Form 5 explained: the toiminimi business tax return

Form 5 (lomake 5) is the business tax return for a self-employed person operating a trade or business: a liikkeen- tai ammatinharjoittaja, which is what a toiminimi is.

It is not a separate tax on the business. A toiminimi is not a separate legal person, so it does not pay its own income tax. Form 5 establishes the business result, and that result is then taxed as your income on your personal assessment.

This is why the numbers on Form 5 turn up on your pre-completed tax return afterwards.

Everyone with an active toiminimi files it, including in years where the business made a loss or barely traded.

The deadline for the business tax return falls in early April following the tax year, and has been 1 April in recent years. The exact date is confirmed annually, so check it rather than relying on memory.

It is filed in OmaVero. The form can be completed on paper, but the electronic route is faster and gives you a submission record.

Filing late attracts a late-filing penalty in the same way a VAT return does.

The form asks for the business result and the business balance sheet position:

• Turnover for the year, excluding VAT
• Business expenses by category: purchases, equipment, vehicle costs, rent, insurance, other operating costs
• Depreciation on assets being written down over several years
• The profit or loss that results
• Assets and liabilities at year end, which produce the business net assets figure

The turnover figure here excludes VAT, which trips people up when they reconcile it against bank deposits. Platform payouts arrive VAT-inclusive; turnover on Form 5 is the amount net of VAT.

Business profit is not all taxed the same way. It is divided between capital income, taxed at a flat rate, and earned income, taxed progressively.

The split is based on the net assets of the business at the end of the previous year. By default, an amount equal to 20% of those net assets is treated as capital income and the rest as earned income.

You can elect a 10% rate instead, or elect to have the whole profit treated as earned income.

Which is better depends on your total income. Capital income is taxed at a flat rate, so for someone with high total income it is often preferable; for someone with modest income, progressive earned income rates can be lower than the flat capital rate, making the 0% election better.

For a typical courier with few business assets, net assets are small and the split makes little practical difference. It matters once there is real equipment or accumulated profit in the business.

Form 5 and your VAT returns describe the same business from different angles, and Vero can compare them.

Turnover reported across your VAT returns for the year should reconcile with the turnover on Form 5. Where it does not, there should be an explainable reason: a different treatment of a specific item, a timing difference, an activity outside VAT.

Unexplained divergence between the two is a straightforward thing for Vero to spot, and it is one of the more common triggers for questions. Keeping the two consistent is mostly a matter of using the same source records for both, which happens automatically if the bookkeeping is done once and used for both filings.

The recurring ones:

• Reporting VAT-inclusive turnover instead of net turnover
• Deducting the full cost of an asset that should have been depreciated, or depreciating something that qualified as a small acquisition and could have been taken in full
• Omitting YEL contributions, which are deductible
• Leaving out bookkeeping fees
• Forgetting to file at all in a loss-making year, when a filed loss can be carried forward against future profits
• Claiming private-use portions of mixed expenses without apportioning

A loss is worth filing carefully. Business losses can be carried forward for ten years against future business income, so a properly reported bad year reduces tax in later good ones.

Through the year you pay prepayment tax (ennakkovero) based on an estimate of your profit. Form 5 establishes the actual figure.

If your prepayments were too low, the shortfall becomes a back tax payment, potentially with interest. If they were too high, you get a refund.

Adjusting your prepayment estimate during the year, when it becomes clear the original was wrong, avoids both a large bill and lending money to Vero interest-free. The adjustment is made in OmaVero and takes effect on future instalments.