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HM Revenue and Customs Brief 23/14 - Wholesale Gas and Electricity

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Issued 29 May 2014.

VAT: introduction of a domestic reverse charge for businesses wholesale trading in gas and electricity

1. Introduction

In this year’s Budget the government announced its plans to introduce a reverse charge accounting mechanism (domestic reverse charge) for wholesale supplies of gas and electricity within the UK. This is in response to the threat of missing trader intra-Community (MTIC) fraud in those supplies.

This brief announces the implementation date and publishes the associated draft legislation and guidance on how the domestic reverse charge for wholesale trading in gas and electricity will operate.

2. Who needs to read this?

Businesses registered or liable to be registered for VAT that buy or sell wholesale gas and electricity in the UK.

3. Background

A domestic reverse charge means the customer receiving wholesale supplies of gas or electricity must account for the VAT due on these supplies on their VAT return rather than the supplier. The customer can deduct the VAT due on the supplies as input tax, meaning no net tax is payable to HM Revenue & Customs (HMRC), subject to the normal rules for reclaiming VAT. This removes the scope for fraudsters to steal the VAT due to HMRC and follows similar measures introduced in response to criminal threats for mobile telephones, computer chips and emissions allowances.

4. Timing and scope of implementation

4.1 Timing

The domestic reverse charge will apply to all affected supplies with effect from 1 July 2014. This means that supplies with a tax point on or after that date will be affected by the change.

HMRC recognises this timetable may be challenging for some businesses and will be adopting a ‘light touch’ approach with regard to penalties to assist those who are making reasonable efforts to comply but may not be able to do so in time - see also paragraph 5.5.

4.2 Scope

Subject to certain exceptions, the domestic reverse charge will apply to all wholesale supplies of gas and electricity between counterparties established in the UK. This typically means wholesale supplies between UK counterparties under trading contracts (for example European Federation of Energy Traders contracts, Grid Trade Master Agreements and National Balancing Point contracts) and over the counter or spot contracts of:

  • gas where it is gas supplied through a natural gas system situated within the territory of a member state or any network connected to such a system, or
  • electricity

The domestic reverse charge will not apply to supplies of gas and electricity made under supply licence or metered arrangements to domestic and business premises (supplies for consumption). VAT registered businesses that do not resell or trade the gas or electricity will not be affected.

Examples of specific supplies or charges covered by the reverse charge are:

  • balancing mechanism imbalance settlement charges, and other gas balancing or gas reconciliation charges
  • electricity supplies under power purchase agreements (including Levy Exemption Certificates and/or Renewable Obligation Certificates to the extent these are under contract with the electricity even if invoiced separately)
  • services supplied under a wholesale/trading contract that are ancillary to the supply of gas or electricity
  • supplies to power stations and Combined Heating and Power plants will only be included in the domestic reverse charge where they are made by way of trading rather than for consumption only

4.3 Exclusions

The domestic reverse charge will not apply to:

  • supplies made by an accredited feed in installation
  • supplies currently zero-rated e.g. trades on terminal markets
  • supplies to third party intermediaries & directed utilities for consumption by the directed utility or onward supply by the directed utility to an end user for consumption
  • supplies that are contracted for separately from wholesale supplies of gas and electricity, for example transportation services, and
  • businesses not registered and not liable to be registered for VAT

Examples of specific supplies or charges unaffected by the domestic reverse charge:

  • distribution use of system charges
  • transmission network use of system charges
  • metering rental charges
  • data collection charges
  • balancing system use of system charges
  • interconnector capacity charges
  • gas storage charges
  • gas network system charges
  • payments made in respect of constraint contracts with National Grid
  • balancing and settlement code charges (Elexon market operator charges)
  • Levy Exemption Certificates and/or Renewable Obligation Certificates traded separately from the underlying electricity
  • fees for exchange related settlement for example N2Ex fees.

The above list is not exhaustive.

5. The domestic reverse charge mechanism

5.1 How will it work?

Under the domestic reverse charge, it is the responsibility of the customer, not the supplier, to account to HMRC for VAT on specified supplies of gas and electricity. As with the mobile telephone, computer chip and emissions allowances domestic reverse charge measures, it will only apply to business to business transactions in the UK where those businesses are registered or liable to be registered for VAT.

5.2 The de minimis rule and Reverse Charge Sales List

As is the case with the emissions allowances domestic reverse charge:

  • there is no de minimis rule excluding supplies under £5,000 so the domestic reverse charge applies to all supplies of gas and electricity, unless those supplies are specifically excluded, and
  • businesses will not be required to complete a Reverse Charge Sales List

5.3 The VAT return

Suppliers of goods under this domestic reverse charge must not enter in box 1 of the VAT return any output tax on sales to which the domestic reverse charge applies, but must enter the value of such sales in box 6.

Customers must enter in box 1 of the VAT return the output tax on purchases to which this domestic reverse charge applies, but must not enter the value of such purchases 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 for a VAT invoice
  • annotate the invoice to make clear that the domestic reverse charge applies and that the customer is required to account for the VAT

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

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 Penalties

HMRC understands the difficulties businesses may have in implementing the domestic reverse charge and will, where there is no loss of tax, apply a light touch in dealing with errors that occur in the first six months after introduction.

6. Current law and draft legislation

6.1 Current law

Section 1(2) of the VAT Act 1994 (VATA) makes the supplier liable for any VAT on supplies of goods or services.
Section 55A of VATA 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 certain supplies of gas and electricity.

6.2 Draft legislation

Statutory instruments will bring the relevant changes into effect:

  • the Value Added Tax (Section 55A) (Specified Goods and Excepted Supplies) Order 2014, which specifies the goods to which the reverse charge applies and the supplies which are excepted supplies for the purpose of section 55A (Annex A (PDF 31K))
  • the Value Added Tax (Amendment)(No 2) Regulations 2014, which amends Regulation 23A such that those who make supplies of gas and electricity to which the Value Added Tax (Section 55A) (Specified Goods and Excepted Supplies) Order 2014 applies, will not be required to make reverse charge sales statements (Annex B (PDF 18K))

7. Further information

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

Further information can be obtained from the HMRC website or by contacting the Helpline on telephone: 0845 010 9000.


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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 2014-06-03 12:54:02 in Tax Articles

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