Deducting VAT on purchases
As a taxpayer with VAT-taxable operations, you may deduct the VAT included in any goods and services you buy from others.You can deduct the VAT only if you have purchased the goods or services for a purpose that relates to the business operation for which you are liable to VAT.
If you also use the purchased goods or services for other activities, your right of deduction is limited to the proportion of their use for VAT purposes. However, it is required that the deduction is not subject to any other restrictions set out by the VAT Act.
For example, no VAT deduction is allowed in circumstances where a self-employed taxpayer or company employees use the goods and services privately or for an activity of the company for which VAT cannot be deducted.
Example: A self-employed person sells domestic cleaning services, subject to VAT, and also performs social services which is an activity exempted from VAT. They purchase a van for business use. The van is also used privately from time to time. The self-employed is entitled to a VAT deduction on the purchase price and running costs of the van only to the extent that it is being used for the domestic cleaning work that is subject to VAT. For getting the deduction, the self-employed must keep a driver's log. If necessary, the entries in the driver's log will serve as proof of the distances driven for a VAT purpose and non-VAT purpose; similarly, they will also prove the extent of private driving.
VAT deduction rights of nonprofit organisations
VAT may be deducted only for purchases that a nonprofit organisation has made for VAT-liable activities.
No VAT deduction is permitted if the purchases were made for the following purposes (some examples):
- activity promoting the public good
- other activity that has been exempted from income tax
- activity for which there is no liability to pay VAT (such as healthcare and medical services, social services and rental operations of real estate property)
- private use by the organisation’s employees or by its membership.
If an aqcuisition has been made for both VAT-liable and VAT-exempt activities, the VAT for it must be divided between the activities in relation to e.g. the use of the goods, net sales, real estate surface area or work hours.
Example: A nonprofit organisation runs a small retail shop. It has been regarded as an activity liable to income tax and VAT. In addition, the organisation also maintains a sports team, which is a VAT-exempt activity as it promotes the public good. The organisation may deduct the input VAT of all the purchases goods and services it makes for the shop. The organisation does not have the right to deduct VAT from the purchases that are related to its activity promoting the public good. If a purchase is made that will serve both the VAT-liable and VAT-exempted activities of the organisation, the input VAT contained by the purchase price must be divided accordingly. In other words, a division must be made that reflects the proportions of the VAT and non-VAT use.
Report the deductible VAT on a VAT return
- When completing the return for the each tax period, enter the period's VAT on purchases in the "Tax deductible for the tax period" line.
- In the case of own use, enter an adjustment caused by the fact that you have used goods and services privately in "Tax on domestic sales by tax rate".
- In the case of revision of a deduction on an investment in real estate, enter an adjustment relating to the VAT deduction in ”Tax deductible for the tax period”.
Restrictions on the VAT deduction
Frequently, your right to deduct VAT is restricted in situations where the purchases relate to private consumption (by yourself or by your employees) rather than company business.
Examples of circumstances where VAT deductions cannot be made:
- Purchases have to do with the self-employed person's daily travel between home and work
- Goods or services were purchased for an entertainment purpose
- Real estate property or expenses relating to it are involved that have to do with residential use by the self-employed person or by employees, or have to do with recreational or hobby use.
Expenses that relate to passenger cars can only be deductible in some circumstances.
Adjustments to VAT deductions
If the taxpayer has entered a VAT deduction on the purchase of a good but it is later used for a non-deductible activity or for a purpose subject to restrictions of VAT deductibility, the taxpayer must treat this the same way as a transfer to own use and pay VAT accordingly.
Adjusting the VAT deduction on an investment in real estate
Construction services having to do with new buildings or major repair of old buildings are referred to as "investment in real estate". Taxpayers may either build or renovate their real estate themselves or buy the construction services from another company. Similarly, it also is an "investment in real estate" if a taxpayer buys real estate property on which the seller has paid some VAT on own use.
Subject to certain conditions, taxpayers may deduct VAT on investments in real estate. However, a revision of a claimed deduction must be made at a later stage if the circumstances of the investment in real estate are changed, for example:
- The extent to which the real estate is used for VAT-deductible purposes has changed
- The real estate unit is sold or transferred
- The taxpayer ceases to have VAT liability
- The real estate unit ceases to be included in the taxpayer's business assets
The right of revision and the obligation of revision are only applicable to real estate that contains new buildings and to real estate where major repairs have been made. The real estate must be part of the company's business assets.
The VAT on an investment in real estate can only be deducted up to the extent to which its use is liable to VAT.
Check the seller's liability to VAT
Buyers can deduct VAT only if the seller, too, is liable to pay VAT. Visit Business information system (ytj.fi) to check the VAT liability of companies you do business with.
Sellers who are liable to pay VAT must issue an invoice to their customers. It must indicate the amount of VAT included in the price.