Light entrepreneur and VAT
VAT, or value added tax, is a tax on consumption that is included in nearly all products and services sold to consumers. Although businesses need to add VAT to their prices, they are eligible to deduct it from purchases they make. When it comes to light entrepreneurs, things are a bit different. To make things easier, we have explained what light entrepreneurs need to know about VAT.
What is VAT?
VAT or value added tax is something you have definitely paid yourself. It is a consumption tax that is included in nearly all products and services. VAT is included in the total price of a product but its share of the price is written out in the receipt.
From the point of view of businesses, VAT works a bit differently. Its purpose is to tax consumers, not the business that sells the product or service to which VAT is added. Businesses liable to pay VAT must add it to the prices of their products and services. These are in turn paid to the state.
However, a business can deduct the VAT it pays itself from the VAT that is paid to the state. This means that the VAT charged by the business on its sales is deducted from the purchases made by the business itself.
Is a light entrepreneur liable to pay VAT?
For entrepreneurs with a Business ID, the liability to pay VAT depends on the amount of sales. If the annual turnover exceeds 15 000 euros, the entrepreneur must apply for VAT registration and add VAT to the amount they charge.
As a light entrepreneur, VAT is added to your invoices from the moment you start operations. This is simply because your light entrepreneur service is liable to pay VAT even if your own sales do not exceed 15 000 euros per year. Invoicing is done via the light entrepreneur service’s Business ID. The service’s own revenue is used to determine whether you are liable to pay VAT or not.
VAT relief for small businesses
In Finland, VAT liability begins after sales exceed 15 000 euros. However, for revenue under 30 000 euros, the business is entitled to VAT relief. In case you have applied to the VAT register as an entrepreneur but your revenue is under 15 000 euros, you are entitled to the full VAT relief. For revenue of more than 15 000 euros but under 30 000 euros, you are returned a share of accounted VAT by the Tax Administration.
As a light entrepreneur, you do not have a Business ID of your own, so officially you are not an entrepreneur. Because of this, you are not entitled to VAT relief.
Entrepreneurs have to make a tax return and pay VAT either monthly, quarterly or annually. The days for tax returns depend on how long the business’ tax period is. For small businesses, it can be a quarter or year long.
VAT has to be declared and paid on the 12th day of the second month following the end of the tax period. For example, the VAT return for January has to be made and paid on the 12th of March at the latest, in case the tax period is one month in length.
VAT tax rate
There are three different VAT tax rates in Finland, on top of which there are some industries and instances where VAT does not apply. When working as a light entrepreneur or an entrepreneur, you must know your own industry’s practices and which rates apply to you in order to use the correct tax rate in your invoices.
Here are briefly the tax rates in Finland as well as some of their goods and services. You can check different rates of VAT and activities subject to them, as well as related practices, from the Tax Administration’s website.
- The general VAT rate for goods and services is 24 %. This includes nearly all industries by default.
- A reduced VAT rate of 14 % applies to groceries, restaurant and catering services, and feed. This does not apply to alcohol or tobacco products.
- A reduced VAT rate of 10 % applies to accommodation services, cultural events, books, pharmaceutical products, and many other goods and services.
- The zero tax rate applies to exports outside of the EU, the sale of membership bulletins to non-profit organizations, the sale, rental, and chartering of some vessels as well as many other sales related to international trade. Generally, performances are also subject to the zero tax rate.
Checklist about VAT for light entrepreneurs:
- VAT is added to your invoicing automatically when using a light entrepreneurship service.
- Find out which VAT tax rate your industry uses. You can check this on the Tax Administration’s website.
- You cannot deduct the VAT you charge as a light entrepreneur.
- As a light entrepreneur, you must consider VAT when pricing your work and include VAT in products and services sold to consumers.
You can read more about VAT and taxation in the “Value Added Tax” -section of our FAQ page.