HMRC revises VAT domestic reverse charge technical guidance
Chris Campbell outlines changes to HMRC’s technical guidance for the VAT domestic reverse charge rules
What do the VAT domestic reverse charge rules relate to?
HMRC introduced the VAT domestic reverse charge for the supplies of building and construction services from 1 March 2021. The scope of the domestic reverse charge includes work on constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), as well as works on walls, roads, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plants, and installations for purposes of land drainage, coast protection or defence. Expenditure on heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure are also within the scope of the domestic reverse charge, as is follow up internal cleaning of buildings and structures after property works are complete, and painting or decorating the inside or the external surfaces of a building or structure.
Where transactions are within the scope of the domestic reverse charge rules, the output VAT is accounted for by the UK customer receiving the supplies rather than the normal position where it is paid over by the UK supplier.
In November 2022, HMRC updated its guidance to include a new section on scaffolding and guidance on the domestic reverse charge exemption for end users and intermediary suppliers, as well as on determining the difference between ‘labour-only’ supplies of construction services and supplies of workers by employment businesses. The revised guidance also covers accounting for VAT where construction services are supplied or received along with other goods or services, and specific guidance on supplies made by and to utility companies, along with how non-established taxable persons should account for VAT on construction services.
HMRC has confirmed that the VAT liability in respect of scaffolding will be based on what is being supplied under a particular contract. The updated HMRC guidance states that the hire of scaffolding itself is not within the scope of the domestic reverse charge, although the cost of erecting and dismantling scaffolding is included.
In respect of new build housing, the VAT payable on scaffolding should be accounted for under normal VAT rules. Where the invoice for the scaffolding breaks down the costs between the scaffolding hire and the labour to erect and dismantle it, the labour element should be treated as zero-rated, as a service carried out in respect of constructing new build housing. The domestic reverse charge does not apply if the scaffolding is supplied for a zero-rated construction project.
End users and intermediary supplier businesses
The revised HMRC guidance gives examples of specific scenarios affecting end users and intermediary supplier businesses.
Key points include confirmation from HMRC that the domestic reverse charge does not apply for supplies to end users when the end user tells their supplier or building contractor in writing that they are an end user. The guidance also states that being an end user is optional, but in order to be treated as one, the customer must tell the supplier or building contractor in writing that they are an end user.
Labour-only supplies versus employment business
The updated HMRC guidance considers factors to think about when determining the difference between 'labour-only' supplies and an employment business.
The key distinction is that ‘labour only’ supplies by sub-contractors are subject to the domestic reverse charge, where supplies are within the scope of the Construction Industry Scheme and several conditions are met. Whereas, supplies by an employment business are not subject to the reverse charge, regardless of whether they are within the scope of the Construction Industry Scheme.
Construction services supplied along with other goods and services
The revised HMRC guidance clarifies that where goods are supplied with construction services, this should be treated as a single supply for VAT purposes and the domestic reverse charge will apply to the full invoice. There are some specific exceptions to this which are outlined in detail.
HMRC outlines specific rules in respect of how the domestic reverse charge will apply to utility companies which supply gas, electricity, water, telephone or internet services to homes and businesses.
The provision of a connection to a utility network, diversionary works to allow the relocation of the network, the development and construction of a private network to be owned by the utility and leased or sold to the customer, and work that is not within the scope of the Construction Industry Scheme (such as the installation of a boiler and ancillary supplies) is specifically identified as falling outwith the domestic reverse charge regime.
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