Exclusions – when does the DRC not apply?
If the reverse charge services are less than 5% of the total value of the contract, this can be disregarded (known as the ‘5% disregard’) and normal VAT rules will apply. Normal VAT rules also continue to apply for the provision of construction staff by employment businesses, even though such supplies fall under the CIS regime mentioned above.
End users and intermediary suppliers
If services and related goods are supplied to business customers who are ‘end users’ and who have notified that status to the supplier, DRC doesn’t apply and these are subject to the normal VAT accounting rules. An ‘end user’ is an entity that uses construction services for any purpose other than making further supplies of construction services. Generally, these are landowners and occupiers of property. For example, a charity commissioning building work for its own property.
There’s also an exception if construction services are supplied to a person who is connected to an end user – an ‘intermediary supplier’ who has notified that status to the contractor. This includes in-house design and build companies, and connections through a landlord and tenant relationship. Therefore, this exception limits the impact of DRC on housing associations and charities with rental portfolios.
Suppliers can consequently assume that if they don’t receive a notification from a customer who meets the other conditions, the reverse charge will apply.