on Invoice System bookkeeping methods for consumption tax required of taxable businesses on their final tax returns can be found on the National Tax Agency’s final tax return page section on record retention.

Also note that adoption of the Invoice System does not affect income tax declarations on the white return and blue return. Therefore, whether a sole proprietor chooses to submit the white or blue return is independent of the Invoice System as it concerns the consumption tax purchase credit, and can be freely chosen by the business owner.

Factors for sole proprietors to consider regarding the Invoice System

How sole proprietors with annual sales of ¥10 million or less respond to the Invoice System may vary, depending on each individual business owner. It is important for sole proprietors who are sellers to carefully take into account the situation and needs of buyers while considering whether to register for the Invoice System.