Domestic Reverse Charge and pending VAT registrations

VAT Question

A question that has been raised with me on several occasions’ is: Should the domestic reverse charge rules be applied for subcontractor construction businesses that are waiting to have a VAT registration approved by HMRC? Meaning that once the registration is approved, will the customer still be required to account for VAT under the reverse charge rules?

VAT Answer

The difficulty in providing a definite answer to this question is that HMRC does not provide any specific guidance that covers this scenario.

It is my view that the domestic reverse charge cannot be applied until the VAT registration is approved. Therefore, if a business is required to account for VAT on services provided whilst waiting for the VAT application to be processed, this should be done under the normal VAT rules and not under domestic reverse charge rules once the registration is approved.

There are three primary reasons for this:

  • HMRC policy and guidance talk about using the reverse charge if you’re registered for VAT. To take a very little interpretation of this, this would mean if your VAT registration is not approved at the time you supply your service, you are not VAT registered, and therefore the reverse charge does not apply. HMRC normally refers to being “required to be registered” if it is necessary to take that into consideration. As this is not mentioned in the reverse charge guidance, this suggests that it does not need to be considered when applying the reverse charge rules.
  • If an application were to take some time to be approved and, in the meantime, the contractor ceases to trade and perhaps dissolves, this would leave no entity with the responsibility to account for the VAT. This would create a risk that VAT would not get accounted for, which is the very issue the domestic reverse charge was designed to prevent.
  • If applications take some time to be approved, this would almost be unfair to contractors who are potentially at the mercy of HMRC or their suppliers in having to account for services supplied under reverse charge that they perhaps had no prior knowledge of or indication that reverse charge would apply to. It is possible that if the supplier does not inform the customer of their pending registration, the customer could easily conclude that the supplier was not required to be VAT registered, perhaps because they are under the threshold for VAT and therefore that the reverse charge does not apply.

We are yet to know precisely what HMRC’s approach to this issue will be and are unlikely to know until such time as HMRC provides clarification in their guidance.

Whilst it is my view that reverse charging should not apply to services supplied whilst a VAT registration is pending, this is only an opinion based on the reasons set out above. It is possible HMRC may have a different view on the matter, and therefore it may be worthwhile seeking a non-statutory clearance on this from HMRC. Whether or not a response to the non-statutory clearance would be received before the VAT application is approved is another question entirely!

Neil Maddison, VAT Consultant

Related VAT Questions

Train Hire for the Purpose of Providing Santa Specials

My client is a historic railway. In previous years they have sold Santa Specials; however, this year a third-party company will organise and sell the Santa Specials to the end customers. My client

Evidence of Zero-Rate Building Services Regarding New Dwelling

My client is a DIY housebuilder and has engaged the services of a building contractor to build the house for them. The contractor is insisting that, in order for him to zero-rate his supplies to my

VAT on Baby Clothes

My client, who sells baby gifts and accessories, has just registered for VAT. Are these zero-rated supplies like children’s clothing? Items sold include baby sized towels, muslin cloths, blankets

Payroll for UK employees going to work overseas and offshore remote workers

We are frequently asked to advise on the Income Tax and National Insurance treatment of UK employees who are being sent to work overseas, and employees who will work remotely from an offshore locat

Supply and Installation of Window Blinds

My client supplies blinds for windows and back in 2021, supplied and installed some blinds to houses at a new housing development before the houses were complete.

What if the Supplier has Charged UK VAT

Do I need to reverse charge VAT for any supply of services ((i.e., software from Apple, Microsoft, Adobe etc…) with no valid vat receipt (no GB vat number). Is any supply of services (i.e.

Vantage Fee Protect Customer Testimonials

Having changed over to Vantage a couple of years ago we have been very satisfied with the service. Especially the claims handling and technical advice lines for both our firm and insured clients on employment and business legal matters. The webshop Vantage offer allows our clients to join and pay electronically. This positively impacts our bottom line and makes things simple and efficient for our clients.

Linda Giles Chartered Accountant

Real people, real results

Vantage Fee Protect provide market leading Tax Fee Protection
Insurance schemes through accountants.

Don’t be shy,
get in touch

Vantage Fee Protect provide market leading Tax Fee Protection
Insurance schemes through accountants.

"*" indicates required fields

This field is for validation purposes and should be left unchanged.