I know it's been kicked into the long grass now, but just so I'm clear for my own peace of mind:
If a client makes nothing but sales caught by the DRC, it remains a full taxable business correct? So if it could reclaim all its VAT at present, it could continue to reclaim it all after the rules (eventually) change.
Presumably because the SR sale remains SR, just who actually accounts for the VAT has changed.
Just want to check... none of my clients sell mobile phones etc... so this will be my first experience with this situation.
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Thats my understanding , switch to monthly returns to help cashflow. I suspect it will be back as too many small contractors fail and the VAT is lost
Not sure I'd automatically switch to monthly returns.
It depends on the numbers .....
However ..... see the debate of last week on what constitutes an end user because I'm beginning to think that fewer businesses will be affected than I originally thought.
All my clients sales would have been subject to DRC, so inaddition to losing the cash flow advantages of the output tax they have to suffer the disadvantage of a delay in reclaiming their input tax
No they only have housing association and local authorities, the thing i havent got my head round is the electrical repair situation which seems to fall outside DRC, seems illogical
Are housing associations and local authorities "end users"?
Are they "making further supplies of specified services" ?
The definition of "end user" is a lot narrower than I thought it was and it's somewhat glossed over in the HMRC blurb.
Local Authorities are end users for the DRC so almost all charges to them would still have VAT on.
Almost none of the building services they commission would be part of an onward supply even where they have housing stock. Improvements to the buildings they let out aren't a) part of an onward supply of building services (they're rental of property) and b) since they still own the buildings they are receiving works to their own properties.
For any highways and street works there's also no onward supply, except for some fairly limited circumstances where they might do work on a trunk road that's the responsibility of Highways England. Most other works will have been procured under a special legal regime meaning that they are not acting in the course of business and so any potential onward supply would fall outside the scope of VAT and hence no onward supply.
I can't see anything very different with housing associations they're presumably doing work to their own properties for which they're not then making onward supplies or relevant services.
So if someone's exclusively supplying Local Authorities and Housing Associations then I'd expect almost everything to be an excepted supply and no DRC applying.
Be careful what you mean by "builders". Most builders, in the true sense, will not be end-users. You may be thinking of the layman's use of the word, applying it to what are actually developers.
An end user is a taxable person who is a recipient of specified services and uses those services for any purpose other than making further supplies of services to which the reverse charge applies.
Someone who engages a builder to repair his own housing stock (whether he lives there himself or not) is an end user.
A builder who builds an extension for a customer is an end user.
Most of my clients fall into the subcontractor>contractor>customer chain. None of those seem to be affected.
Which leaves the first two entities in the subcontractor>gangmaster>contractor>customer chain.
According to the Statutory Instrument an End User is: "a recipient of specified services [who] uses those services for any purpose other than making further supplies of specified services".
Specified Services are those services listed in schedule 4 which is basically all normal 'construction services' it doesn't say anything about the DRC needing to have applied or not applied to any charges for them to be specified services.
So someone building an extension for someone else, they may not be making a DRC supply as they supply an end user but they are a recipient of specified supplies and they are supplying those supplies onto their customer (the end user) and so there's nothing excepting the supplies from the subby to them from the DRC that I can see. (Unless the contractor is an intermediary connected to the end user e.g. in a joint venture or as a group company)
So I can't see why the DRC wouldn't apply to the sub contractor to contractor arm of most construction services even though it doesn't apply to contractor to customer supplies.
Article 4 specifies construction services as being services to which the reverse charge applies.
So, in the builder>householder leg, the householder isn't able to reclaim the VAT so the reverse charge doesn't apply. So the builder is making supplies for a purpose other than making further supplies of specified services so he must be the end user.
Strange use of the words "end" and "user", I know, but that's what it says.
I'm beginning to wonder whether the word "not" has been omitted somewhere....
Where?
Here's the entirety of Article 4 et seq as relevant to the definition in 4 (although I've taken out some of the "including offshore installations and such fluff") and I can't find anything that relies on a reverse charge being applied anywhere or any direction to a part of the instrument that does:
Specified services
"4. The services referred to in article 3(1) are construction services as defined in articles 5 to 7 together with any goods supplied with those services which fall to be treated as part of a single supply of services."
5. “Construction services” comprise—
(a) construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations;
(b) construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, …
(c) installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection;
(d) internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;
(e) painting or decorating the internal or external surfaces of any building or structure;
(f) services which form an integral part of, or are preparatory to, or are for rendering complete, the services described in paragraphs (a) to (e).."
"6. “Construction services” do not include—
(a) drilling for, or extraction of, oil or natural gas;
(b) extraction (whether by underground or surface working) of minerals and tunnelling or boring, ...
(c) manufacture of building or engineering components ...
(d) manufacture of components for systems of heating, lighting,[etc.]...
(e) the professional work of architects [etc.]…
(f) the making, installation and repair of artistic works...
(g) signwriting …
(h) the installation of seating, blinds and shutters;
(i) the installation of security systems, ...
"7. But the services described in article 6 shall be treated as construction services to the extent that they form part of a single supply that includes services described in article 5."
I can't see anything anywhere that says a DRC needs to have been applied to be within the above.
Keep reading.....
"Article 4 specifies construction services as being services to which the reverse charge applies."
Which as has been pointed out below is part of the Explanatory and not the law itself, and is talking rowlocks (for those of a nautical bent)... still glad to see that it got sorted.
Now if only they could get themselves sorted so that they a only tried to publish things with a degree or clarity.
And since article 3 (1) says S55A of VATA94 (reverse charge) applies to services under Article 4 then the law would basically be saying:
"3 (1) A reverse charge shall apply to any services defined in Article 4"
"4 The construction services referred to in 3 (1) are those defined in 5 to 7 below:"
"5 Those Construction Services to which a reverse charge applies."
Oh you think to yourself I'd better then find out to which Construction Services a Reverse charge applies so I know if a reverse charge applies, how do I do that? Ah luckily the order tells me at 3 (1) lets look at that....and then repeat ad infinitum.
"A builder who builds an extension for a customer is an end user."
No he isn't. He's making a supply of building services.
"Article 4 specifies construction services as being services to which the reverse charge applies"
No it doesn't
You have mis-interpreted the Explanatory Note. It explains which services fall within the DRC. What it most certainly does not do is explain that specified services are those to which the reverse charge applies. If it did you'd end up going right up your own backside.
I can understand your misunderstanding, though. Better wording might have been
"Article 4 states that the reverse charge will apply to construction services"
Ah - that's good. It's back to what I originally thought it was.
I thought it was blocks at the time but I read so much Government blocks that I didn't see it as unusual.
I dont know why i bothered with the webinar which even by HMRC standards was very clunky. And why they persist with those ridiculous polling questions is a mystery.
Try this Accounting Web article by Neil Warren on 3 September.
https://www.accountingweb.co.uk/tax/business-tax/vat-basic-guide-to-the-...
The reverse charge applies to building services supplied to another builder for onward charge. Eg where the builder building the house extension sub-contracts the plastering to a plasterer.
