We outlined the domestic reverse charge (DRC) conditions on 11 June 2020 and updated this on 7 January 2021, but new conditions and exemptions have been clarified since June of last year.
The 5% disregard rule applies where the invoice includes both work subject to the DRC and items which are not subject to the DRC. If the DRC work does not exceed 5% of the total invoice value the whole invoice can be treated as being outside of DRC and VAT at the relevant rates should be applied to the entire invoice.
Remember the DRC never applies to zero-rated work.
The 5% exemption could apply where a subcontractor is undertaking a range of tasks on new homes. The cost of labour will be zero-rated (not within DRC) as it is a supply of building work on new homes, but the supply of materials such as carpets, will be standard rated (within DRC).
If the labour is more than 5% of the total invoice value the whole invoice is outside of DRC. This applies even if the labour and materials are charged as one item as “supply and fit”, see section 16 of the DRC technical guidance.
The following construction related services which are always excluded from DRC:
- goods supplied on hire without labour
- professional fees such as from surveyors and architects
- employment businesses supplying staff
The last point is one to watch out for, as employment agencies should apply VAT to their invoices of labour to building firms.Written by the Tax Advice Network