Fraudulent tax credit claims cost Finland state state of Finland

The state of Finland has been caused by various mistakes in claims for the tax credit and fraudulent measures used to obtain the credit, resulting in tax revenue losses of up to 30 million Euros.

The study suggests that if service production eligible for the tax credit constitutes a significant portion of a company's annual turnover, the risk of participating in shadow economy activities is lower. For companies that provide such services only occasionally or on a small scale, however, the risk reduction is not as pronounced. Company selling services that qualify for the credit and those that don't is also likely to be held responsible for the probability of non-reporting and non-payment of taxes.

The Grey Economy Information Unit calculated the impact of the tax credit on household expenses by analyzing tax-assessment data from 2018 to 2021. Proponents of the tax credit frequently emphasize its beneficial effects on job creation and the fight against the shadow economy. The study suggests that the credit's beneficial impact mainly applies to a limited number of businesses across various sectors, rather than improving the overall state of affairs in the entire sector. To justify using the fight against the shadow economy as a justification for increasing credit or expanding its scope to new sectors, it may not be a justified use.

Our analysis indicates that although the tax credit can deter shadow economy activities to some extent, its useful impact is confined to a relatively small number of businesses in various sectors. To combat the shadow economy, increasing the credit or extending its scope to new sectors cannot be justified. The study did not address the question of how many unreported activities would occur if the tax credit were unavailable to households purchasing services.

If the service provider is a registered business with tax prepayments, consumers can apply for the tax credit for household expenses if they receive services in their households. Companies offering these services offer an additional incentive for them to comply with tax regulations and maintain their registration status. The information from individual claims for the credit is also used for control purposes, increasing the probability of detecting non-compliance entrepreneurs who fail to report their sales.

The study compared companies in sectors where the tax credit for household expenses is offered with companies in similar industries where no qualifying work for tax credits is offered to customers. The risk of encountering shadow economic practices in both sectors is at the same level.

The report reveals that there is a significant amount of false claims for tax credits. Individual taxpayers often submit claims containing false expenses and information. The state of Finland annually loses 20-30 million euros in tax revenue due to claims for the credit that contain error or intentional false information. This indicates that there is a problem in approximately 5% to 7% of all submitted claims for the tax credit for household expenses.

To tackle shadow economy practices among businesses providing services to households, the study recommends introducing changes to the tax rules, such as prohibiting the credit for cash payments to service providers and prohibiting the credit if the main part of the qualifying service was not performed by an employee of the company. To combat the shadow economy, lowering the credit ceiling to zero is not considered a cost-effective solution.

According to yearly statistics, approximately 490,000 individuals file claims for the tax credit for household expenses. The granted credits reduce tax revenues resulting from individual income taxes by more than 400 million euros a year.