Pozzi
Hey there,
I've been down this road with my own startup, and I can definitely relate to the dilemma you're facing. Here's how I approached it and what might help you make your decision:
If your business is in a high investment phase, the effective method is likely the better choice. Since it allows you to fully reclaim input tax, you'll be able to offset some of those upfront costs, which can be a significant relief when cash flow is tight. The trade-off is the additional administrative burden, but in the long run, it could save you money, especially if your input VAT is substantial.
The effective method offers more flexibility in the early stages when your revenue might be unpredictable. You can switch to the net tax rate later on, once your business model has stabilized and your revenue streams are more predictable. This is a strategic move because it allows you to maximize your input tax deductions when you need them most.
With the net tax rate, you run the risk of overpaying VAT, especially if your investments are high compared to your turnover. This can be frustrating and costly. On the other hand, if your business is heavily service-oriented with lower input costs, the net tax rate might simplify your accounting without a huge financial downside.
When I was in your shoes, I opted for the effective method initially. It was a bit more work, but reclaiming input tax on our heavy early investments made a big difference in our cash flow. As the business grew and stabilized, we reconsidered our approach, but by then, we had a clearer picture of our finances.
Think about where your business is right now and where it's headed in the next few years. If you're still in the heavy investment phase and your revenue is uncertain, the effective method could be your best bet. But if your industry and costs are relatively stable, and you want to minimize admin work, the net tax rate might be worth considering later on.
Hope this helps! Feel free to reach out if you have more questions.
