20th May 2024Overseas landlords and the VAT Domestic Reverse Charge

The Domestic Reverse Charge (DRC) for VAT on construction services came into effect in the UK on March 1^st, 2021.

In this article, Mike Block, Director of VAT at HW Fisher, explains how the charge works, the implications for overseas landlords, and what they should do before starting construction work on their UK properties.

What is the VAT Domestic Reverse Charge?

The VAT DRC applies to most supplies of building and construction services. It applies to both standard and reduced rate VAT services for businesses that are registered for VAT in the UK, and report their payments for the supply within the Construction Industry Scheme.

Under the measure, supplies of construction services by a UK VAT registered business to another UK VAT registered business are not subject to VAT, however the recipient business must account for VAT at 20% using the reverse charge.

For example, if a sub-contractor charges a contractor £10,000 for the supply of construction services, the contractor will receive an invoice for £10,000 with no VAT added. The contractor must then pay £2,000 VAT to HMRC, but they can recover £2,000 as input VAT at the same time, so the overall impact is neutral.

How does the VAT DRC impact overseas landlords?

The domestic reverse charge does not apply if the recipient business is an “end user”.  End users are property owners or developers that are not going to supply on the construction services.

Overseas landlords that have work completed on their UK properties, such as a refurbishment, qualify as end users. As such, UK contractors should add VAT on their invoices issued to overseas landlords in the normal way.

An important reminder for overseas landlords completing refurbishments in the UK

A supplier should only charge VAT on construction services where it has been notified, in writing, that its customer is an end user. It is therefore recommended that any overseas landlord contemplating a refurbishment or requiring construction work to be carried out on its UK properties, notifies all relevant contractors of its end user status, in writing, prior to any work commencing.

The reason for this is that HMRC’s guidance states that where the customer has not provided confirmation of end user status, it is not to be treated as one and VAT must not be charged. However, our experience is that most contractors charge UK VAT without obtaining confirmation of end user status. HMRC can then disallow this VAT, as it has been incorrectly charged, and issue a penalty to the overseas landlord.

Once the penalty is issued, it can be difficult to recover the VAT from the supplier and the overseas landlord risks being left significantly out of pocket.

If you are an overseas landlord and would like to discuss your personal circumstances, please get in touch with Mike Block.