Light entrepreneur’s VAT deductions
VAT is an indirect tax that businesses collect from consumers and remit to the tax authorities. Businesses are allowed to deduct VAT on the products they purchase, so the taxation is aimed at consumers.
Light entrepreneurs must also add VAT to their prices, but can light entrepreneurs benefit from VAT deductions? In this article, we explain the basics of VAT deductions and a light entrepreneur’s right to make them.
Light entrepreneurs must pay VAT
Usually, VAT liability in Finland only arises when the annual revenue exceeds EUR 15,000. However, for light entrepreneurs, VAT liability begins immediately without a minimum limit. This is due to the fact that light entrepreneurs do not have their own business ID, and the VAT liability limit is specific to a business ID.
The revenue of a light entrepreneur service consists of the invoicing of all light entrepreneurs operating in the service, so the annual revenue of EUR 15,000 is always met, creating VAT liability.
VAT rates
A light entrepreneur must invoice their customers for VAT according to the correct VAT rate. The standard VAT rate in Finland is 25,5 %, but reduced rates of 14%, 10% and 0% are used in some industries. If a reduced VAT rate is used in your industry, you must find out the correct rate and invoice your customers accordingly.
VAT deductions
Value added tax is an indirect tax intended to be paid by consumers. Businesses only have to add the tax to the price of their products, collect it from customers and remit the received tax to the Tax Administration.
However, businesses have to pay VAT on the services they purchase, even though the tax is not intended for businesses. As a result, businesses are allowed to make VAT deductions that lower the amount of VAT they pay to the tax authorities.
VAT deductions can be made for all business-related purchases. The VAT on the products and services purchased is deducted from the VAT collected on the products and services sold by the business. In this way, the business itself does not have to pay VAT on its purchases.
If the amount of VAT deductions during the tax period exceeds the amount of VAT payable, the business will receive refunds of the VAT paid retroactively.
VAT deductions can only be made for such purchases that have been made from a VAT-liable business.
If a business purchases products or services from a business not registered for VAT (a business with a revenue of less than EUR 15,000 and not registered voluntarily), VAT is not included in the price of the products, and no VAT deduction can be made.
Can a light entrepreneur make VAT deductions?
Light entrepreneurs who operate through an invoicing service without their own business ID are not directly liable to pay VAT. Instead, light entrepreneurs only invoice their customers for VAT on behalf of the light entrepreneur service.
Because light entrepreneurs do not own a business ID and therefore are not liable for VAT, light entrepreneurs are also unable to make VAT deductions or apply for VAT relief.
Instead of VAT deductions, a light entrepreneur can deduct the following in their own taxation:
- The employer’s health insurance contribution
- The possible YEL insurance contribution
- Other expenses for the production of income
However, a light entrepreneur can benefit more by invoicing the costs related to their work directly from the customer. In this case, a light entrepreneur can make use of tax-free reimbursements, for example, in terms of travel expenses and kilometre allowances.
