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
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.
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
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.
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
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
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
- 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,
- businesses not registered and not liable to be registered
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
- balancing and settlement code charges (Elexon market
- Levy Exemption Certificates and/or Renewable Obligation
Certificates traded separately from the underlying electricity
- fees for exchange related settlement for example N2Ex
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
- 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
When making a supply to which the domestic reverse charge
applies, suppliers must:
- show all the information normally required for a VAT
- annotate the invoice to make clear that the domestic
reverse charge applies and that the customer is required to account for
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
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
- 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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Article Published/Sorted/Amended on Scopulus 2014-06-03 12:54:02 in Tax Articles