The tax treatment of invoice financing is straightforward once you understand the basic principles. In this article, we cover the key tax implications and concrete journal entry examples.
Tax Deductibility of Service Fees
Invoice financing service fees are fully tax-deductible business expenses. They are recorded in the income statement under financing costs or other business expenses. According to the Finnish Tax Administration, financing costs related to business operations are deductible business expenses.
Invoice financing costs are 100% tax-deductible.
VAT Treatment
Financing services are VAT-exempt (VAT Act Section 41), so invoice financing service fees do not include value-added tax. This means you pay the service fees as they are without a VAT surcharge. At the same time, there is no deductible VAT on service fees.
Key points on VAT treatment:
- Financing services are VAT-exempt (VAT Act Section 41)
- No value-added tax is added to service fees
- No deductible VAT from financing costs
- VAT on the original invoice is treated normally
Accounting Treatment
Accounts receivable remain in the books until the customer pays the invoice. The advance received is recorded as a financing liability, and interest and service fees are recorded as financing costs. Below are concrete journal entry examples.
Journal Entry Example: EUR 10,000 Invoice
Assume you sell a EUR 10,000 invoice through invoice financing and receive a 90% advance (EUR 9,000). The service fee is EUR 150 and the interest cost is EUR 50.
Entry 1: Receipt of advance payment
- Debit: Bank account EUR 9,000
- Credit: Short-term liabilities / Financing liabilities EUR 9,000
- Note: Accounts receivable EUR 10,000 remain unchanged
Entry 2: Recording the service fee and interest (upon final settlement)
- Debit: Financing expenses EUR 150 (service fee)
- Debit: Interest expenses EUR 50
- Credit: Bank account / Short-term liabilities EUR 200
Entry 3: Customer payment and final settlement
- Debit: Short-term liabilities EUR 9,000 (advance offset)
- Debit: Bank account EUR 800 (final payment to you)
- Credit: Accounts receivable EUR 10,000
- Note: EUR 200 has already been deducted as expenses
Considerations for Financial Statements
If the company uses invoice financing at the closing date, it appears on the balance sheet in two places: in accounts receivable (original invoices) and in short-term liabilities (advances received).
Financial statement checklist:
- Accounts receivable: Still include financed invoices
- Short-term liabilities: Include advances received from the finance company
- Financing costs: Service fees and interest recorded in the income statement
- Notes: For significant amounts, it may be good practice to mention the use of invoice financing
Practical Account Numbers (Standard Chart of Accounts)
Below are example accounts based on the general chart of accounts for business bookkeeping. Always verify with your own accounting firm or accountant.
Typical accounts:
- 1700 Accounts receivable (remain unchanged regardless of financing)
- 2870 Other short-term liabilities (advances received from finance company)
- 9100 Interest expenses (possible interest cost)
- 9200 Other financing expenses (service fee)
"Invoice financing is straightforward from an accounting perspective: receivables remain, the advance is a liability, and the service fee is a financing cost. It is worth paying attention to the correct presentation method in the financial statements."
