VAT reverse charge in the construction industry

Usually, the seller is liable for value added tax. The VAT reverse charge mechanism applied in the construction industry means that VAT liability for certain construction services is carried by the buyer rather than the seller. This means that the buyer must calculate and pay the VAT. Construction services are subject to VAT according to the general rate (25.5%).

When is the reverse charge mechanism applied?

The buyer must always pay the VAT when all the following conditions are met: 

1. The service being supplied is a construction service or a service consisting of employee leasing, where the work of the leased individual employees is intended to contribute to construction services.  
2. The buyer is a company that engages in at least one of the following activities, and the activity is not taking place on an incidental basis:
   • The buyer sells construction services.
   • The buyer leases out employees, and the work of the leased employees is for contributing to the production of a construction service.
   • The buyer sells buildings or comparable real property, which the buyer has constructed or ordered the construction of, which are situated on land owned or held by the buyer. 
   • The buyer sells buildings or real property before they are placed into service, and construction services have been performed on the buildings/property.

And further, it is possible that the buyer is another company that sells the purchased services to the buyer fitting the above description.

Note that the reverse charge mechanism is not applied if construction services are sold to a private person or if goods (e.g. building materials) are being sold instead of services.

It is always the seller’s responsibility to find out whether the buyer meets the conditions of the reverse charge mechanism or whether the seller is liable for VAT.

What information must the invoice include?

Although the buyer must file and pay VAT on the construction service sold, the seller must issue an invoice to the buyer. The invoice must include the price without VAT and a text referring to VAT reverse charge mechanism. The buyer can prepare the invoice on behalf of the seller if the seller and buyer so agree and the seller accepts the invoice. Even so, responsibility for the invoice, and for correct VAT markings and entries on it, always lies with the seller.

Make sure the invoice contains the following information:

• the normally required invoice entries (however, excluding the VAT rate and the amount of VAT)
• the buyer's VAT number – for domestic sales transactions, it is the Business ID of the Finnish buyer
• a text saying that the buyer must file and pay VAT (”reverse charge”)
• grounds for the buyer’s VAT liability − e.g. reference to § 8 c of the Value Added Tax Act
• an indication of "self-billing" if the buyer prepares the invoice.

File the details on the VAT return

Complete and submit the VAT return in order to declare the sales and purchases of construction services to the Tax Administration.

• Buyer: Report the construction services you have bought on which you are liable to pay VAT based on the reverse charge mechanism. Report the total purchases under “Purchases of construction services and scrap metal” on the VAT return. Calculate the amount of VAT when the VAT rate is 25.5% and enter it under “Tax on purchases of construction services and scrap metal”. If the VAT on the purchase is deductible, report it under "Tax deductible for the tax period".
• Seller: Even if, based on the reverse charge mechanism, the buyer is liable for VAT, you still need to declare the total sum of the construction services you have sold under “Sales of construction services and scrap metal” on the VAT return.

Read more about filing and paying VAT

The reverse charge mechanism has no impact on the right to deduct VAT

Buyer: If you have bought construction services for your VAT-taxable business, you can deduct the VAT.

Seller: If you have bought construction services for a purpose that serves the operation of the business that entitles your company to VAT deductions, you can deduct the VAT.

Read more:

VAT reverse charge in the construction sector (available in Finnish and Swedish, link to Finnish)

Concept of real estate for VAT purposes as of 1 January 2017 (available in Finnish and Swedish, link to Finnish)

Sales and own use of construction services in value added taxation (available in Finnish and Swedish, link to Finnish)

A list of construction services to which the VAT reverse charge applies. This list is not exhaustive. (rt.fi, in Finnish)