VATREVCON43000 - Compliance issues: Checks on traders who receive specified services

Where the supplier has wrongly charged VAT on supplies within scope of the construction reverse charge, and input tax has been claimed by the customer, an assessment will have to be raised. From a technical point of view, the assessment should be classed as an output tax assessment because the customer will still have received a taxable supply so will retain a right to deduct VAT in relation to that supply. The customer will need to seek recovery from their supplier of the VAT wrongly paid to them.

Where no VAT has been charged on supplies in scope of the construction reverse charge, but the customer has simply failed to account for the reverse charge VAT, there is no assessment to be raised because no VAT is due to HMRC, as the output tax due equals the input tax claimable for the specific prescribed accounting period, provided the customer has not claimed input tax on the supply. The only exceptions to this would be:

  • if input tax recovery is restricted (such as in the case of partially exempt businesses)
  • if it can be established that the customer knew or should have known of a connection to a fraudulent tax loss (i.e. a fraudulent defaulter further up the supply chain), in which case it may be possible to deny their right to input tax recovery. In this case follow the procedures set out in VATF80000.

If there are errors in the same prescribed accounting period which result in an amount of VAT due to HMRC, an assessment should be raised (subject to time limits). The reverse charge input and output tax errors should also be included in the assessment.


Reverse charge output tax errors

If the only error is the reverse charge output tax you should consider raising an assessment for tax misdeclared, with penalties and interest if appropriate, under the normal procedures. Reverse charge output tax due but not declared should be assessed together with any allowance for input tax entitlement not deducted.

Where the error also includes input tax you should read VATF42000.


End users

If a customer has incorrectly declared that they are an end user because they didn't meet the criteria, they are responsible and should be assessed for the output tax. The supplier will then have a right to recovery of any output tax overdeclared as a result of that incorrect declaration, subject to normal error correction rules.

Where a customer has been treated as an end user, they should have supplied notification in writing to the supplier that they are an end user. This notification can take many forms and can include a generic clause in the terms and conditions of the supplier; some form of written understanding that the customer is an end user.

If a trader who has been treated as an end user is not able to produce a copy of the end user notification they supplied to their supplier (which may be in the form of agreeing to a generic clause in a contract), you may wish to consider raising an internal referral to check that the corresponding output tax was paid. Where a trader who was eligible for end user status is unable to show that they notified their end user status, AND there has been a proven tax loss (output tax not paid by the supplier), an assessment should be considered for the output tax they should have accounted for under the reverse charge. If the trader is able to prove that they notified their end user status (and they had the right to do so), then the reverse charge has been correctly disapplied.


5% disregard

The 5% disregard as set out in VATREVCON25000 may take supplies out of the reverse charge; while this will have been by mutual agreement, there is no prescriptive form that this agreement might take. If the 5% disregard has been applied where the reverse charge element of the supply is legitimately less than 5% as set out in VATREVCON25000, and the invoice has been paid without dispute, this should be satisfactory from a compliance perspective.