TL;DR
You must register for VAT when revenue exceeds 2,000,000 ISK over 12 months. Standard VAT rate is 24% (11% for some services). Reports are filed bi-monthly, due the 5th of the following month. FreelancePay handles everything automatically.
1) What is VAT (VSK)?
VAT is a consumption tax levied on the sale of goods and services. As a contractor you collect VAT from clients and remit those funds to the state. You act as a tax collector for the government.
You can deduct input VAT on legitimate business expenses — paying only the net difference to the state.
2) When to Register?
2.000.000
ISK
Registration threshold — over any rolling 12-month period
- When you reach the threshold: register immediately at skatturinn.is
- Use the RSK 5.02 form (VAT section)
- Wait for your VAT number — up to 21 days
- Do not issue invoices with VAT before you have a VAT number
- You can register proactively before reaching the threshold
3) VAT Rates 2026
24%
Standard rate
Applies to most services and goods. This is the rate most contractors use.
Examples:
- •Consulting and professional services
- •Software development
- •Design
- •Construction services
11%
Reduced rate
Applies to specific services and goods as defined by VAT legislation.
Examples:
- •Accommodation (hotels, Airbnb)
- •Foodstuffs
- •Books and magazines
- •Transport
0%
Exempt
Some services are VAT-exempt — you charge no VAT but also cannot deduct input VAT.
Examples:
- •Financial services
- •Insurance services
- •Healthcare (some)
- •Education (some)
4) How Reporting Works
VAT Filing Periods 2026
Jan–Feb
Due: 5 Mar
Mar–Apr
Due: 5 May
May–Jun
Due: 5 Jul
Jul–Aug
Due: 5 Sep
Sep–Oct
Due: 5 Nov
Nov–Dec
Due: 5 Jan
📌 Deadline is always the 5th of the month following the period end.
How to File
- 1Log in to skatturinn.is with electronic ID
- 2Select VAT report for the relevant period
- 3Enter total revenue (output VAT base) and purchases (input VAT base)
- 4System calculates net VAT due
- 5Confirm and pay — payment request appears in your online bank
5) Input VAT Deductions
You can deduct VAT paid on business expenses from your output VAT liability. This reduces the net VAT you owe.
Example:
⚠️ You must have valid invoices/receipts to claim input VAT deductions.
6) Penalties and Consequences
Late VAT report filing
5,000 ISK flat fee
Late VAT payment
1%/day for 10 days + late interest (dráttarvextir)
Failure to register for VAT
Skatturinn can register you retroactively and charge VAT on all past invoices
Charging VAT without being registered
Personal liability for all VAT collected
7) FreelancePay Handles VAT Automatically
- VAT calculated automatically on every invoice (24% or 11%)
- Bi-monthly VAT reports submitted to Skatturinn on time
- Input VAT tracked and deducted automatically
- VAT registration assistance if you are new to VAT
- No late fees or penalties due to oversight
- You focus on work — we handle VAT
Frequently Asked Questions
Q: When do I need to register for VAT?
A: When your total revenue exceeds 2,000,000 ISK over any rolling 12-month period.
Q: How often do I file VAT reports?
A: Bi-monthly (every 2 months). 6 periods per year, deadline always the 5th of the following month.
Q: What if I forget to file a VAT report?
A: 5,000 ISK flat penalty, and Skatturinn will estimate your VAT liability.
Q: Can I deduct VAT on business expenses?
A: Yes! Input VAT deduction is one of the main benefits of VAT registration. You need valid invoices/receipts.