A&M Tax Advisor Update
DRC – what types of supplies are covered?
To decide if the services you supply and/or receive fall within the scope of the DRC, you will firstly need to consider if these are construction services or whether they are specifically excepted, and secondly, if they are supplied in their own right or as part of a wider supply of construction services. Once this has been determined, you can then apply the correct invoicing and VAT accounting position, subject to whether you are an end user or intermediary (see the link to our previous article on this below).
What are construction operations falling within the DRC?
Activities regarded as construction operations within the DRC fall within the following categories:
A. Construction works carried out on permanent or temporary buildings and structures – these typically fall within the following 6 areas:
Construction – a wide ranging term that covers building, making, putting together and includes the assembly of prefabricated units and site facilities. Buildings and structures include, for example, storage tanks, silos, pylons, cranes or derricks, pumps, and installations (such as rigs, pipelines, construction platforms) maintained or intended to be established for underwater exploration for, or exploitation of, minerals where the work is on land or in the U.K. territorial waters (up to the 12-mile limit). Construction activity also includes provision of temporary and permanent roadways and other access works such as drives.
Alterations – this covers works that involve making a building or structure different in some way and such alteration works can be major or simply minor adjustments or modifications. For example, altering the fabric of a building to accommodate an item of plant or machinery, lifts, hoists, heavy-duty conveyors, or a building service system; removal of asbestos; installing partitioning or shop fittings to allow the building to be used in a different way.
Repairs – includes works involving ‘making good’ and replacement of defective or damaged parts of a building or structure. Repairs also include repair of a building or structure which is necessary following a repair to any systems in the building or structure (even though a repair to the system itself is not a construction operation). Also included is the construction, repair and resurfacing of roads and bridges (including white-lining), construction and repair of industrial plant, and the installation of and repair to glazing, doors and rolling grills or security shutters, kitchens and bathrooms, shop-fittings including fixed furniture (except seating and freestanding display cabinets).
Extensions – extension works fall within the DRC, essentially involving adding to or enlarging an existing building or structure.
Demolition – this means works involving pulling down a building or structure.
Dismantling – this involves works of taking a building or structure apart (normally where the materials are expected to be used again) including any dismantling of associated scaffolding. A part of a building may be destroyed or dismantled before it is refurbished or its use is changed, so this type of work will often involve an alteration to a building or structure; totally destroying a building or structure, rebuilding a building or structure; or altering a building or structure (the resulting building or structure may be permanent or temporary).
B. Construction works that do not involve buildings or structures but are works forming (or to form) part of the land.
This includes, for example, minor works, such as a wooden fence with concrete posts; major works like roads, railways, bridges, harbours and power lines; industrial plant e.g. petrochemical plant, a silo, tank or water treatment plant. As plant located in a building does not form part of the land, it will not fall within the DRC under this category. But, if the installation of plant requires that the building be altered to accommodate or remove the plant, this will still be a construction operation for the purpose of the DRC. Alteration, repair, extension, and demolition of works forming part of the land are also construction operations, as well as plant hire with an operator for use on site.
C. Other works which are construction operations for the DRC include:
Installation – this includes installation of complete ‘systems’ (i.e. something made up of connected parts to perform a particular function such as heating, lighting, air-conditioning), rather than parts of a system. Complete systems are usually installed in new builds or existing buildings and structures under redevelopment. Included is installation of power lines, pipelines, gas mains, sewers, water supply and drainage, ventilation, cable television and telecoms distribution systems, closed-circuit television for purposes other than security (such as traffic management) and public services. Also included is installation of fire protection systems designed specifically to protect the fabric of the building (e.g. sprinkler systems, fireproof cladding) rather than a fire alarm system, prefabricated components or equipment under ‘supply and fix’ arrangements and installation of lifts, plant, or machinery required by the specification of a building being constructed or altered. Installation, structural repair and painting of lamp standards, traffic lights, parking meters and street furniture are also included.
Internal & external cleaning – includes internal cleaning of buildings and structures performed when the contract for construction, alteration, extension, repair or restoration is underway. But external cleaning or routine cleaning of existing commercial or industrial premises that are not undergoing any type of construction operation are excluded unless the cleaning is preparatory to painting and decorating.
Painting & Decorating – painting and decorating of the internal or external surfaces of any building or structure is regarded as a construction operation for the purpose of the DRC.
Integral works – works that need to be carried out for construction operations to be completed. For example, if a subcontractor provides the labour of scaffolders to a contractor, the work of the scaffolders falls within the DRC when the assembly of scaffolding is preparatory or integral to construction operations taking place (i.e. where the other construction operations are not possible without it).
Site preparation/preparatory works – This covers works that are needed for the construction operations to commence, such as site-clearance, tree felling, earth-moving on site, excavation, laying of foundations, tunnelling, boring and construction of site facilities (e.g. site huts, portable buildings and site hoardings). Another example is clearing a site or draining land in a flood plain prior to building houses, or asbestos removal. Although transport of materials on site is a construction activity, the delivery of materials and transport of spoil from site are specifically excluded.
Finishing operations – this includes work that ‘renders complete’ or ‘finishes off’ construction operations. Although not construction operations in their own right, they are considered part of the overall construction work if part of the contract as a whole. For example, internal fixtures and fittings within the design specifications of a commercial building; fitting of pigeon mesh or TV aerials; tree planting, site restoration and landscaping as part of a new housing development. Carpet fitting (although no other floor covering) is specifically excepted and excluded from the DRC (although if carpet fitting is part of a mixed contract, then all the contract falls within the DRC).
What services fall outside of the DRC?
The following activities are not construction operations and are specifically excluded from the DRC when supplied on their own. But if a contract includes both construction operations and operations that are not construction operations, all payments for both types of work will fall within the DRC (subject to the 5% limit).
Drilling or extraction of minerals or natural resources – i.e. work connected with actual, physical drilling, extraction of such, or pumping for oil and gas; digging for and removal of coal and other minerals from underground deposits; associated surface workings e.g. open cast mine quarrying; tunnelling, boring and shoring up tunnels in mines; installing rail, conveyor and other systems. But, if tunnelling relates to construction of a mainline railway, this would then be an integral part of the construction work forming part of the land.
Manufacture of building or engineering components and delivery to site – the manufacture or delivery to site of components, equipment, material, plant machinery (e.g. traditional building materials, prefabricated beams and panels, ready-mixed concrete/road-making materials) does not qualify as a construction operation, building or engineering. Also excluded are manufacture and delivery of glazing materials, computer and instrumentation systems, thermal insulation materials, heating and ventilation systems, doors, rolling grills, painting or decorating materials, and offsite manufacture and delivery of flooring materials.
Manufacture, delivery, repair, servicing or maintenance of components for systems – e.g. heating, lighting, air-conditioning, ventilation, power or water supply and distribution, drainage, sanitation, fire protection works, lifts, plant or machinery needed by the specification of a building under construction or alteration. The manufacture and installation of solar, blackout or anti-shatter film is also excluded.
Hire of scaffolding equipment (without labour)
Assembly of temporary stages and exhibition stands – including lighting. Also excluded is setting out traffic cones etc.
Delivery, repair or maintenance of construction plant or hire equipment without an operator – e.g. concrete mixers, pumps and skips; or stairlifts requiring no alteration or repair to the building.
Transport of materials from site to site on the public highway
External cleaning – (other than painting or decorating) of buildings and structures. The manufacture, delivery and routine maintenance (e.g. cleaning and general replacement) of lamp standards is also excluded.
Replacement of system parts – (e.g. taps or a radiator) which does not involve other construction operations. Similarly, the installation or replacement of telecommunication or computer wiring through pre-existing ducting in buildings is excluded.
Professional work – work carried out by architects, surveyors and consultants as part of their normal professional discipline, whether on or off site, is not a construction operation, except where a professional goes beyond their professional discipline to take on the role of developer or main contractor in addition to providing professional services. The work of other professionals (e.g. engineers, draughtsmen) is excluded if they act purely as consultants (producing designs, plans, technical assessments and reports relating to construction projects including site testing etc). For example, tree planting and felling in the ordinary course of forestry or estate management is excluded. But, if the work extends beyond a consultancy/advisory role and involves the supervision of labour or the co-ordination of construction work using that labour, this will fall within the DRC.
Artistic works – wholly artistic works are not construction operations, unless the works fulfil a normal functional purpose associated with a building. For example, a statue, even if commissioned with a new building, has no function except than to be enjoyed as an artistic work, so its manufacture and installation (and associated repair) would not be regarded as a construction operation. However, the construction and installation of a stained glass window with incidental artistic merit, but which lets in light and is a decorative version of a common feature of a building, would be regarded as a construction operation.
Signwriting and signboards – work related to installation and repair of signboards and advertising boards is specifically excluded. The exclusion does not extend to traffic signs or street furniture.
Seating blinds & shutters – the manufacture, delivery and installation of such in theatres, sports stadiums and other locations (e.g louvered shutters, venetian blinds, other similar internal blinds, and curtain fittings). However, awnings are not excluded.
Security systems – installation of security systems dedicated to security only (e.g. burglar alarms, fire alarms, closed circuit television, public address systems, computer controlled centralised locking system with programmable key cards). Preparatory works on the land such as digging, building/erecting concrete posts on which to install the closed-circuit television (CCTV) do fall within DRC. The installation must be a system and not simply a building feature that incidentally fulfils a security purpose. Therefore, as doors equipped with locks or fencing to deter intruders are traditional features of buildings and do not represent a security system, they would not be excluded from the DRC.
Certain construction site activities – the running of site facilities such as canteens, hostels, medical or safety services, security services and other site facilities (e.g. offices and toilets).
When deciding if the DRC applies, it is not only the type of work that needs to be considered, but the context in which it is being provided (i.e. whether being provided in its own right or as part of the overall delivery of a construction project/wider construction operations). Therefore, works will sometimes be covered by the DRC and sometimes will not depending on the situation and a case by case approach will need to be taken.
For example, a supply of drilling/tunnelling of natural resources will fall within the DRC if part of a wider supply of construction services, but will fall within the normal VAT rules if supplied on a standalone basis as is specifically excepted from the DRC.
If both construction and non-construction works are provided under a single (i.e. mixed) contract, then all payments due under the contract will fall within the DRC, even if shown on separate invoices. This is provided the DRC services are more than 5% of the total supplies being made.
Businesses based outside of the U.K. who perform construction work within the U.K. will also fall within the DRC and will need to VAT register accordingly where required.
Since the introduction of the DRC, many of our clients have already experienced practical day to day challenges in cases where their suppliers have misinterpreted the rules and where subsequent credit notes have needed to be issued to correct the initial invoicing position. For example, where suppliers have incorrectly assumed end user status of the recipient and have therefore issued invoices with VAT under the normal rules, rather than invoicing as a DRC supply. In addition to the invoicing and VAT accounting corrections required, these errors have in some cases, resulted in significant VAT cash flow issues for the parties involved.
The position can be complex, and as the DRC will affect both suppliers and customers, it is important to get the VAT accounting correct. If you have any questions regarding your own situation, please contact us or your usual A&M VAT adviser.