Until the end of 2025, a tax invoice above the threshold with no allocation number cost a business the input VAT on it. From 2026 it also costs the expense itself for income tax. In January 2025 Israel Tax Authority representatives told accountants this was their plan, so that someone stopped on VAT would not inflate their expenses for income tax. The amendment to section 32 of the Income Tax Ordinance passed, and in October 2026 Moshe Melamed, the Tel Aviv 4 assessing officer, explained on a Tax Advisors Association panel what it changes in practice.
The building that stands and still doesn't count
Before the amendment, an assessing officer who found fictitious invoices at a contractor could compute an economic profit for him. A 2012 Tax Authority circular allowed this, on the view that income tax taxes enrichment: the building was built, so clearly there were expenses. According to him, that is how things work up to the 2025 returns.
From the 2026 returns that is over. An expense that should have carried an allocation number and did not is not deductible, "even if I see a building standing on its foundations". A tax adviser in the audience asked whether the expense can be saved by proving the supplier reported and paid the VAT, as it can when tax was not withheld at source. The answer was no. In the withholding section the law gives that option. In the allocation number section it does not. He added that the position may change if the Authority looks at the issue again.
One case remains open: an expense with no invoice at all. According to him, in theory the 2012 circular still applies to it, but the business will have to show the expense really happened, for example with a money transfer.
One of the association's representatives on the panel spoke directly to developers: a building takes two years. Anyone who works for two years with a subcontractor who issues no allocation numbers should not be surprised when the expense is not recognized.
When the problem is the suppliers
In February 2026 CPA Jack Belanga told an Institute of CPAs lecture about a large company whose allocation numbers on its own outgoing invoices the Tax Authority blocked. The company itself is sound, he said, and the problem was its suppliers. The company went into receivership. "Instead of blocking the way out, they blocked its way in," he said.
The same amendment disallows an expense when a monetary sanction was imposed under the cash law. Here the expense is disallowed only after a sanction was actually imposed. A breach that drew no sanction does not disallow it. Melamed explained that if the sanction was imposed before the return was filed, the expense is adjusted in the reconciliation statement. If it was imposed after filing, the Authority has not yet decided how to handle it, and is weighing an assessment by correspondence, a partial assessment or an amended return.
What you can do now: check that every supplier invoice above 5,000 shekels before VAT carries an allocation number, and ask a new supplier for a number on the transaction account already, before work starts. The input VAT guide explains what else is disallowed from the outset.