VAT reverse charge in the construction sector
The seller is liable to pay the required value added tax in most cases. The reverse charge mechanism for VAT in the construction sector means that, in the sales of certain construction services, the buyer rather than the seller is VAT-liable.
When is the reverse charge mechanism applied?
The reverse charge mechanism for VAT is applied when all the following conditions are met:
- the transaction involves selling construction services or leasing workforce for executing construction services
- the buyer is a business operator who sells constructions services or leases workforce for executing construction services on a non-temporary basis, and
- the sales take place in Finland.
Note that the reverse charge mechanism for VAT is not applied if the construction service is sold to a private person or in the case of sales of goods.
Information to be filed in a VAT return
Details of sales and purchases of construction services are reported to the Tax Administration using a VAT return (previously the periodic tax return).
- The seller reports the total sum of construction services subject to a reverse charge in the VAT return, in the section “Sales of construction services and scrap metal”.
- The buyer reports any purchases of construction services for which the buyer is VAT-liable based on the reverse charge system. The total sum of purchases is reported in the VAT return, in the section “Purchase of construction services and scrap metal”. The buyer calculates the amount of payable taxes according to the tax rate 24%, and reports the sum in the section, “Taxes on purchases of construction services and scrap metal”. Taxes on deductible purchases are reported by the buyer in the section, “Tax deductions for the tax year”.
The seller of construction services must provide the buyer with an invoice. The seller must find out whether the buyer meets the conditions for applying the reverse charge mechanism. If the conditions are met, the seller will not charge the buyer for VAT in the invoice.
The invoice must include the usual billing details, but no tax rate or tax amount. The buyer’s VAT identification number must be indicated in the invoice. In domestic trading, the VAT identification number is the Finnish buyer’s Business ID. The invoice must also state that the buyer is liable to file a VAT return and pay the VAT (reverse charge). The grounds for the buyer’s VAT liability must be stated in the invoice, for example by referring to Section 8c of the Value Added Tax Act.
Reverse charge has no impact on the right to deduct VAT
The buyer has the right to deduct the VAT for which it is liable based on reverse charging, in the case of goods or services acquired for the purposes of the buyer’s taxable business operations.
The seller also has the right to deduct VAT on acquisitions relating to the sales of construction services in the usual manner, even though the buyer rather than the seller is VAT-liable.
- VAT reverse charge in the construction sector
- Concept of real estate for VAT purposes as of 1 January 2017
- VAT reverse charge for construction services and local governments (www.kuntaliitto.fi)
- A list of construction services to which the VAT reverse charge applies. This list is not exhaustive. (rakennusteollisuus.fi)