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Sub-contractors & zero rating

29th Jul 2022
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There is some misunderstanding on this issue. Two recent Tribunal decisions have highlighted the inconsistency in the legislation, and the consequence that contractors are left substantially out of pocket if they fail to apply the rules correctly.

The key problem arises because of Note 12 to zero rate Group 5:

(12)     Where all or part of a building is intended for use solely for a relevant residential purpose or a relevant charitable purpose—

(a)     a supply relating to the building (or any part of it) shall not be taken for the purposes of items 2 and 4 as relating to a building intended for such use unless it is made to a person who intends to use the building (or part) for such a purpose; and

(b)     a grant or other supply relating to the building (or any part of it) shall not be taken as relating to a building intended for such use unless before it is made the person to whom it is made has given to the person making it a certificate in such form as may be specified in a notice published by the Commissioners stating that the grant or other supply (or a specified part of it) so relates.

The italicised words indicate that zero rating is only available where the recipient of the supply is the person who will use the building (or part of it) for relevant residential purpose or relevant charitable purpose.

Similar wording is also found in Note 8 to reduced rate Group 6, which applies to conversions for relevant residential purpose.

HMRC make the simple statement that sub-contractors’ supplies in respect of RRP and RCP buildings are always standard rated; Notice 708, para 2.1.3. A similar statement is made in HMRC guidance at VCONST18300, with a very basic explanation.

The additional detail for contractors is that the domestic reverse charge applies to such supplies. So, a sub-contractor should not charge VAT to the main contractor. Rather his invoice must show the reverse charge wording. The main contractor then has to account for VAT using the reverse charge, whilst still zero-rating his supply to the client.

There’s lots to go wrong for contractors. As always, seek appropriate advice at an early stage.

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