Tag Archives: domestic reverse charge

Are you ready for the new Construction Industry Reverse Charge?


HMRC sees the construction industry as a sector that presents a significant risk to the Exchequer. As a result a reverse charge for building work is to be introduced, to combat fraud. This was originally due to be introduced on 1 October 2019, but its implementation has been delayed several times. Once implemented the new legislation will mean, essentially, that building contractors will not pay VAT to their sub-contractors, but will account for it themselves. It is important that all affected parties familiarise themselves with the new rules before they are introduced on 1 March 2021.

Reverse charge accounting already exists in other areas seen as susceptible to fraud, notably mobile phones and computer chips. The reverse charge also applies (for reasons not associated with combating avoidance) to some goods and services, including building work, received from outside the UK. The proposed construction reverse charge mechanism is therefore sometimes referred to specifically as the ‘domestic reverse charge’, or DRC.

How will the new reverse charge work in practice?

The reverse charge will apply to VAT-registered building contractors engaging VAT-registered sub-contractors and, similarly, to sub-contractors engaging others through the supply chain. A final customer for building work, such as an occupier or a developer, will not have to apply the reverse charge, and will continue to incur VAT in the same way as now.

The reverse charge is aligned with the Construction Industry Scheme (CIS), and will only apply to supplies that are within the scope of the CIS but with some notable differences.

  • Not all supplies within the CIS will be subject to the reverse charge. There will be various exclusions which will be particularly relevant to ‘deemed contractors’.
  • The reverse charge will not apply to zero-rated supplies.
  • The reverse charge will extend to building materials included within a supply of building work.
  • Deductions under the CIS do not affect the amount of VAT.

Contractors and sub-contractors include anyone who is acting in that capacity by making a supply of building work, whether or not this is their normal activity. HMRC have confirmed that staff agencies acting as such are not seen as supplying building work, so that their services are outside the scope of the reverse charge.

If a supplier charges VAT, the customer needs to be satisfied that it is actually due. If VAT is charged incorrectly it will not be recoverable as input tax. This is particularly important because when HMRC disallows a VAT refund claim, the customer will need to seek a recovery of overcharged VAT from the supplier which may be straightforward but can be difficult or impossible, for example, if the supplier is no longer trading. In this context it is important to note that, despite CJEU judgments to the effect that customers who cannot obtain rebates from suppliers should have available a mechanism to obtain a refund from HMRC, HMRC has, at time of writing, refused to accommodate this and whilst accepting claims may be possible it has adopted a policy of requiring businesses to make claims via the High Court, an expensive and uncertain approach. In essence HMRC is only too pleased to accept windfalls, collecting VAT from suppliers that have charged it incorrectly whilst refusing to offer any practical solution to reclaiming that VAT other than via the supplier.

There are various situations, set out in the relevant legislation, where the reverse charge will not apply, otherwise, the presumption is that the reverse charge does apply. In particular, there will be no de minimis threshold.

The supplier should not charge VAT unless:

  • The payment is outside the scope of the CIS;
  • The customer is not (and is not required to be) VAT-registered; or
  • The customer is treated as or like an ‘end user’ or is not acting in a business capacity.

Additionally the supplier should not charge VAT if the supply is zero-rated, or if it is not VAT registered or required to be registered.

Accounting for the reverse charge

If the reverse charge does apply, its actual application may be relatively straightforward, at least once accounting systems have been adapted to deal with it.

The customer needs to declare as output tax whatever VAT the supplier would have charged, without the reverse charge, and to do so in the period when the tax point arises.

If a supplier charges VAT, the customer needs to be satisfied that it is actually due: if not, it will not be recoverable as input tax. Otherwise, the customer can treat the same amount of VAT as input tax, in the same period. It will normally be directly attributable to an onward supply of building work, and recoverable in full. If so, the reverse charge has no net effect.

Impact of the reverse charge

The reverse charge may have some significant commercial implications, particularly for small sub-contractors. There will be an impact on cash flow where businesses have used VAT collected to finance their business. Additionally if a business is in a repayment position as a consequence of no longer having to pay VAT to HMRC they will have to wait for the refund to be processed by HMRC rather than offsetting input VAT against output VAT on a VAT return. Businesses that expect to be regularly in a repayment position may wish to switch to monthly VAT returns.

Contracts for building work will need to accommodate the new regime and in cases of uncertainty professional advice should be sought. This blog is intended to give an overview and where there is uncertainty Constable VAT would be happy to assist further. It may also be helpful to consider HMRC’s guidance.

Constable VAT Focus 16 May 2019

This VAT Focus provides the usual updates of HMRC news as well as coverage of some of the more recent developments in the Courts including judgments in relation to the deductibility of input VAT in different situations, where a tax point arises in relation to certain types of services and what constitutes “school or university education”.


Update to Public Notice 701/41: How VAT applies if you give or get sponsorship.

This notice explains how VAT applies if you give or receive sponsorship. A new section on crowdfunding has been added.

Update to Compliance Checks for VAT

This factsheet contains information about the penalties HMRC may charge you for a VAT or excise wrongdoing.

Update to Public Notice 700/22: making Tax Digital for VAT

This notice explains the rules for Making Tax Digital for VAT and about the digital information you must keep if they apply to you.

VAT Single Entity and Disaggregation

HMRC has updated its list of useful legal decisions in its internal guidance for single entities and the rules around disaggregation.




1. When a Tax Point Arises for a Supply of Services

This case concerned Budimex S.A., a Polish company engaged in the provision of construction services. The question which arose was when a tax point arises for a supply of services under which payment only becomes due when the customer is satisfied with the works; when the services are “performed” or when the customer certifies their satisfaction. Polish law dictates that where an invoice has not been issued within 30 days after the completion of work then the tax point arises on this date. Budimex had not issued an invoice for the supplies it made to a customer as they had not yet certified their satisfaction so had not paid any money over, the Polish authorities sought to recover the output VAT as a de facto tax point had arisen after the passing of 30 days from the completion of the services.

In considering this question, the Court highlighted that, according to EU law, VAT is to become chargeable when the goods or services are supplied. However, it was also considered that, taking into account the economic and commercial realities of the industry, that the contractual term may incorporate part of the service offered.

That is to say that Budimex was supplying construction services which, contractually, would only be “performed” when the customer was satisfied with the work, a contractual term specifically allowed for by the Federation of Consulting Engineers. Therefore it was held that the requirement for the customer to be entirely satisfied is a part of the service being offered.

The Court held in favour of Budimex.

Constable Comment: The type of rule in question stating that a de facto tax point must arise at some stage seeks to combat avoidance by companies who deliberately do not create a tax point in order to defer VAT liabilities. However this case shows that it is possible for these rules to be circumvented where “customer satisfaction” is a specific provision of the supply made.

2. Fictitious Transactions: A Right to Deduct?

This Italian referral considered whether supplies which were fictional but created no loss to the Revenue bear a right to deduct input VAT.

EN.SA is an Italian company which produces and distributes electricity, the Italian tax authorities denied recovery of input VAT in relation to certain supplies as there was no actual transmission of energy. The question arose before the Court whether this refusal breached the principle of fiscal neutrality.

Whilst accepting that it was not the case in the current circumstances, the Court considered a situation in which the customer had acted in good faith in which case, it was hypothesized, that the right to deduct would have to arise owing to the underlying principles of the EU law. Therefore it was found that the Italian law which gave the Italian authorities the right to refuse the repayment of input VAT was not contrary to EU law.

However, in considering the question, the Court also pondered whether a fine may be levied equal to an amount of the deduction made. It was found that a fine of this amount would go against the EU principle of proportionality and, therefore, that domestic tax authorities are precluded from issuing this type of fine.

Constable Comment: this was an interesting case as, on the surface, a fictional transaction should clearly not give rise to a right to deduct VAT. However, the Court was forced to consider a situation in which a customer had acted in good faith in which it stated that the right to deduct must arise. Therefore this judgment applies to very specific facts and national legislation which prevents the right to recover more broadly may be incompatible with EU law.

3. The Exemption for Private Tuition

This case concerned whether the provision of driving tuition by a private company benefits from the exemption found in EU law for the provision of education in the public interest, typically provided by schools and universities, when provided by certain private bodies.

A&G Fahrschul-Akademie GmbH (A&G) is a German company which provides private driving tuition to students with an aim of ultimately earning a driving license. It applied to have its VAT debt cleared as it believed it was exempt from VAT but the German tax authorities refused on the grounds that the tuition provided is not normally taught by schools and universities. A&G appealed this point and the question was referred to the CJEU; does the concept of school or university education cover driving schools?

In considering this point at length the Court suggested a broad definition of what does constitute “school or university education” for the purposes of the exemptions:

“…an integrated system for the transfer of knowledge and skills covering a wide and diversified set of subjects, and to the furthering and development of that knowledge and those skills by the pupils and students in the course of their progress and their specialisation in the various constituent stages of that system.”

The Court then posited, in the light of this consideration, that driving tuition provided by a private body would be specialised tuition rather than a transfer of knowledge and skills covering a wide set of subjects.

Constable Comment: This judgment will be important in the future as it provides a reasonably solid framework for what constitutes a school or university education, a part of the legislation which comes without a definition. However, whilst a good starting point, this is a broad definition with plenty of constructive ambiguity meaning the issue is likely to surface in the Courts again.

4. Incorrectly Charged VAT: Recoverable?

This case concerned whether PORR, a Hungarian company involved in construction, was entitled to deduct input VAT on certain transactions in relation to which VAT had been incorrectly charged under the normal VAT system where the reverse charge mechanism should have been applied by the supplier.

PORR sought to argue that the supplies were not subject to the reverse charge mechanism and, in any case, the tax authority had denied it the fundamental right in the VAT system to deduct input VAT. The tax authorities contended that such a right had not been denied, indeed that it had been expressly provided for under the reverse charge procedure. PORR also put forward that the tax authorities had failed to ascertain if the suppliers could correct this mistake at no expense to PORR.

The Court considered the relevant EU law and concluded both that the tax authority had no obligation to seek corrections from the supplier and that PORR has failed, in a substantive way, to fulfil its obligations under the reverse charge mechanism. The VAT charged was, therefore, not deductible by PORR.

Constable Comment: Different to the EN.SA case which dealt with fictional transactions, the transactions in this instance took place but had been classified incorrectly as normal supplies rather than reverse charge supplies. This outcome may appear harsh to a customer who has acted in good faith but it is vital to ensure that input tax cannot be deducted twice; once by the supplier and once by the customer.

5. Restrictions on Recovery of Input VAT

This case concerned Grupa Lotos S.A., a parent company to a group of companies in Poland, operating in the fuel and lubricants sector. Polish law excludes the recovery of input VAT incurred on overnight accommodation and catering services with limited exceptions where the cost relates to a supply of tourism services or, in the case of food, the provision of microwave meals to passengers. This provision in domestic law predates Poland’s accession to the EU however it was extended in 2008 to further exclude all overnight accommodation.

The dispute in the domestic court concerned whether Grupa Lotos could deduct VAT incurred on accommodation and catering services purchased, in part, for its own use and part for its subsidiaries. Grupa believed it should be entitled to recover a portion as it was not the consumer of the services and VAT is a tax on the consumption of goods or services. The Polish tax authorities disagreed and claimed that the Polish law made no distinction between the consumption and purchase for resupply of these services.

The matter was referred to the CJEU, the question being whether EU law must be deemed to preclude legislation such as the Polish law in question after its accession to the EU and whether domestic law can extend pre-existing exclusions after accession to the EU.

Giving consideration to the nature of the VAT system and relevant case law such as Iberdrola, the Court turned to look to Article 176 which provides that Member States may maintain restrictions on recovery which were in force before their accession to the EU. It was held that the Polish law, as it was in place prior to Poland’s joining the EU, was valid but that EU law would preclude the introduction of legislation akin to this were it to be introduced whilst any given Member State was within the EU. Therefore the extension to the exclusion in 2008 was invalid.

The question of VAT recovery in this particular case has been referred back to the domestic courts to determine if the supplies involved are ‘tourism services’.

Constable Comment: This case serves as a reminder of how EU law works. Whilst “direct effect” means EU law takes precedence where domestic law is incompatible with new EU laws, where a country joins the EU and becomes a member state, direct effect does not apply retrospectively. This is interesting given the current climate with five nations seeking to join the EU; they may be allowed to keep certain restrictions but will not be allowed to extend them if they successfully enter the EU.


Constable VAT Budget Focus: Autumn 2018


Philip Hammond has delivered the last Budget before the UK leaves the EU in March 2019. He has based the Budget on an assumption of an average free trade deal being struck between the UK and the EU. However, if no agreement can be reached between the two parties, the Chancellor has stated that a different strategy would be necessary and the UK has been working on contingency plans for different possible Brexit negotiation outcomes. Here we look at the key VAT issues which have been covered in the announced Budget issued but will provide continued coverage of any progression in line with Brexit negotiation results.


VAT registration and deregistration thresholds

The VAT registration threshold of £85,000 has stayed at the same level again in this Budget, as has the de-registration threshold of £83,000. It has been confirmed that these will stay in place for the next two years. The effect of this measure, when inflation is factored in, is that there will be an increased number of smaller businesses that are required to register for VAT.


VAT grouping eligibility to be extended

The Government has announced that it will extend the eligibility to join a VAT group to certain non-corporate entities in the Finance Bill 2018-19. This extension will allow partnerships and sole traders to benefit from VAT grouping provided the entry criteria are met.


The treatment of vouchers from 1 January 2019

The Government intends to introduce legislation to give effect to an EU Directive in the UK providing for the VAT treatment of vouchers issued on or after 1 January 2019. It will impact vouchers for which payment has been made and which will be used to make a purchase.

The aim of the measure will be to harmonise the rules for the taxation of vouchers within the EU and, ideally, to prevent any non-taxation or double taxation of goods or services. This is not a true Budget measure as the new rules were agreed sometime after extensive discussions within the EU.


Specified Supplies Order

For a brief summary and an analysis of the Specified Supplies Order, we recently provided coverage of the issues presented by Brexit and the Specified Supplies Order on our website. There has been some clarification around some of the issues associated with the Order offered as part of the Budget 2018. In essence, the Order allows companies who export certain financial services from the EU to third countries to reclaim input VAT on what would normally be an exempt supply giving no right to recovery.


HMRC believe the Order is currently being abused by companies who form agreements with associates located outside the EU and re-supply those services back to UK consumers meaning that the company can reclaim the input VAT on the specified supply and gain a VAT advantage. This measure seeks to prevent “looping” by restricting the applicability of the Order to cases where the final consumer is not in the UK. We are not convinced that either existing UK measures or the proposed measures are compliant with the EU VAT directive and, were the UK to remain in the EU, we would be surprised to find that the proposed measure is not challenged in the Courts. Brexit may nullify this consideration.


VAT reverse charge anti-avoidance amendment

A measure has been introduced which allows for the disapplication of the existing anti-avoidance provision in relation to any specified reverse charge. Originally the provisions were introduced to prevent criminals avoiding reverse charge measures by supplying non-VAT registered businesses instead and charging VAT. This measure will allow regulations to be made to prevent unintended consequences for small businesses who trade below the VAT threshold which will remain at £85,000.


VAT and higher education

It has been announced that the Government will amend VAT law to enable bodies registered with the Office for Students, in the approved (fee cap) category, to exempt supplies of education. This is a measure aimed at ensuring continuity of VAT treatment for English higher education providers following the Higher Education and Research Act 2017. Constable VAT will follow the development of this policy, if your business is likely to be affected then please do not hesitate to contact Constable VAT.


Unfulfilled supplies and prepayments

HMRC’s policy around the VAT treatment of prepayments where customers have been charged for a supply but have failed to collect or use what they have paid for and have not received a refund. These prepayments will be brought into the scope of UK VAT from 1 March 2019 and VAT will be due on the prepayment.


Increase or decrease in consideration after supply (Regulation 38)

Regulation 38 requires businesses to adjust their VAT account where there has been a change in the value of the supply on which VAT is due, and a corresponding change in the amount of VAT charged.


It has been announced that legislation will be introduced to ensure that a credit note is issued to customers who receive a discount to ensure a higher degree of transparency with businesses, ensuring that they do not benefit by reclaiming VAT that should be refunded to either the customer or paid to HMRC.


Alternative method of VAT collection for online sales

Following a recent consultation, the Government is considering introducing a split payment model for collecting VAT on sales made online by overseas sellers. An industry Working Group is to be set up by HMRC to work with relevant stakeholders to consider this further.


The effects

If you require further information or assistance on any of the points raised above, please speak with your usual Constable VAT contact.