Juhani Artto 29.11.2012

With reverse VAT it is the buyer of services that pay the VAT and not the seller as is common under the normal VAT system. In practice, this means that the main contractor is obliged to report and pay VAT to the Tax Administration (Inland Revenue) in respect of the entire work or project.

Preliminary results indicate that this measure has succeeded in reducing tax fraud, which was the main goal of the reform. According to the study, published on Tuesday by the Tax Administration, the changes boost state coffers by at least EUR 75 million more in VAT-revenue annually.

The study also suggests that the criticism and dire warnings of the construction industry representatives during the preparation stage of the reform was baseless. The study concludes that the new system has been adopted satisfactorily and any fears that it might lead to the black economy (in this sector) changing its modus operandi or becoming more innovative to meet the challenge have not materialized. Construction industry representatives repeatedly warned that this kind of reform would inevitably result in the emergence of fraudulent and dishonest "main contractors" but so far there has been no sign that this has happened.

As expected the adoption of the reverse VAT system has not succeeded in eliminating or even led to a reduction in operations with fake receipts but nevertheless the reform has had a positive impact also on the receipt fraud. For criminal businessmen the immediate benefit of fake receipts has become smaller as now they are unable to deduct fake VAT-payments.

However, it is well to remember that the findings so far are based on a limited number of tax control measures and it is advisable to avoid the temptation of coming to early or premature conclusions at this stage, the study reminds us. Sweden, Belgium and the Netherlands had already taken the bold step and introduced reverse VAT systems prior to Finland’s adoption of the same. And the experience in these countries has been
positive and encouraging.

Read more:

Reverse charge in value added taxation in the construction sector from 1 April 2011, Tax Administration