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