Value added tax in Finland - Entrepreneur's guide
Value added tax and the VAT register - What should an entrepreneur be aware of?
When you become an entrepreneur, you'll quickly learn a lot of things about taxation that you may not have thought of before. One good example is VAT (value added tax), which as a consumer you usually pay as part of the price of a product or service you buy - the seller then takes care of paying the VAT onwards to the tax authorities.
Value added tax issues should be taken into consideration already as you set up your business when you are asked to register for VAT. VAT registration, payment, and deduction practices are some of the most frequently asked questions by entrepreneurs, and we are here to answer them in this quick guide!
What is VAT?
VAT, or value-added tax, is the consumption tax that, as a business owner, you add to the selling price of the product or service you sell. The standard rate of VAT in Finland is now 25,5 %, which applies to most goods and services.
So your customer pays VAT as part of the price of the goods they buy, and you, as an entrepreneur, account the VAT to the tax authorities.
However, if you have made purchases for your business that also include VAT, you can deduct this part of the VAT on your own sales that you account to the tax authorities.
Example: You set up a business and during the month you sell your services to customers for 2510€ (2,000€ + VAT 25,5%). Of the 2510 € that appears in your account, 510 € is the VAT portion that goes into the tax authorities' pocket.
However, during the month, you have bought a machine for your business for 1255€ (1000€ + VAT 25,5 %). You can deduct the 255€ VAT on the machine from the VAT on your sales.
In this case, the VAT payable for the month is 510 - 255 = 255€.
To be able to add and deduct VAT, your business must be registered for VAT. It must also be liable for VAT activity, which is defined in more detail below.
When is a business liable for VAT?
Your business must be entered in the VAT register if its turnover for 12 months exceeds 15 000 €. If the accounting period is shorter or longer than 12 months, the calculation must be made to correspond to the 12-month period. Previously, the lower limit was 10 000 €, but in 2021 the limit increased to 15 000 €.
Turnover means the total amount of your sales revenue excluding VAT.
Example: In your first financial year, you charge 15 000€ + VAT 24% = €18 600. Of this amount, your turnover is 15 000€, and the remaining 3 600€ is the VAT component.
You join the VAT register when you set up your business or later by means of a VAT change declaration.
If your company intends to conduct business outside of Finland, it is important to check the obligations that may arise from the authorities of the target country before starting operations.
Please note that the turnover of the first financial year is converted!
New entrepreneurs need to remember that the turnover affecting VAT liability is converted in the first accounting period to correspond to a 12-month period.
Most businesses are set up in the middle of the year, so the length of the first accounting period may be longer or shorter than the usual 12 months.
For example, a turnover of 12 000€ in an eight-month period is 18 000€ when converted to 12 months, so the business is liable for VAT.
If the business is small and part-time, the VAT limit of 15 000€ may not be met. If you are not registered for VAT, you of course sell your goods or services without VAT.
However, if your business does better than expected and your turnover exceeds 15 000€, you will have to pay VAT retroactively on all your sales.
It is therefore usually worth registering for VAT if you are at all concerned about exceeding the 15 000€ limit. If your turnover stays below 15 000€, you can claim back the VAT paid to the tax authorities in full thanks to the small business VAT relief.
The VAT relief is a tax credit for entrepreneurs with a small turnover and is explained in more detail further down in this blog.
When should you register for VAT voluntarily?
If you are becoming a part-time entrepreneur, the annual turnover of 15 000€ may not be met. In this case, VAT registration is not compulsory.
However, you may benefit from registering and VAT deductions, especially if your business involves a lot of VATable purchases in the early stages.
Once you are VAT registered, you can deduct the VAT on your purchases from the VAT on your sales.
If the VAT on your purchases is higher than the VAT on your sales, the Tax Administration will credit the difference to your account. In other words, you get a VAT refund.
By joining the register, you also ensure that you will not have to pay retrospective VAT on all your sales if your turnover does exceed 15 000€.
It is good to note that different types of business activities may oblige the company to register separately for VAT. Such a situation can arise, for example, if you practice transferring the right to use real estate or act as a performing artist through your company. VAT liability can also arise if you buy products or services internationally (reversed tax liability), but your company's operations are VAT-free for these purchases.
What is the small business VAT relief and how is it calculated?
The VAT relief is a tax advantage for small businesses.
If your business is registered for VAT but its turnover is less than 15 000€ in a financial year, you can claim back all the VAT you have paid.
If your turnover is between 15,000€ and 30,000€, you will get a partial refund of the paid VAT– this is called partial relief and is calculated accordingly:
Naturally, you can only get a relief if the VAT on your sales is higher than the VAT on your purchases.
An accounting period that is longer or shorter than the assumed 12 months must be remembered to convert the turnover to correspond to the turnover of 12 months.
During the accounting period, VAT is paid normally, and the timing of the declaration of the small business relief information depends on the length of the tax period:
- If your tax period is a month, you report the information on the VAT declaration for the last month of the financial year,
- for quarterly filers, the last quarter of the calendar year, and
- for annual filers, the VAT declaration is given for the calendar year, i.e. latest by the end of February of the following year.
The VAT relief is not automatically credited to your account, you must remember to apply for it yourself in MyTax – unless you have an accountant who can do it for you.
The accountant will also automatically know which taxes and sales are taken into account when calculating the VAT relief and which are excluded.
What is VAT exempt activity?
Almost all sales of goods and services are subject to VAT, but there are some exceptions.
Some activities are completely excluded from VAT, and if a business sells only them, it cannot be registered for VAT.
The most common types of business activities that are not subject to VAT include:
- health, medical and social care services,
- insurance and financial services,
- sale of condominiums and real estate,
- education and training services, and
- performance fees.
The activities excluded from VAT, with their specific characteristics, are listed in detail in the VAT Act (in Finnish).
How, when, and where is VAT paid?
VAT is a so-called self-assessed tax, which you declare and pay in the Tax Administration's MyTax service without receiving a separate invoice from the tax authorities.
However, if you have an accountant, they will calculate your VAT on the basis of the vouchers and receipts you provide.
You will then receive a VAT invoice from your accountant for payment. If you wish, you can also authorise an accounting firm to make the VAT declaration for you.
VAT is usually paid monthly, and the due date is the 12th of each month (or the following working day if the 12th is a Saturday or a public holiday).
VAT must be declared and accounted by the 12th day of the second following month of the tax month. For example, November VAT must be declared by the 12th of January.
If you wish, you can apply for a longer tax period on the basis of a low turnover.
- Entrepreneurs with an annual turnover of less than 30 000€ can declare and pay VAT only once a year.
- For a turnover of less than 100 000€, VAT can be declared quarterly.
In some cases, the extension of the tax period may bring cash-flow advantages for the business. A longer tax period allows a business to keep the VAT on sales for a longer period, temporarily leaving more funds for financial purposes. On the other hand, a longer tax period means that the VAT deducted on purchases and any VAT refunds can take longer. The most appropriate VAT period for a business should always be assessed on a case-by-case basis.
You can apply for a change of tax period via MyTax. After the change, the Tax Administration will send you a notification of the new tax period and information on the date from which the new tax period will apply. Until then, the current tax period will apply. The longer tax period will take effect from the beginning of the year following the application. If the turnover limit for the extended tax period is exceeded, the Tax Administration must be informed without delay.
If a tax period is shortened, the shorter tax period takes effect from the beginning of the shorter tax period following the application. Note! For the months within the old tax period preceding the change, the declaration must be submitted, and the taxes paid before the due date of the old tax period.
If you apply retrospectively, you can only apply for a change after at least one year has passed since the start of the business or the previous change.
Payment or accrual-based accounting for VAT?
The accrual-based accounting for VAT is the most common and the main rule. In accrual-based accounting, VAT on sales and purchases is accounted when the goods or services are delivered to the customer. Similarly, with purchases, the right to deduct VAT under accrual-based accounting arises when the goods or services are received, not when the invoice is paid.
Payment-based accounting for VAT means that VAT is accounted when the money is exchanged. So VAT on sales is accounted when the customer pays and VAT on purchases is deducted when the purchases are paid. If you choose to account for VAT on a payment-base for invoiced sales, this should be applied consistently also to the purchase invoices.
Payment-based accounting for VAT is possible for all businesses with a turnover of less than 500 000€.
It is also important to note that this is internal Finnish legislation, so the payment-base does not apply to foreign trade.
Payment-based VAT accounting benefits a company with long payment periods for sales invoices. In such cases, VAT is only charged on sales when payment is received. It can also benefit businesses with few purchases, such as service businesses. A typical example would be a small consultancy firm, for which a payment-based VAT accounting could be appropriate.
How is VAT entered on the invoice?
When you issue an invoice to your customer, alongside other mandatory or reduced invoice entries, it should always show:
- which VAT rate you are selling goods or services at, and
- what are the tax-free price and the VAT proportion of the total price.
When selling and marketing to private individuals, VAT is included in the price declared to the consumer.
In inter-company transactions, on the other hand, prices are typically quoted excluding VAT. This is because the buyer company can deduct the VAT on top of the tax-free price. In other words, the VAT is not passed on to the buyer – unlike for a consumer customer. The VAT payer's invoice must still include itemised VAT.
How is VAT calculated on the tax-free and taxable price?
VAT calculation formulas
Accounting software and applications will tell you directly the VAT rate based on the price and tax rate information you provide.
For a quick run-through, here are the calculation formulas using the example VAT rate of 24%.
Calculating the amount of VAT on the price without tax
- Tax-free price 1000€ x 0.24 = VAT to be added to the price 240€
Calculating the taxable price from the price without tax
- Tax-free price 1000€ x 1.24 = taxable price 1240€
Calculating the amount of VAT from the taxable price
- Taxable price 1000€ x 24 / 124 = VAT included in the price 193,55€
Calculation of the tax-free price from the taxable price
- Taxable price 1000€ / 1,24 = tax-free price 806,45 €
What to do in case of VAT payment difficulties?
If a business is unable to pay VAT within the designated time limit, it can obtain an extension to pay VAT by applying for a payment arrangement. The tax covered by a payment arrangement will not be put in the debt recovery procedure if the company complies with the conditions agreed in the payment arrangement. Furthermore, during the period of a valid payment arrangement, the company is not removed from the preliminary tax withholding register and the tax debt under the payment arrangement is not published in the tax debt register or on the protest list.
The payment arrangement must be applied for on your own initiative and can be applied for if the following conditions are met:
- The payment difficulties are temporary
- Taxes from any previous payment arrangements have been paid
- There are no outstanding taxes in the debt recovery procedure
- Tax returns and declarations to the Income Register have been submitted
The Tax Administration may, however, reject a request for payment arrangements if the company has had several successive payment arrangements.
It is not always necessary to apply for a payment arrangement. The tax can still be paid at the stage of reminder. It should be noted that the Tax Administration does not send a separate reminder, but it is part of a summary of the tax payment situation. For overdue taxes, depending on the situation, between 1 and 3 reminder notices are sent before the tax goes to the debt recovery procedure. If the tax is going to recovery proceedings, it will be indicated in the payment reminder.
Finally
Although it is easy to learn the basics of VAT, in the daily life of an entrepreneur you will very quickly come across VAT derogations and questions:
- What exactly are representation expenses, which are completely non-deductible for VAT?
- How are VAT issues handled in foreign trade?
- What is not included in turnover when claiming the small business VAT relief?
- What is reverse charge VAT in the construction sector?
And so on.
Your accountant will help you with these and dozens of other accounting and tax questions. As an entrepreneur, you only have a limited number of hours on you, and you are better off spending them on your core business than being wrapped up with the VAT Act and the Tax Administration's advanced instructions.
