VAT rate increase on 1.9.2024: What should a light entrepreneur know?

At the beginning of September 2024, an increase in the value added tax (VAT) rate will enter into force in Finland. This change will affect all entrepreneurs, including light entrepreneurs who invoice their customers through, for example, invoicing services. The VAT rate increase brings with it specific challenges and opportunities for which light entrepreneurs should be prepared. In this blog post, we will discuss what a light entrepreneur needs to take into account when the VAT rate rises on 1 September 2024.

1. Background and impact of the VAT rate increase

From 1 September 2024, the standard VAT rate will rise to 25.5%, which will directly affect the price of all goods and services subject to this rate. It is important for light business owners to understand that this change will affect the services they sell. In practice, this means that all services sold after 1 September 2024 will be subject to increased VAT, which will be charged to the tax authorities.

2. Time of sale of the service

The time of sale of the service determines the VAT rate at which taxation takes place. If the service is provided before 1 September 2024, the old VAT rate will still apply, even if the invoice is sent after September. If the service is provided after 1 September 2024, the new increased VAT rate will apply, regardless of when the contract for the service was concluded or when the pre-invoice was issued.

3. Invoicing and pre-invoicing

Invoicing practices will require particular attention as VAT rates rise. The light entrepreneur must carefully monitor when the service is provided and when the invoice is sent. If the service is provided in August 2024 but the invoice is sent in September, the old VAT rate may still apply. On the other hand, if the service is provided after the beginning of September, the new VAT rate must be used, even if the advance invoice was sent earlier.

Pre-invoicing can pose challenges, especially for longer projects where the service is provided beyond 1 September. In this case, the old VAT rate is applied for pre-invoicing, but the new, higher VAT rate must be taken into account in the final invoice.

4. Unfinished services

Unfinished services that start before September and continue afterwards can lead to confusion over the VAT rate. It is important for the light entrepreneur to agree with the client how the VAT rate increase will be handled to avoid potential conflicts. One solution may be to split the invoice into two parts: the part paid before 1 September at the old VAT rate and the part paid afterwards at the new VAT rate.

5. Pricing of the service for light entrepreneurs

The increase in the VAT rate has a direct impact on the pricing of the service. The light entrepreneur has to consider how to pass on the increase in the VAT rate to the customer. This may mean increasing the price of the service to maintain the margin. At the same time, it is important to communicate clearly to customers the reasons for the price increase and to ensure that pricing reflects both the market situation and the new tax practices.

When setting prices, it is important to bear in mind that the competitive situation may become more competitive as the VAT rate increases. If competitors do not raise their prices, the light entrepreneur may need to consider other ways to cover costs without a significant price increase, for example by improving his own efficiency.

Summary

The increase in the VAT rate on 1 September 2024 will have a significant impact on the daily lives of light entrepreneurs. It is important to prepare for this change well in advance by reviewing billing practices, pricing strategies and communicating the changes to customers. Careful planning and timely action will help minimise the impact of the VAT rate increase on business and maintain competitiveness during the new rate period.