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HM Revenue and Customs Brief 1/16 - domestic reverse charge telecommunications services


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domestic reverse charge for businesses wholesaling telecommunications services


The government has laid legislation, in the form of a statutory instrument, to introduce a reverse charge accounting mechanism (domestic reverse charge) for wholesale supplies of telecommunications services in the UK. This is in response to the threat of missing trader intra-community fraud in those supplies.

The purpose of this brief is to provide guidance on how the domestic reverse charge will operate. It should be read in conjunction with VAT Notice 735: VAT domestic reverse charge on specified goods and services.

2. Who should read this brief

Businesses that buy or sell wholesale telecommunications services in the UK, including:

  • airtime carriers
  • network operators
  • message hubbing providers
  • short messaging service (SMS) and voice aggregators

3. Background

A domestic reverse charge means the customer receiving the wholesale supply of telecommunications services must account for the VAT due rather than the supplier. In turn the customer deducts the VAT due on the supply as an input, meaning no net tax is payable to HM Revenue and Customs (HMRC). This removes the scope to evade any VAT owing to HMRC.

The UK has introduced similar measures, in response to criminal threats, for mobile telephones, computer chips, emissions allowances, gas and electricity.

4. Timing and scope of implementation

4.1 Timing

The reverse charge will take effect from 1 February 2016 and will apply to the wholesale buying and selling of telecommunications services in the UK, subject to certain exceptions.

HMRC recognises this timetable may be challenging for some businesses. It will be adopting a ‘light touch’ approach regarding penalties to help those who are making reasonable efforts to comply but may not be able to do so in time - see paragraph 5.6.

4.2 Scope

4.2.1 What is covered by the reverse charge

Subject to certain exceptions, the domestic reverse charge will apply to all wholesale supplies of telecommunications services between counterparties established in the UK. This will typically mean transmission or carriage services of airtime and telephony related data.

The reverse charge will cover telecommunications services which enable:

  • speech communication instantly or with only a negligible delay between the transmission and the receipt of signal
  • the transmission of writing, images and sounds or information of any nature when provided in connection with services described above

Examples of services covered by the reverse charge include:

  • wholesale switched voice services, including switched voice over internet protocol (VOIP) services
  • wholesale SMS and multimedia messaging service (MMS) services (eg push messages)
  • wholesale “Over The Top” telecommunications messages
  • SMS hubbing
  • SMS and voice aggregator services

The above list is not exhaustive.

4.2.2 What is meant by ‘wholesale supplies’

In terms of the reverse charge wholesale supplies takes its normal meaning of being business to business supplies where the intention is to sell on the supply with no or negligible consumption of the supply by the businesses concerned.

For telecommunications services it means supplies between carriers of these services (in the UK), or supplies of these services to network operators for onward supply to the consumer or user of the underlying service.

4.3 Exclusions

The domestic reverse charge will not apply in the following circumstances:

  • non-wholesale supplies
  • transport/capacity and related access services (i.e. wholesale line rental, lease lines)
  • Indefeasible Right of Use charges (IRUs)
  • broadband and other data transmission only services
  • supplies for final consumption
  • supplies to a member of a corporate group for onward supply within that corporate group, and where the corporate group members consume that supply
  • the return of unused minutes that were not originally subject to the reverse charge
  • supplies where section 8 of the VAT Act 1994 (reverse charge on supplies received from abroad) applies
  • supplies where Schedule 10A of the VAT Act 1994 (face value vouchers) applies
  • businesses not registered or liable to be registered for VAT

4.4 Incidental or bundled supplies

There may be supplies which contain a mixture of reverse charge and non-reverse charge supplies, for example supplies to mobile virtual network operators (MVNOs), and it’s impossible or impractical to separate out the element subject to the reverse charge. In these cases it’s acceptable for the reverse charge to apply to the whole supply.

5. The domestic reverse charge mechanism

5.1 How does the domestic reverse charge mechanism work?

Under the domestic reverse charge, it’s the responsibility of the customer, rather than the supplier, to account to HMRC for VAT on supplies of telecommunications services. It will only apply to business to business transactions in the UK where those businesses are registered or liable to be registered for VAT.

This is the same as the mobile phone, computer chip, emissions allowances, gas and electricity domestic reverse charges.

5.2 The de minimis rule and Reverse Charge Sales List

As is the case with the emissions allowances, gas and electricity domestic reverse charges:

  • there is no ‘de minimis’ rule excluding supplies under £5,000 so the domestic reverse charge applies to all supplies of electronic communications services, except where those supplies are specifically excluded
  • businesses are not required to complete a Reverse Charge Sales List

5.3 Completion of the VAT Return

5.3.1 Suppliers

Suppliers of goods or services under the domestic reverse charge must not enter any output tax on sales to which the domestic reverse charge applies in box 1 of the VAT Return. The value of such sales must be entered in box 6.

5.3.2 Customers

Customers must enter the output tax on purchases to which the domestic reverse charge applies in box 1 of the VAT Return. The value of such purchases must not be entered in box 6.

They must reclaim the input tax on their domestic reverse charge purchases in box 4 of the VAT Return and include the value of the purchases in box 7, in the normal way.

5.4 Invoicing

When making a supply to which the domestic reverse charge applies, suppliers must:

  • show all the information normally required to be shown on a VAT invoice
  • make a note on the invoice to make clear that the domestic reverse charge applies and the customer is required to account for the VAT

The amount of VAT due under the domestic reverse charge should be clearly stated on the invoice but shouldn’t be included in the amount shown as total VAT charged.

If you produce invoices using an IT system, and the system can’t show the amount to be accounted for, you should read section 7.5.1 of VAT Notice 735.

Under EC law and the VAT Regulations 1995, invoices for domestic reverse charge supplies, when the customer is liable for the VAT, must include the reference ‘reverse charge’. The following examples fulfill the legal requirement:

  • Reverse charge: VAT Act 1994 Section 55A applies
  • Reverse charge: S55A VATA 94 applies
  • Reverse charge: Customer to pay the VAT to HMRC

5.5 Tax points

The provision of a telephonic service is a continuous supply of services. The tax points are therefore the issue of a VAT invoice or the receipt of payment, whichever is earlier (Regulation 90 of the VAT Regulations 1995). Additionally, in certain circumstances, where there is a delay beyond one year in issuing a VAT invoice or receiving payment, an annual tax point will apply (Regulation 94B(5) of the VAT Regulations 1995).

5.6 Penalties

HMRC understands the difficulties businesses may have in implementing the domestic reverse charge and will apply a light touch in dealing with errors that occur in the first 6 months after introduction.

5.7 Further guidance on the application of the domestic reverse charge

Detailed guidance on the other domestic reverse charges can be found in VAT Notice 735: VAT domestic reverse charge on specified goods and services. This will be updated in due course to include guidance for telecommunications services.

6. Current law and draft legislation

6.1.1 Current law

Section 1(2) of the VAT Act 1994 makes the supplier liable for any VAT in supplies of goods or services.

Section 55A of VAT Act 1994 provides that the recipient of a supply must account for the VAT due on supplies of a kind specified in an order made by the Treasury.

EU legislation in Article 199a of Directive 2006/112/EC allows member states to provide for a domestic reverse charge for supplies of telecommunications services as defined in Article 24(2) of the Directive.

6.1.2 Draft legislation

A statutory instrument will bring the relevant changes into effect:

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© Crown Copyright 2016.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.

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Article Published/Sorted/Amended on Scopulus 2016-02-22 17:10:46 in Tax Articles

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