What is value added tax (VAT)?

VAT is a tax related to consumption. It must be paid when goods and services are purchased.  When business enterprises sell goods and services, they must add VAT to the price. 

In fact, the consumer is the real payer of VAT, because VAT is part of the price the consumer must pay for goods or services. 

Who is liable to pay VAT?  

When businesses begin their activities, they must submit an application for VAT registration. In some circumstances, an application for VAT registration can be submitted even if the law does not require it. For example, a small business or an operator of a VAT-exempt activity may still wish to register for VAT.

In general, the party liable for VAT is the seller. This means that it is the seller’s responsibility to report and pay VAT to the Tax Administration.

A reverse charge mechanism is applied in some circumstances, which means that the buyer reports and pays the VAT on the seller’s behalf. Examples of sectors where VAT reverse charge is applied in Finland include the construction sector and the scrap metal industry. 

When a business enterprise ends its activities, its VAT liability ends as well.

Business enterprises report and pay VAT

When businesses sell goods or services, they must add VAT to the price. The business must then report and pay the VAT on the sales to the Tax Administration. The company’s tax period determines how often VAT must be filed. 

Business enterprises can deduct the VAT they pay on purchases

When businesses have bought goods or services from other parties liable for VAT, they can make deductions from the VAT on their sales. This requires that the business bought the goods or services for a purpose related to its VAT-taxable activity. No VAT deductions can be made if the business bought the goods or services for its own use or for its employees’ private use.