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1. Risk of Retroactive Reclassification as a VAT General Taxpayer
If invoices are issued late, revenue is not recognized in the correct period. This leads to an understatement of cumulative revenue over any rolling 12-month period.
In the event of a tax audit, tax authorities will adjust revenue recognition according to statutory rules. If the adjusted 12-month cumulative revenue exceeds RMB 5 million, the company will be retroactively reclassified as a VAT general taxpayer, effective from the month the threshold was crossed.
Consequences:
1. VAT must be recalculated and paid at the VAT general taxpayer rate (e.g., 13% for trading, 9%, 6% for services), which is significantly higher than the VAT small-scale taxpayer rate (typically 3% or 5%).
2. During the period when the company was still treated as a VAT small-scale taxpayer, it would not have requested special VAT invoices from suppliers (since at that moment the company didn't need), meaning no input VAT can be claimed to offset the higher output VAT liability.
This results in a sharp and unexpected increase in overall VAT tax cost.
2. Loss of Quarterly VAT Exemption Threshold
Even no such above risk, for small-scale taxpayers, a quarterly VAT exemption applies if cumulative taxable revenue (including both invoiced and uninvoiced income) does not exceed RMB 300,000.
If revenue is not recognized timely, invoice are not issued timly and the cumulative revenue more easily exceeds RMB 300,000 in a quarter, the company loses the exemption and becomes liable for VAT on the full amount in a certain quarter.
3. Conclusion
Accurate and timely revenue recognition — through prompt invoicing — is not merely an administrative task. It ensures compliance with VAT classification thresholds, protects access to preferential tax treatments, and prevents unexpected, retroactive tax burdens.
Have questions about your specific situation? Call our hotline at 86+189 1629 8482 (English service available).
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Set up in 2009
Focus on Tax& Accoounting
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