CW Energy LLP

VAT Domestic Reverse Charge on sales of gas in the UK

From 1st July 2014, VAT on sales of gas supplied though a natural gas system in the UK to a UK VAT registered buyer will no longer be charged by the seller but will instead be accounted for by the buyer making a domestic reverse charge (DRC) for the value of the gas supplied.

The reason for this change is to counter possible MTIC fraud whereby there was the risk of the seller not passing over VAT collected to HMRC.

Whilst there are exceptions for certain sellers such as directed utilities, sales to UK buyers by the majority of independent gas producers will be affected.

The DRC will apply to all wholesale supplies of gas and electricity between counterparties established in the UK including balancing mechanism imbalance settlement charges, and other gas balancing or gas reconciliation charges. Sales where the buyer does not resell the gas or electricity are not affected as are sales which are zero rated.

Supplies unaffected by the DRC mostly relate to charges such as system charges for capacity, distribution and transmission, or virtual trades.

The main effect of the provisions is that the seller will no longer charge VAT to the buyer and will not show the VAT component of the supply on its invoices. Instead the buyer will account for input and output tax on its VAT returns.

According to HMRC, 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.

A typical wording might be “Customer to account to HMRC for the reverse charge output tax on the VAT exclusive price of items marked reverse charge”.

Where there is a self-billing arrangement in place it will be the responsibility of the buyer to apply the revised accounting procedure, and to account for the VAT on the supply.

Given the short timescale in which these provisions have been introduced HMRC have said that they will apply a light touch in dealing with errors that occur in the first six months after introduction, where there is no loss of tax.

CW Energy LLP

18th June 2014