Reverse VAT in construction, Finland


Construction and woodworking
Target Groups: 


Reverse VAT is a system used in the construction sector in which VAT is paid by the buyer (main contractor) as opposed to the seller (subcontractors), as is usually the case. The purpose is to ensure the due collection of VAT and discourage the use of undeclared work.



The legislative proposal to establish reverse value added tax (VAT) in construction services was given to the Parliament on 9 April 2010 (number 41/2010). The bill was passed on 24 June 2010 and became law on 1 April 2011 (number 686/2010). Although serious reservations were expressed about the proposal, the observed increase of undeclared economic activity in construction was deemed a sufficient justification for adopting this additional measure. The measure does not address undeclared work as such, but VAT fraud is often associated with undeclared work. Unpaid VAT can, for example, be used to pay undeclared wages, and improved VAT collection can help level the playing field between honest and dishonest actors.


Reverse VAT is aimed at improving the rate of VAT collection. The ways in which VAT goes uncollected include simply not disbursing the taxes to the Tax Administration and claiming fraudulent VAT refunds through fake invoices (‘invoice trade’). Having the main contractor disburse the taxes was deemed more effective because the tax liability does not disappear as easily into the subcontracting chain and because the main contractors tend to be large, established and reputable companies that typically meet their obligations.

Specific measures

The reverse VAT system reverses the normal way in which VAT is collected. As it is applied here to construction services, the party that is mainly responsible for a construction project disburses the taxes to the Tax Administration. Subcontractors do not charge VAT in their invoices to the main responsible party. If there is a chain of subcontracting, as is typical, all invoicing excludes VAT, which is only disbursed at the top of the chain. The reverse system only applies to services, not materials, and private individuals as buyers are excluded. The other side of the VAT system (refunds for VAT paid to suppliers) operates normally: all parties can claim refunds for VAT that they have paid to their suppliers of materials or other services. As the measure is a modification of an existing tax system, it doesn’t have a budget in and of itself. The Tax Administration estimated, however, that during the first three years the reverse system would annually require 60 work-years, followed by 30 work-years in each subsequent year.

Actors involved

The main actor in the measure is the Tax Administration, which has had to adapt its existing systems to accommodate both regular and reverse VAT collection. As the targets of the measure are construction businesses, other actors include Rakennusteollisuus (RT), representing construction businesses; Taloushallintoliitto (TAL), representing accounting firms; and Suomen Yrittäjät (SY), representing entrepreneurs.

Outcome of evaluations; lessons and conclusions

Achievement of objectives

As the reverse VAT system has operated for only a short period of time, only preliminary evaluations have been carried out. According to a report prepared by the Grey Economy Information Unit of the Tax Administration, the impact on VAT collection cannot be estimated at this point. The disbursement of VAT has been shifting towards the main contractors, as intended, given the fact that the reverse system only applies to construction projects that were started after the enactment of the measure. Information on the few tax audits based on it have been analysed and reported. They have uncovered both honest mistakes and suspicious activity. There are no reports, however, of suspected appearances of ‘front’ organisations as fraudulent main contractors.

Obstacles and problems

The reverse VAT system may increase the administrative burden on the main contractor, which then has to handle VAT for the whole project. It also complicates procedures for actors who have both ordinary and reverse VAT activities. It also means that subcontractors file negative VAT reports more often, as they pay VAT to their suppliers but do not collect VAT from their clients.

Reverse VAT does not in and of itself target undeclared activity as it merely tries to ensure that VAT is in fact paid. Concerns have been raised about the situation where the main contractor becomes unable to disburse the tax due to insolvency. This would increase the risk of losing the entire tax amount for the whole project and open the possibility for ‘front’ main contractors, which would declare bankruptcy before completing the project.

Lessons learned

Adoption of the reverse VAT system requires an extra effort regarding information and instructions. Tax authorities must be prepared for questions concerning the boundaries between the reverse and the regular VAT systems. Tax Administration has also pointed out that refunds resulting from negative VAT reports are disbursed quite quickly after approval.

Impact indicators

The ultimate indicator for this measure is the increase of VAT revenue received from construction business, relative to the volume of construction activity. In the legislative proposal, this increase was estimated to be €80–€120 million. Other indicators include the number of tax audits as well as tax-related prosecutions and penalties. Indirectly, changes should be seen in the payment of retirement and unemployment taxes, as fraudulent operators typically neglect those payments as well.


Reverse VAT is perhaps most suitable for activities where the main project is split into many small subcontracts and where there is a chain of subcontracting. Before Finland, reverse VAT had been in use in several EU Member States.


Tax Administration, instructions on reverse VAT:

Website designated to the reverse VAT system:


The reverse VAT system adopted for construction services in Finland remains controversial. In some survey data, its effectiveness in reducing undeclared economic activity has been questioned and the increase in administrative burden has been criticised. On the other hand, other survey data have suggested that the increase in administration is not necessarily dramatic and that the system is quite often applied without any problems. One necessary condition for evaluation is a reliable system of tracking VAT revenue. The tax account system, which has been in use in Finland since the start of 2010, doesn’t distinguish VAT transactions from businesses’ other transactions.


Harmaan talouden selvitysyksikkö (2012), ‘Rakennusalan käännetty arvolisäverovelvollisuus – lain vaikuttavuus’, HTSY, Verohallinto, 29 February, available at

Rakennusteollisuus (RT) (2012), Press release concerning the impact of reverse VAT on the construction sector, 17 April, available at

Suomen Yrittäjät (SY) (2012), Press release concerning the SME Barometer, 14 February, available at

Tax Administration (2012), Press release concerning a survey about opinions on reverse VAT, 6 June , available at

Simo Virtanen, Finnish Institute of Occupational Health


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