Policy paper

Revenue and Customs Brief 4 (2019): VAT - domestic reverse charge for businesses trading in renewable energy certificates

Published 13 June 2019

The government has introduced legislation, in the form of a statutory instrument, to introduce a reverse charge accounting mechanism (‘domestic reverse charge’) for supplies of gas and electricity certificates in the UK (‘renewable energy certificates’). This is in response to a serious and credible threat of missing trader intra-community fraud in those supplies.

The purpose of this brief is to provide guidance on how the domestic reverse charge will operate. It should be read with Notice 735: VAT domestic reverse charge on specified goods and services.

1. Who needs to read this

You should read this if you’re a business registered or liable to be registered for VAT that buys or sells renewable energy certificates.

2. Background

A domestic reverse charge means the UK customer receiving supplies of renewable energy certificates must account for the VAT due on these supplies on their VAT return rather than the UK supplier.

The customer can deduct the VAT due on the supplies as input tax, meaning no net tax is payable to HMRC, subject to the normal rules for reclaiming VAT. This removes the opportunity for fraudsters to steal the VAT due to HMRC and follows similar measures introduced in response to criminal threats for:

• mobile telephones
• computer chips
• emissions allowances
• gas and electricity
• telecommunication services

3. Timing and scope of implementation

3.1 Timing

The reverse charge will take effect from 14 June 2019 and will apply to the buying and selling of renewable energy certificates in the UK on and from that date.

HMRC understands that the new reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as businesses are trying to comply with the new legislation and have acted in good faith.

Any errors need be corrected as soon as possible, as the longer under declared or overcharged sums remain outstanding the more difficult it may be to correct or recover them.

HMRC officers may assess for errors during the light touch period. Penalties will only be considered if businesses are deliberately taking advantage of the measure by not accounting for it correctly.

3.2 Scope

3.2.1 What is covered by reverse charge

The domestic reverse charge will apply to all supplies of renewable energy certificates between VAT-registered businesses established in the UK.

3.2.2 What are ‘renewable energy certificates’

They are certificates that are issued to gas and electricity generators when they produce energy from renewable means. These certificates can also be bought and sold as a commodity attracting others into the market which creates an opportunity for fraud.

They are commonly called Guarantees of Origin (GoOs) and are also known as:

• Renewable Energy Certificates (RECS)
• Renewable Obligation Certificates (ROCS)
• Renewable Energy Guarantee of Origin (REGO)
• International Renewable Energy Certificates (I-RECS)

Although this list is not exhaustive.

3.3 Exclusions

Whilst VAT legislation allows for certain supplies to be ‘excepted’ from a reverse charge, there are no ‘excepted supplies’ specified in this reverse charge.

4. The domestic reverse charge mechanism

4.1 How does the domestic reverse charge mechanism work

Under the domestic reverse charge, it is the responsibility of the customer, rather than the supplier, to account to HMRC for VAT on supplies of renewable energy certificates. It will only apply to business to business transactions in the UK where those businesses are registered or liable to be registered for VAT. This is the same as the domestic reverse charge for:

• mobile phone
• computer chip
• emissions allowances
• gas and electricity
• telecommunications

4.2 The de minimis rule and Reverse Charge Sales List

As is the case with the emissions allowances, gas and electricity and telecommunications domestic reverse charges:

• there is no ‘de minimis’ rule excluding supplies under £5,000 so the domestic reverse charge applies to all supplies of renewable energy certificates
• businesses are not required to complete a Reverse Charge Sales List

4.3 Completing the VAT return

4.3.1 Suppliers

Suppliers of goods or services under the 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. Suppliers must enter the value of such sales in box 6.

4.3.2 Customers

Customers must fill in box 1 of the VAT return the output tax on purchases to which the domestic reverse charge applies. They 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.

4.4 Invoicing

When making a supply to which the domestic reverse charge applies, suppliers must:

• show all the information normally required to be shown on 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 should be clearly stated on the invoice but should not be included in the amount shown as total VAT charged.

If you use software to produce your invoices, and your system cannot show the amount of VAT to be accounted for under the reverse charge, then the wording should state that VAT is to be accounted for by your customer at the standard rate of VAT, based on the VAT-exclusive selling price for the reverse charge services.

Under EU 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

4.5 Place of supply

The place of supply for services is where a business is located. Renewable energy certificates bought or sold by a UK-based business that is registered or liable to be registered for VAT will be subject to UK VAT. This is the case even if those certificates are being traded outside the UK.

4.6 Penalties

HMRC understands that this immediate change may be challenging and the difficulties businesses may have in implementing the domestic reverse charge. It will apply a light touch in dealing with errors that occur in the first six months after introduction.

HMRC officers may assess for errors during the light touch period, but penalties will only be considered if businesses are deliberately taking advantage of the measure by not accounting for it correctly.

4.7 Further guidance on the application of the domestic reverse charge

Detailed guidance on the other domestic reverse charges can be found in Notice 735: VAT domestic reverse charge on specified goods and services.

5. Current law

Section 1(2) of the VAT Act 1994 (VATA) makes the supplier liable for any VAT in 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 199a1(f) of Directive 2006/112/EC allows member states to provide for a reverse charge for supplies of gas and electricity certificates.

A statutory instrument (2019/1015) brings the relevant changes into effect.

6. More information

For more information to contact the VAT helpline.