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. VAT on construction services is 24%, i.e. value added tax must be paid according to the general tax rate.
When is the reverse charge mechanism applied?
The buyer must always pay the VAT when all the following conditions are met:
- The seller is a company that sells construction services or leases out employees to provide construction services.
- The buyer is a company that sells or leases construction services on a non-casual basis – for example, repeatedly or for a long-term building project.
- The service is sold in Finland.
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 mention of the 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. However, the seller is always responsible for the invoice and its accuracy.
Make sure the invoice contains the following information:
- the normally required invoice entries (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 d of the Value Added Tax Act
- an indication of "self-billing" if the buyer prepares the invoice.
File the details on the VAT return
Report the sales and purchases of construction services to the Tax Administration on the VAT return.
- 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 24% 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 the buyer is liable for VAT based on the reverse charge mechanism, report the total sum of the construction services you have sold under “Sales of construction services and scrap metal” on the VAT return.
Reverse charge mechanism has no impact on the right to deduct VAT
Buyer: If you have bought construction services for your taxable business, you can deduct the VAT.
Seller: If you have made purchases relating to the sale of construction services, you can deduct the VAT in the usual manner, even if the buyer rather than the seller is liable for the VAT.
- 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)
- VAT reverse charge for construction services and local governments (kuntaliitto.fi)
- A list of construction services to which the VAT reverse charge applies. This list is not exhaustive. (rakennusteollisuus.fi, in Finnish)