VATREVCON25000 - Scope of the construction reverse charge: Supplies where the reverse charge element is a minor part
Normally if any of the services in a supply are subject to the reverse charge, all other services and goods supplied will be subject to the reverse charge (). However, there may be situations where this would be disproportionate because the amount of specified services is very small.
To avoid the disproportionate impact a minor reverse charge element could have, if it is 5% or less of the whole supply value under a contract this can be disregarded (this is referred to as the 鈥�5% disregard鈥�). The 5% disregard is not compulsory; it should only be applied by mutual agreement.
The 5% disregard can be used where there is a single supply of construction services and only one minor element of the supply would fall under the reverse charge.
Where there is a single supply of services and one minor element would fall under the reverse charge, the effect of could be disregarded, if both parties agree, if the value is minor and insignificant, meaning 5% or less of the supply value.
However, this would not be an expected scenario so caution should be exercised / checks should be made to make sure the values are fair and reasonable.
The 5% disregard only applies where both the supplier and customer agree, from the start of the contract, that it should apply on the basis of the overall contract values (for example, the contracted value of reverse charge supplies being less than 5% of the total contract value). The 5% should not be calculated on an invoice by invoice basis.
The 5% disregard does not apply where there is a single supply and the predominant element is zero-rated, for example the construction of a new build block of flats with a small element of commercial premises. In this situation, the reverse charge procedure must be used for the standard-rated element.
A similar situation exists with the qualifying criteria for construction zero and reduced rates. To ensure that the relief is not lost due to minor non-qualifying use, a disregard of up to 5% is applied to non-qualifying use 鈥� see VCONST18600.
The 5% disregard is optional 鈥� the parties to a supply can choose not to apply it and instead to reverse charge the whole supply.
A similar provision can be applied to end users who re-supply a minor and insignificant amount of construction services (see VATREVCON33200).