Using a refund for unpaid taxes
This guidance contains information about how taxpayers’ refund balances are applied on unpaid taxes. The guidance concerns individual and corporate taxpayers alike.
If taxpayers are due a refund but they also have some taxes outstanding, the Tax Administration will use the refundable balance to settle what is unpaid. However, this is not done until on the due date of the tax or taxes. The refundable balance can be applied on the taxpayer’s unpaid taxes, or on other taxes that the taxpayer is responsible for (e.g. if the taxpayer is a shareholder in a partnership). How and when refundable balances are applied depends on the type of tax that the refund concerns, and on the taxes that the taxpayer has failed to pay.
For example, the following taxes may give rise to a refund:
- corporate income tax
- individual income tax
- VAT and other self-assessed taxes
- inheritance and gift tax
Whenever a refund has been used for settling a taxpayer’s tax debts, the taxpayer will receive a notice in MyTax or by post. The notice is normally shown on the summary. Read more about the summary
In some cases, amounts that would otherwise be refunded may also be applied on an unpaid debt that has been transferred to the enforcement agency for enforced recovery.
If a corporate taxpayer is due a refund of its income tax but has failed to pay some of its taxes and they are now overdue, the Tax Administration applies the refundable balance on the unpaid taxes in the following order:
- income tax, self-assessed taxes (e.g. value added tax) and inheritance and gift tax; arranged in the same order as their respective expiration dates and statute dates are
- other overdue taxes such as real estate tax
If due date has not passed, the Tax Administration does not apply a refundable balance on any tax.
When are tax refunds used for tax payment?
The Tax Administration may apply a corporate taxpayer’s refunds on unpaid taxes immediately on the end date of its tax assessment. In 2017, this date is 10 months after the last day of the calendar month when the corporation’s accounting year ends. However, starting from tax year 2018, every corporate taxpayer has its own end date for tax assessment. This date will be printed on the tax decision. However, the tax assessment will end no later than 10 months after the end of the last calendar month of the accounting period.
Refunds are applied on the taxes that fall due by the 22th day of the month after the end date for tax assessment. However, this time limit will change in November 2018: Starting 1 November 2018, refunds will only be applied on the taxes that fall due by the 18th day of the month after the end date for tax assessment. If the 18th is not a business day, the time limit will end on the day before it, or on the previous day if that day is a business day.
The accounting period of a corporation ended in December 2017. Its standard tax assessment ends on 31 October 2018, which means that the Tax Administration can use the corporation’s refundable balance as a payment up to 16 November 2018 (because this year, 18 November falls on a Sunday). The corporation would be due a refund of €4,000. The corporation should pay €2,000 in VAT on 12 November 2018 but fails to pay it. In addition, it should pay €1,000 in prepayments by 23 November 2018.
The Tax Administration will use €2,000 of the refund to settle the VAT on 12 November. However, the refund is not applied on the prepayments that will fall due on 23 November, because the above rule prevents the use of a refundable balance on taxes with due dates after 16 November. On 5 December, the Tax Administration pays the corporation a tax refund of €2,000 into its bank account.
The accounting period of a corporation ended in February 2018. The corporation receives a tax decision stating that the end date of its tax assessment will be 8 August 2018, and that an amount of €5,000 is refundable. On 12 August 2018, the corporation should pay €1,000 in VAT, and it should additionally pay €3,000 in prepayments on 23 August 2018. The corporation fails to pay both. The Tax Administration will use the refund to pay the VAT on 12 August and the prepayments on 23 August. A balance of €1,000 remains. The Tax Administration will pay this amount into the bank account of the corporation on 5 October.
The accounting period of a corporation ended in December 2017. The end date of its standard tax assessment is 31 October 2018, and a refund of €2,000 would be coming to the corporation. However, the corporation should have paid €400 real estate tax by 3 September but did not do so. The Tax Administration will use the refundable balance on 31 October for settling the real estate tax and the late-payment interest on it.
The corporation should additionally pay €1,000 VAT by 12 November. On 12 November, the corporation sends the Tax Administration a payment of €1,000 and uses the reference number for self-assessed taxes (for the bank transfer). The purpose of this payment was to pay the VAT that falls due on that date.
However, within just one day, the bank does not have enough time to transfer the payment to the Tax Administration. As a result, the Tax Administration uses the corporation’s refund as payment of the VAT. The amount will either wait for any upcoming taxes to fall due, or alternatively, the Tax Administration may refund it to the corporation. The outcome depends on what settings the corporation had made in MyTax for its refund time and refund limit.
How is a refund due to changes in income tax used?
Another possibility for a corporate taxpayer to receive a refund is a situation where the Tax Administration has adjusted the amount of income tax downwards, i.e. decreased the corporate taxpayer’s prepayments or back taxes. Situations like this might arise when a corporate taxpayer has submitted an appeal against/claimed adjustment of its prepayments or back taxes at a time when it has already paid them. In these circumstances, due to the revised amount of tax to pay, the Tax Administration can apply a refund on the corporate taxpayer’s unpaid taxes immediately after the decision on refunding is made.
A corporation’s imposed prepayments of income tax are €24,000 for 2018. The payments fall due every month in instalments of €2,000. On 10 August 2018, the corporation requests a change of its annual prepayments in MyTax. The Tax Administration approves the request on 14 August, and the annual requirement of prepayments decreases to €12,000. Only the instalments with due dates between January 2018 and June 2018 will remain valid.
The corporation should have paid €1,000 in VAT by 12 August, but did not do so. On 14 August, the Tax Administration applies part of the refundable prepayments of income tax on the VAT and related late-payment interest. What is left of the refundable amount will be paid into the corporation’s bank account a week later.
In the same way as for corporate taxpayers, refunds that would otherwise be paid back to individuals may also be applied on overdue taxes. If a refund is due for you but you have failed to pay some of your taxes, the Tax Administration will settle them with the money. This is done immediately on the date when your assessment is completed. For individual taxpayers, the standard assessment process for the 2017 tax year ends on 31 October 2018. The Tax Administration will apply a refund on any taxes that you have not paid by their due date, up to the 12th day of the next month. This means that a 2017 tax refund may be applied on overdue taxes from 31 October to 12 November 2018.
Mikko would be getting a refund of €2,500 for tax year 2017. However, he forgot to pay real estate tax: the 2nd instalment, amounting to €600, is overdue. The due date was 15 October. The Tax Administration will apply the sum that would otherwise be refunded on the 2nd instalment of real estate tax and on the related late-payment interest. The remaining part of the refund will be paid into Mikko’s bank account on 11 December.
Anu would be getting a refund of €2,000 for 2017. However, inheritance tax has been imposed on Anu, and she is expected to pay the first instalment by 1 November and the second one by 2 February 2019. The instalments are €1,500 each. Anu pays the first instalment on the due date, i.e. on 1 November. However, within just one day, the bank does not have enough time to transfer the payment to the Tax Administration. For this reason, the Tax Administration €1,500 of Anu’s refund on the first instalment of the inheritance tax. The €1,500 that Anu paid in is applied on the second instalment. After this, the inheritance tax has been paid in full. The Tax Administration pays €500 into Anu’s bank account as a tax refund on 11 December.
You can receive a refund of self-assessed tax if, for example, the amount of an employer contribution decreases due to an adjustment, or if you file negative VAT. If you have any self-assessed taxes outstanding, the Tax Administration will immediately apply a refund in order to settle them. If there are overdue taxes that are not self-assessed, the Tax Administration will normally not apply a refundable balance on them until at the end of the calendar month. Another factor affecting the schedule of applying refunds as settlement of unpaid taxes is the refund time that the taxpayer has selected for self-assessed taxes in MyTax. The selection only concerns self-assessed taxes.
Refunds consisting of self-assessed taxes are used in the following order:
- self-assessed taxes, from earliest to latest (immediately)
- income taxes, from earliest to latest (at the end of the calendar month, or when the refund would otherwise be paid into the taxpayer’s bank account)
- inheritance and gift tax, from earliest to latest (at the end of the calendar month, or when the refund would otherwise be paid into the taxpayer’s bank account)
- other overdue taxes such as real estate tax (at the end of the calendar month, or when the refund would otherwise be paid into the taxpayer’s bank account)
Negative VAT can be applied on an unpaid tax before the return has been processed
If you file a VAT return that indicates you have negative VAT, the Tax Administration will apply it on your unpaid taxes. The earliest time when the Tax Administration will do so is the general due date in the month after the tax period. For example, negative VAT that would be refundable for January can be applied on an unpaid tax on 12 February. Such a refundable balance is applied on self-assessed taxes as soon as they fall due even if the taxpayer’s VAT return has not yet been processed. If the taxpayer has made a payment arrangement with the Tax Administration and if self-assessed tax is included in it, refundable amounts are not used immediately – they are used only at the end of the month. For other taxes, negative VAT can be used only after processing of the return. If a tax is included in a payment arrangement, the refund is used at the end of the month. In this case, however, it is required that the return has been fully processed.
The taxpayer’s refund time selection has an impact on when the remaining refundable balance can be paid to the taxpayer. The selection only concerns self-assessed taxes. More information about refund times
A small business files a return on 12 February, reporting a negative balance of VAT – €3,000. The return also contains €2,000 of employer contributions for January. However, the business fails to pay this amount. On the due date, i.e. 12 February, the Tax Administration applies part of the negative balance of VAT – €2,000 – on the unpaid employer contributions. The remaining €1,000 is either refunded to the business or left waiting for upcoming taxes. The way the remaining €1,000 is used depends on the refund time that the busines has selected in MyTax.
A business enterprise files a return on 14 February, reporting a negative balance of VAT – €3,000. The business should pay employer contributions amounting to €2000 on 12 February, but fails to do so. On 14 February, the Tax Administration applies an appropriate amount of the negative VAT for January on the employer contributions and the related late-payment interest. The Tax Administration processes the VAT return, filed by the business, that contains the negative VAT on 17 February. The due date for prepayments for February, amounting to €500, is 23 February, but the company does not pay this either.
The MyTax setting concerning refund time determines how the remaining negative VAT is used after the unpaid employer contributions are covered:
- refund time: immediately after processing
The Tax Administration pays the remainder of the negative VAT into the bank account of the business on 17 February. Because the due date for prepayments has not yet come, the Tax Administration does not apply the negative VAT on them. If the VAT return were to be processed later, on the due date for prepayments or at a later date, the Tax Administration would first use the negative VAT on prepayments. After this, the remaining amount would be paid into the business enterprise’s bank account.
- refund time: after the general due date following the day of filing
The Tax Administration processed the VAT return before the month ended, so at the end of the month (28 February), the amount necessary is applied for settling the business’s prepayments including late-payment interest (if the VAT return were still unprocessed, the Tax Administration would not be able to apply the negative balance on them.)
The remaining balance will be used in March on the general due date, the 12th, if the business enterprise has any new overdue taxes. The rest of the refund is paid into the bank account of the business.
- refund time: the refund will be saved for later use
At the end of the month (on 28 February), an appropriate part of the negative VAT balance is first applied on the business’s prepayments and related late-payment interest. If the Tax Administration had not processed the VAT return by end of February, the refund would not have been applied on the unpaid prepayments. The remainder stays with the Tax Administration, waiting for any upcoming taxes. It is not transferred into the bank account of the business unless a specific request is made.
Inheritance and gift tax can also be refundable to the taxpayer in situations where the tax has already been paid, but its amount has later decreased due to an appeal, for example. In circumstances like this, the amount you had paid in excess is paid to you as a refund. However, if you have any overdue taxes, the Tax Administration will cover them with the sum that would otherwise be refunded. This is done on the same day as the decision to send you a refund is made. If you were to have other taxes that you fail to pay but their due dates are after the date of the decision, the Tax Administration would no longer apply the refund on them.
What is the order of priority for settling various types of unpaid taxes with refunds?
If a refundable balance relates to inheritance or gift tax, the following order of priority is used:
- inheritance and gift tax, income tax, self-assessed taxes (such as VAT), in the same order as their respective statute dates are
- other taxes (such as real estate tax) also in the order of their statute dates
The total of €4,000 was assessed for Marianne to pay as inheritance tax. She paid it by due date. She has also filed a claim of adjustment concerning the same inheritance tax. The Tax Administration approves the claim and adjusts the inheritance tax on 14 February, reducing it to €3,000. This would mean that Marianne can expect a refund of €1,000. However, she has failed to pay €500 in VAT that fell due on 12 February. The Tax Administration will apply the refund on the VAT and its late-payment interest. The remainder of the refundable amount will be paid into Marianne’s bank account a week later.