Domestic Reverse Charge 4: New 5% disregard rule and other invoicing quirks

Neil Warren explains how the 5% disregard rule works, and why subcontractors should be careful when invoicing for work undertaken on new dwellings.

2nd Feb 2021
Independent VAT Consultant
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There are times when you need to understand what a tax rule means, although it will rarely be relevant in your day-to-day work. This is to ensure you can give a straight answer to a question asked by a client with reassuring words such as: “That’s OK, you don’t need to worry about that.”

One such issue is the new 5% disregard rule, which will be part of the new domestic reverse charge legislation for builders that will come into effect on 1 March 2021.

Patsy the plumber has untaken two jobs for Contractor Ltd and has raised her sales invoice on 1 April 2021. Contractor Ltd is registered for both the construction industry scheme (CIS) and VAT. The sales invoice itemises the two jobs:

  • work carried out in a hotel bathroom for Contractor’s client - Hotel Ltd: £500

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Replies (18)

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7om
By Tom 7000
03rd Feb 2021 09:54

Except Clive is providing services to the developer ie the end user who will sell the house and so reverse charge doesnt apply, now if he had been supplying it to builder who was supplying to developer I agree.

But here we are lots or really really clever people and we are tripping up here... what chance does the subbie have who spent most of his education behind the bike sheds smoking.

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Replying to Tom 7000:
Ivor Windybottom
By Ivor Windybottom
03rd Feb 2021 10:06

I read it differently... I think that the article is saying Clive works for Contractor Ltd who supplies construction services to Developer Ltd.

Just shows how import being clear on who is the customer can be!

Fun and games await in the fiscal themepark....

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Replying to Ivor Windybottom:
By turchyna582
03rd Feb 2021 10:56

My experience is that developers (generally) are not the end users; as they still have to complete (develop) and then sell their end-product/service to their ultimate customer.
Therefore all suppliers of goods/services to Developers 'in the chain' to the ultimate Developer's customer who is the end-user, will apply the Reverse Charge procedure.

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By Moonbeam
03rd Feb 2021 11:25

Forgive me for asking, but aren't carpet fitters outside the CIS rules? Why then would the domestic reverse charge apply to them?

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Replying to Moonbeam:
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By rmillaree
03rd Feb 2021 12:32

Forgive me for asking, but aren't carpet fitters outside the CIS rules? Why then would the domestic reverse charge apply to them?

Exactly Moonbeam - i think the author of this report might be presuming we know more than we do here. Ie presumably your question is the same as mine - can something not within the scope of cis be within the scope of reverse charge ?

To be fair to the author if they are expert in vat and not cis they might not even realise carpet fitting is potentially a a specifically excluded "trade" presuming the facts meet the details of CISR14170.

One item i struggle to rememeber when i look at CISR14170 is whether the question is looked at from the point of view of what the subcontractor does - in which case its not part of a larger conttruction project if they are only fitting carpets (i suspect this is the correct way to llok at it) - or whether you are looking at the project being done which will likely be a "construction project" - i didnt think you look at it from that point of view but am not 100% certain of taht fact.
and CISR14170 doesnt really asnwer the question.
I simply default to the activities being engaged for that bit of specific work and that is only carpet fitting and nothing else so as you say not cis? and therefore why is it being mentioned in this article if its not a construction activity - i guess the vat rules
Ok i have looked at the technical flowchart and it appears if work is not cis reverse charge does not apply Q2

https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

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Replying to rmillaree:
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By rmillaree
03rd Feb 2021 13:03

all i can think of when i think of this reverse charge stuff is Dumb and Dumber - dumb people talkng to dumber people about dumb stuff - i think some of my clients think i must be on drugs when a start explaining you need to pay across vat you were never billed - but we need to know whether you would have been billed you vat if it was a different supply-and when i say you pay the vat across you dont really pay the vat across as you get a deduction to for the vat you werent billed to get you back to nothing - perhaps i need to amend my spiel.

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By AndrewV12
03rd Feb 2021 12:05

Reading the above, it appears we are disagreeing on a number of technical points.

One thing we can agree on is the Vat reverse charge for the construction industry is going to be a disaster, and individuals (inc some accountants) are going to interpret the rules as they see fit.

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Replying to AndrewV12:
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By Southwestbeancounter
04th Feb 2021 13:24

Agreed Andrew!

I was going to send the links to this article (and the one that preceded it) to some clients that it will affect but on second thoughts I think not as I will be the one facing the barrage of questions which will come back and I don't have a clue what the answers are - definitely not yet anyway!

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By AndrewV12
03rd Feb 2021 12:08

see above

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Morph
By kevinringer
03rd Feb 2021 12:57

The reverse charge is going to be a disaster. I'm now more confused after reading this article and the various responses. If we're confused, Joe the Plumber can't be expected to apply the rules correctly. It ain't going to happen. I have a question: if I have a query about the reverse charge and need to phone HMRC, do I phoned HMRC's VAT Helpline or CIS Helpline? There is no mention of who to contact in the guidance. I suspect the VAT people will tell me to phone CIS and vice versa.

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Replying to kevinringer:
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By rmillaree
03rd Feb 2021 13:10

if I have a query about the reverse charge and need to phone HMRC, do I phoned HMRC's VAT Helpline or CIS Helpline?
I suspect you may need to go back to basic principles as to what question you are asking.
Don't expect the vat helpline to confirm whether something is in cis or not - and don't expect the cis helpline to entertain any questions other than whether something is within cis or not.
You may need two calls if you first need to determine whether the service is within cis and then second one to see if reverse charge applies - call 1 to cis helpline and call2 to vat helpline.
Its easily possible my answer may be gibberish.

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Nichola Ross Martin
By Nichola Ross Martin
03rd Feb 2021 13:44

Carpet fitting is not within CIS.
HMRC's other guidance is challenging. Take scaffolding, for example https://www.gov.uk/hmrc-internal-manuals/vat-construction/vconst02750 says:
1 7. Goods on hire only
The hire of goods only is not within the scope of CIS and therefore the reverse charge does not apply to the hire charge.

What happens though then when you have hired your scaffold towers?
We know that scaffold is within CIS DRS, because it says so.

Compare this fact to VAT Notice 708
3.4.2 Goods on hire
Goods hired on their own are always standard-rated. Examples include the hire of:
plant and machinery (although plant hired with an operator can be zero-rated where all the conditions in paragraph 3.1.2 are met)
scaffolding, formwork or false work (although the service of erecting or dismantling can be zero-rated where all the conditions in paragraph 3.1.2 are met)...

This though seems to ignore the GT Scaffold decision where the whole service of scaffold hire was zero rated, see https://www.gov.uk/hmrc-internal-manuals/vat-construction/vconst02750

I don't think that the VAT helpline will help with these things.

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Replying to Nichola Ross Martin:
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By rmillaree
03rd Feb 2021 17:14

"I don't think that the VAT helpline will help with these things."

The vat helpline should most definately help with any vat related guidance.

The flowchart linked earlier (copied again below)seems to set the order that items need to be looked at reasonably clearly.

https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

point 1
so looking at your example you work out whether its within cis or not by referrring to cis guidance. If "erection is included" its in cis.

point 2
Then work out if the supply is standard rated or not - the vat office should be able advised along the same lines they always have in that regard and as per the info you have posted a decision may be needed.

point 3
Then if it known to be within cis and known to be not zero rated then you need to decide whether reverse charge applies - at which time the vat office can again help ref that query.
If its either non cis or zero rated it can't be reverse charge according to the flowchart.

so part 1 cis helpline and parts 2 and 3 vat helpline -why would the vat helpline not help with points 2 and 3?

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Replying to Nichola Ross Martin:
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By rmillaree
03rd Feb 2021 17:14

"I don't think that the VAT helpline will help with these things."

The vat helpline should most definately help with any vat related guidance.

The flowchart linked earlier (copied again below)seems to set the order that items need to be looked at reasonably clearly.

https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

point 1
so looking at your example you work out whether its within cis or not by referrring to cis guidance. If "erection is included" its in cis.

point 2
Then work out if the supply is standard rated or not - the vat office should be able advised along the same lines they always have in that regard and as per the info you have posted a decision may be needed.

point 3
Then if it known to be within cis and known to be not zero rated then you need to decide whether reverse charge applies - at which time the vat office can again help ref that query.
If its either non cis or zero rated it can't be reverse charge according to the flowchart.

so part 1 cis helpline and parts 2 and 3 vat helpline -why would the vat helpline not help with points 2 and 3?

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By North East Accountant
03rd Feb 2021 17:24

The lunatics have taken over the asylum.... this DRC is crazy.

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Replying to North East Accountant:
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By Southwestbeancounter
04th Feb 2021 13:28

Agreed!

As it we haven't had enough *%*% to deal with this last year or so!!

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By CJaneH
05th Feb 2021 13:27

If the independent VAT consultant does not understand it, so the comments say, and accountants in practice disagree how the hell is any trader suppose to get it right!

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Replying to CJaneH:
Morph
By kevinringer
05th Feb 2021 14:04

They're not. It's going to lead to mass non-compliance.

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