VAT - Reverse Charge on Construction Services

New rules for Principal Contractors and Sub-contractors from 1st September 2008

The 2008 Finance Act amended the 1972 VAT Act to introduce a new system of reverse charge for VAT on services provided by subcontractors to principal contractors in the constuction industry.

From 1 September 2008, principal contractors will be obliged to self-account for VAT on amounts charged by sub-contractors for construction operations to which RCT applies (but excluding haulage for hire). From 1 September the amount a sub-contractor charges to a principal contractor should not include VAT. Instead, the principal contractor must calculate the VAT on the amount charged by the sub-contractor and account for the VAT directly to the Revenue Commissioners through his/her VAT return.

The subcontractor should continue to issue invoices to the principal contractor. The invoice should include the statement: 'VAT on this supply to be accounted for by the principal contractor' together with all the information normally required on a VAT invoice, except the VAT rate and the VAT amount. The principal contractor may issue the invoice, and give a copy to the subcontractor, if both the principal contractor and the subcontractor agree. Where RCT is to be deducted from the payment, the deduction should be 35% of the amount actually paid (i.e. excluding VAT).

A list of frequently asked questions is included below; these are upadated regularly on the Revenue website, where there is more detailed information at: “Construction Services - New VAT rules for Principal Contractors and Sub-contractors” - from 1 September 2008.

Frequently Asked Questions

When does the new system take effect?

It will take effect from 1 September 2008.

Who does it affect?

All those involved in construction services within the scope of RCT i.e. all principal contractors and sub-contractors within the construction industry, but excluding those providing haulage for hire.

What is the reverse charge?

The reverse charge is a method of accounting for VAT.

Meat processing and forestry operations come under the scope of RCT. Does reverse charge apply to them?

No. Although it is closely linked to RCT reverse charge VAT only applies to construction services that come under the scope of RCT.

When a sub-contractor invoices a principal contractor, who must account for the VAT?

From 1 September 2008, the principal must account for the VAT.

How does the principal contractor show the reverse charge VAT on the VAT?

The principal contractor must include the VAT due on supplies from the sub-contractor with VAT on Sales under T1. If the principal contractor is entitled to a deduction s/he should claim a simultaneous deduction for the VAT on the supplies from the sub-contractor in T2 (VAT on Purchases).

If a sub-contractor is no longer required to charge VAT is s/he still required to be registered for VAT?

Yes, if his/her turnover exceeds the threshold of €37,500 (effective from 1st May 2008) in any continuous period of twelve months, unless s/he is a sub-contractor who is not established in the state.

Does the new system apply to construction services supplied outside of the construction industry?

No. Sub-contractors who also supply services to customers outside of the construction industry will continue to account for VAT on these services as before. These services are not within RCT and therefore the reverse charge does not apply.

Who is responsible for issuing the reverse charge invoice?

The sub-contractor normally issues the invoice but, if both the sub-contractor and the principal contractor agree, the principal contractor may issue the invoice and provide a copy to the subcontractor.

What information must appear on the reverse charge invoice?

The invoice must contain the statement VAT on this supply to be accounted for by the Principal Contractor as well as all the same information that would appear on a normal VAT invoice, except the VAT rate and the VAT amount.

Is VAT due on the supply if a sub-contractor does not have a VAT number?

If a sub-contractor is not VAT registered because his turnover is under the threshold, he will not have a VAT number. VAT is not then due on the supply. However, where a sub-contractor who is not established in the State makes a supply to a principal contractor VAT is due on the supply irrespective of whether the sub-contractor provides an Irish VAT number.

How will a principal contractor know he must account for VAT by reverse charge?

The invoice issued by the sub-contractor will state VAT on this supply to be accounted for by the principal contractor. However the principal should ensure that the correct documentation is received i.e. (a) that an invoice received with the above notation is for services correctly subject to reverse charge and (b) that where services supplied do not come within reverse charge a normal VAT invoice is received.

How are prepayments and progress payments dealt with under the new system?

The principal must account for VAT when the payment is made. The principal may claim input credit for the VAT on such payments for the same period.

If a progress payment is made in August 2008 and the invoice does not issue until after 1 September 2008, what is the VAT treatment?

VAT is deemed to be included in the progress payment. The sub-contractor must issue a VAT invoice before the 15 September 2008 and account for the VAT to Revenue. The principal contractor can claim a deduction in the period the invoice issued.

What is the position where payment is made in September 2008 for construction services provided in August 2008?

A principal should not include VAT in any payment (in respect of construction services) made to a subcontractor on or after 1 September 2008 unless that VAT is in respect of a VAT invoice issued on or before 31 August 2008. The table below sets out when the VAT is due and who is liable in various scenarios.

How is retention money dealt with?

Liability on retention money will arise when the payment is made.

What is the two-thirds rule?

Where the VAT exclusive cost of goods supplied in the course of providing a service exceeds twothirds of the total VAT exclusive charge for the supply, the rate of VAT applicable is the rate that applies to the goods.

Is there any change relating to the two-thirds rule?

The two-thirds rule will not apply where the reverse charge applies.

If, as is the practice in some cases, a principal contractor applies RCT to all payments made to a sub-contractor, even if some of the services supplied are not construction services, what is the VAT treatment of the non-construction services?

Reverse charge should only be applied to those services that are construction operations. For example, an alarm company installs an alarm system for a local authority and gets the contract for the routine maintenance of the alarm. The installation of the alarm is subject to reverse charge, so the local authority accounts for the VAT. The maintenance service is not subject to reverse charge and the alarm company should account for the VAT on the maintenance service.

Is there any change in the application of RCT as a result of the reverse charge system?

The only change is that the principal contractor will calculate RCT on the VAT exclusive amount.

How does a subcontractor know that a customer is actually a principal?

The principal and the subcontractor are obliged to complete Form RCT 1, making a joint declaration that they are proposing to enter a relevant contract. If it is the first time that principal and subcontractor have entered a relevant contract, the principal is obliged to lodge the form with his Revenue district within seven days of making the declaration. Where the subcontactor has any doubts in relation to the bona fide of the principal, he would be advised to contact his Revenue office to verify or investigate.

Are non-established sub-contractors required to register for VAT?

Not if their only supplies within the State are to principal contractors. However those subcontractors who are already registered should remain registered for the purpose of claiming any VAT repayments due. Non-established sub-contractors who are commencing work in the State for the first time and who only provide services to principal contractors are not obliged to register for VAT but should register for the purpose of claiming any VAT repayments. Non-established subcontractors who also provide construction services for customers other than principal contractors must register. For example, a carpenter from the UK who carries out work only for principal contractors in this State is not obliged to register. However if he also gets a contract from a retailer to fit out a shop, he must register irrespective of turnover.

If the principal is a Government Department, Local Authority or Public Body what is their VAT situation?

Many of these organisations were not previously registered for VAT. They must now register for VAT. Instead of paying VAT to the subcontractor they must pay the VAT on the supplies from subcontractors directly to Revenue, showing it on the VAT 3 return form under T1. Most of these organisations are not carrying on taxable activities and so are not entitled to claim input credit in respect of the reverse charge VAT.