The Finnish Government has proposed several changes in relation to the value-added tax rates. The most significant change is the standard VAT rate being raised to 25.5%, as it applies to almost everyone and is planned to take effect soon, on 1 September 2024. You should therefore make sure that you are prepared for this change in the autumn before you start your summer holiday.
In this article, we will go over the key changes to the VAT rates, as well as their implementation schedule, and give tips for how you can deal with the change. The article is written based on the presumption that the law concerning the increase in the VAT rate will come into force in accordance with the government proposal on 1 September 2024.
Key VAT rate changes and their implementation schedule
- The standard VAT rate will be raised from 24% to 25.5%. The proposed effective date of the change is 1 September 2024.
- The reduced VAT rate of 14% applied to foodstuffs will no longer be applied to confectionery and chocolate, which will instead become subject to the standard VAT rate. Most likely, this change will not come into force until 2025.
- Moving forwards, the 14% VAT rate will be applied to most of the commodities currently subject to the reduced VAT rate of 10%. In the future, the 10% VAT rate will only be applied to the sale of newspapers and magazines. Most likely, this change will not come into force until 2025.
- The VAT on incontinence and menstrual pads, as well as diapers, is planned to be decreased to 14%. Most likely, this change will not come into force until 2025.
Before the changes to the VAT rates come into force, the Government still has to put forward official proposals and Parliament must approve the changes. Government proposal HE 61/2024 vp on the increase in the standard VAT rate was presented to Parliament on 30 May 2024, but Parliament has yet to approve the amendment to the law as of the publication of this article.
Avoid the most likely mistakes in relation to the VAT rate change
Accrual basis will be applied
In general, the accrual basis will be applied when the VAT rate change comes into force. Therefore, from the perspective of sales, the obligation to pay VAT arises when the sold item is delivered or the provision of a service is completed, or when the payment or a part thereof accumulates before the delivery of the item or completion of the provision of the service. Similar principles will also apply to the allocation of purchases.
In relation to the changes to the VAT rates, it is important to keep in mind that the invoice basis cannot be applied, as the VAT rate is determined in accordance with the accrual basis.
Example: A Oy carries out a building renovation in August 2024 and the buyer accepts the work and pays for it in September 2024. As the provision of the service is not considered to be completed until its acceptance in September 2024, the new VAT rate of 25.5% will be applied to the sale.
Care must be taken with regard to advance payments
In relation to the changes in the VAT rates, the most likely context where the most mistakes and situations subject to interpretation may occur is the processing of advance payments, which is why you should avoid using them immediately before and immediately after the effective date of the change. This is because advance payments are subject to a separate legal provision stating that the decisive factor from the perspective of the allocation of sales is the accumulation of the advance payment, while the payment of the advance payment is decisive from the perspective of purchases.
What this means is that advance payments are subject to the lower VAT rate, regardless of the delivery date of the goods or the date on which the provision of the service is completed, if an advance payment is made to the seller before 1 September 2024. However, if the payment accumulates after the new VAT rate comes into force, the new VAT rate of 25.5% must be applied. When advance payments are charged, it may, in practice, be possible that the sale has to be divided under different VAT rates, depending on when the payment accumulated.
Example: A Oy sells a machine to B Oy. The machine is delivered in September 2024. A Oy receives half of the purchase price from B Oy as an advance payment in August 2024, and B Oy pays the rest of the purchase price in September 2024, the month during which the machine is delivered.
The sale is subject to the VAT rate of 24% with regard to the part of the payment accumulated prior to 1 September 2024. For the part of the payment that accumulates in September 2024, the VAT rate of 25.5% is applied to the sale.
In an instalment sale, the VAT rate is determined by the date of delivery of the item
In an instalment sale, the payment for the item is made to the seller in several instalments, but the obligation to pay VAT arises when the item is delivered to the buyer. In practice, this means that the lower VAT rate of 24% may be applied to the sale as a whole, even if the payments do not accumulate until after the legislative amendment comes into force.
Example: A Oy sells a washing machine to person X as an instalment sale and delivers the item to X at the beginning of August 2024. The instalments do not accumulate to the seller until after the effective date of the legislative amendment, in late 2024. A VAT rate of 24% is applied to the sale because the item is delivered to the buyer in August, before the effective date.
Intra-Community acquisitions are generally allocated to the month following the month of delivery of the goods
In relation to the changes in the VAT rates, an exemption based on the general principles of the allocation of intra-Community acquisitions in terms of time will be applied to intra-Community acquisitions. What this means is that an intra-Community acquisition of an item is usually allocated to the calendar month following the month of delivery of the item, unless the invoice is already received during the month of delivery, in which case the intra-Community acquisition is allocated to the month of delivery. If, however, the invoice is received before the month of delivery, the acquisition is allocated to the calendar month following the month of delivery. From the perspective of intra-Community acquisitions, advance payments do not affect allocation in terms of time.
Example: A Oy buys spare parts from X GmbH in Germany. The goods are delivered from Germany to Finland in August 2024, and X GmbH invoices A Oy in July 2024.
The intra-Community acquisition is allocated to September 2024, and therefore a VAT rate of 25.5% is applied to the acquisition.
Considerations arising from the changes
Due to the changes in the VAT rates, businesses should identify and take into account the impacts of these changes on the following and other matters:
- Systems – What changes must be made to systems?
- Internal guidelines – Is it necessary to update the internal guidelines or organise training for the staff?
- Agreements and invoice templates – What updates must be made to templates?
- Processing of unfinished projects – What is provided about VAT in agreements? Is it necessary to update agreements?
- Returns and refunds during the transition period – How will VAT be processed in these situations?
- Pricing – How will the change affect pricing?
- VAT rate on confectionery – The food industry must decide in which respects confectionery and chocolate products will become subject to the standard VAT rate.
Rantalainen’s services
Rantalainen’s VAT experts would be happy to help you identify the impacts of the changes to the VAT rates and clarify situations that are subject to interpretation. Contact us, and we will help you ascertain the correct procedures and prevent any inaccurate VAT processing by your business.
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