The limited effect of the tax credit for household expenses on the gray economy of companies

The limited effect of the tax credit for household expenses on the gray economy of companies

This is due to various errors in tax refund applications and fraudulent arrangements used to obtain refunds, which have caused the Finnish government to lose tax revenue, which can amount to 20-30 million euros.

The report reveals that if the service production eligible for tax credit forms a significant part of the company’s annual turnover, the risk of participating in the activities of the gray economy is lower. However, for companies that offer such services only occasionally or on a small scale, the reduction in risk is less clear. In addition, businesses that sell services that qualify for the credit are just as likely to fail to report and pay taxes as those that do not.

The gray economy information unit analyzes the effects of the tax credit on household expenses on the gray economy using tax data from 2018–2021. Proponents of the tax credit often emphasize its positive effects on job creation and the fight against the gray economy. However, the research suggests that the beneficial effect of credit primarily targets a limited number of companies in different sectors, rather than improving the overall situation of the industry as a whole. Therefore, using the fight against the gray economy as a basis for increasing credit or extending it to new sectors is not necessarily justified.

Manager Janne Marttinen The Tax Administration’s Gray Economy Information Unit states: “Our analysis shows that although the tax credit can prevent the activity of the gray economy to some extent, its beneficial effect is limited to a relatively small number of companies in different industries. The credit or the extension of its scope to new sectors cannot be justified as a way to combat the gray economy.”

The study did not address the question of how many unreported activities would arise if the tax credit were not available to households purchasing services.

Consumers who have received services for their households can apply for a tax credit for household expenses if the service provider is a registered company with advance payments. This acts as an additional incentive for companies providing these services to comply with tax regulations and maintain their registered status. Information on individual credit claims is also used for monitoring purposes, increasing the likelihood of detecting irregular entrepreneurs who fail to report their sales.

The report compared companies in sectors covered by the tax credit for household expenses with companies in similar industries that do not offer work that qualifies for a tax credit to customers. Surprisingly, the overall risk of encountering shadow economy practices has been found to be at the same level in both industries.

The report highlights the prevalence of fraudulent tax relief claims. Some individual taxpayers file claims that include false expenses and information. Every year, the Finnish government loses 20-30 million euros in tax revenue due to compensation claims containing errors or intentionally false information. This suggests that the problem occurs in around 5-7% of all submitted household expenditure tax credit applications.

In order to correct the gray economy practices of companies providing services to households, the study proposes changes to taxation rules, such as denying credit for cash payments by service providers and granting credit if the main part of the service was not performed by an employee of the company. However, lowering the credit limit to zero is not considered a cost-effective solution to combating the gray economy.

According to the annual statistics, about 490,000 private taxpayers apply for a tax credit for household expenses. Granted refunds reduce tax revenues from personal income taxes by more than 400 million euros annually.


Source: The Nordic Page




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