What is the difference between VAT and non-VAT?

A VAT-registered business charges value-added tax on sales and can claim VAT on purchases, while a non-VAT business does not charge VAT and usually pays the simpler percentage tax instead.

When do I have to register for VAT?

Generally when your annual gross sales go above the VAT threshold set by law. Below it, you can usually stay non-VAT. Ask AskOnward for the current threshold.

Is it better to be VAT or non-VAT?

It depends. VAT can suit businesses with VAT-paying suppliers or large clients who want VAT invoices, while non-VAT is simpler and often lighter for small operations. There is no single right answer.

VAT vs Non-VAT: Which One Applies to Your Business

Taxes2 min readUpdated May 30, 2026

One of the first questions a new business faces is whether it should be VAT or non-VAT registered. The choice affects the taxes you charge customers and the returns you file. Here is the difference in plain terms.

The core difference

A VAT-registered business adds value-added tax to its sales, can claim back VAT on its own purchases, and files VAT returns. A non-VAT business does not add VAT, but typically pays the simpler percentage tax instead.

Think of VAT as a tax you collect from customers and pass on, while percentage tax is a smaller flat charge on your sales.

The VAT threshold

The deciding factor is usually the VAT threshold, a level of annual gross sales set by law. Businesses whose sales go above it are generally required to register for VAT. Those below it can usually stay non-VAT, though some choose VAT registration on purpose.

Crossing the threshold mid-year can trigger a requirement to register for VAT, so it is worth watching your sales as you grow.

Which is better for you

Neither is automatically better. VAT registration can suit businesses with many VAT-paying suppliers or large clients who prefer VAT invoices. Non-VAT is simpler and often lighter for small operations and the self-employed.

Ask AskOnward how the threshold and the two options apply to your business, or check with a tax professional.

Have a specific question?

Ask AskOnward and get an answer grounded in the official BIR rules, with the current forms, fees, and steps for your situation.

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Frequently asked questions

What is the difference between VAT and non-VAT?: A VAT-registered business charges value-added tax on sales and can claim VAT on purchases, while a non-VAT business does not charge VAT and usually pays the simpler percentage tax instead.
When do I have to register for VAT?: Generally when your annual gross sales go above the VAT threshold set by law. Below it, you can usually stay non-VAT. Ask AskOnward for the current threshold.
Is it better to be VAT or non-VAT?: It depends. VAT can suit businesses with VAT-paying suppliers or large clients who want VAT invoices, while non-VAT is simpler and often lighter for small operations. There is no single right answer.

Related guides

This guide is for general information and is not affiliated with the government. For official forms and the latest rules, see the Bureau of Internal Revenue at bir.gov.ph.