Quick answer: The most common VAT bookkeeping mistakes in Iceland are mixing up the 24% and 11% rates on the same invoice, missing the seller's or buyer's kennitala on invoices, failing to keep input VAT and output VAT in separate accounts, and assuming that income under the ISK 2,000,000 threshold means no tax is owed at all. Most of these errors surface at VAT return time — bi-monthly, on the 5th of the second following month — and can trigger penalties, interest, or an estimated ("áætlað") assessment from Skatturinn.
Mistake 1: Mixing up the 24% and 11% rates
Iceland uses two VAT rates: 24% (standard) and 11% (reduced, for specific categories like books, newspapers, and certain food items). A common bookkeeping error is applying the wrong rate to a line item, especially on invoices that mix goods taxed at different rates. Each rate needs its own clearly identified line and its own running total in the books — not a single blended VAT figure.
Mistake 2: Missing kennitala or VSK-númer on invoices
Icelandic VAT invoices require more identifying information than many foreign accounting teams expect. Both the seller's and the buyer's kennitala (the national ID number used for individuals and businesses alike) must appear on the invoice, and the seller must separately display their VSK-númer — the VAT registration number issued by Skatturinn. These are two different numbers, and skipping either one can jeopardize the buyer's ability to deduct input VAT.
Mistake 3: Not separating input VAT and output VAT in the books
Under the VAT Act, VAT-liable businesses must keep separate accounts for output VAT (VAT charged on sales) and input VAT (VAT paid on purchases), either directly in the main ledger or in dedicated sub-ledgers tied back to it. If a business's activity includes both taxable and VAT-exempt parts, those two categories of transactions must also be clearly separated in the bookkeeping — not just at return time, but as transactions are recorded.
Mistake 4: Believing "under the threshold" means "no tax"
This is one of the most common misunderstandings among new freelancers and small business owners. If your taxable turnover is ISK 2,000,000 or less in a 12-month period, VAT registration is optional — but this does not mean the income itself is tax-free. Income tax still applies to all income regardless of whether VAT registration is required. Treating "under the VAT threshold" as "under the radar" for tax purposes entirely is a mistake that can create a much bigger problem later.
Mistake 5: Recording transactions after the return is already due
Skatturinn requires that bookkeeping for a VAT period be finalized before the VAT return for that period is submitted — the return is supposed to be built from completed books, not the other way around. Businesses that reconstruct their bookkeeping at the last minute, right before the return deadline, run a higher risk of misclassified transactions, missing invoices, and rushed errors that are harder to catch.
Mistake 6: Missing the filing deadline and triggering an estimate
VAT periods in Iceland run bi-monthly — January–February, March–April, and so on — with each return due on the 5th of the second following month (the Jan–Feb period, for example, is due April 5th). If a return isn't filed, Skatturinn will estimate the VAT owed, and a late-filing fee of 5,000 ISK applies on top of that. Separately, late payment carries a penalty of 1% per day, up to a maximum of 10%. If a business is estimated for two consecutive periods, RSK can also remove it from the VAT register altogether — which creates its own complications to fix.
Common mistakes at a glance
| Mistake | Why it's a problem | How to avoid it |
|---|---|---|
| Mixing 24% and 11% rates | Wrong VAT collected or claimed | Separate line items and running totals per rate |
| Missing kennitala/VSK-númer | Buyer may lose input VAT deduction | Use an invoice template with both fields mandatory |
| No separation of input/output VAT | Return figures can't be traced to the books | Keep dedicated accounts from day one |
| "Under threshold = tax-free" belief | Unreported income tax liability | Track all income regardless of VAT status |
| Late bookkeeping | Rushed, error-prone returns | Close the books before preparing the return |
| Missed filing deadline | Estimated assessment, fees, deregistration risk | Calendar all six bi-monthly deadlines in advance |
Important / Heimild og fyrirvari
VSK.is is an independent informational resource and is not affiliated with Skatturinn or any Icelandic government body. Penalty amounts, filing deadlines, and thresholds can change. Always confirm current figures and requirements directly with Skatturinn or a qualified Icelandic accountant.
Frequently Asked Questions
Most businesses file bi-monthly — six periods per year (Jan–Feb, Mar–Apr, and so on) — with each return due on the 5th of the second following month.
Skatturinn will estimate the VAT owed and apply a 5,000 ISK late-filing fee. Late payment separately carries a penalty of 1% per day, up to a 10% cap.
Yes — if your VAT is estimated for two consecutive periods because no return was filed, Skatturinn can deregister your business from the VAT register.
No. Staying under the threshold only makes VAT registration optional — all income is still subject to income tax regardless of VAT status.
Both the seller's and buyer's kennitala, the seller's VSK-númer, a sequential invoice number, the date of issue, a description of the goods or services, and the total amount with the VAT rate and VAT amount clearly shown.
Yes — Icelandic VAT law requires output VAT (on sales) and input VAT (on purchases) to be tracked in distinct accounts or sub-ledgers, so figures on the VAT return can be traced back to the underlying bookkeeping.
Important
VSK.is is an independent informational resource and is not affiliated with Skatturinn or any Icelandic government body. VAT thresholds, rates, and registration procedures can change. Before registering or making a business decision, verify current requirements directly with Skatturinn or a qualified Icelandic tax advisor.