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					Frequently Asked Questions

Last updated – 11 June 2009

Latest updates at end of document.

VAT - Reverse Charge in the construction industry

Clarification – When should reverse charge VAT be accounted for?

These FAQs are regularly updated. For a period from early July to mid August these
FAQs contained a table outlining when VAT should be accounted for by the
principal. The table contained an error. It incorrectly showed in one example that the
VAT should be accounted for when the payment for services was made to the
subcontractor. It should have indicated that the principal accounts for the VAT
when the invoice is issued or correctly due to be issued, whichever is earlier. Any
confusion caused is regretted.




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 3.

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).


When must the principal contractor show the reverse charge VAT on the VAT 3?

The reverse charge VAT should be included in the VAT return for the VAT period in
which the reverse charge invoice is issued or should have issued.


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 12 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 (or settlement
voucher) and provide a copy to the sub-contractor

What information must appear on the reverse charge invoice?

The invoice (whether issued by the subcontractor or the principal contractor) 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 are 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.


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 15th September 2008 and account for the VAT to Revenue. The
principal contractor can claim a deduction in the period the invoice issued.

A subcontractor has issued a valid VAT invoice to a principal contractor prior to 1
September 2008 and subsequently needs to issue a credit note in respect of that same
supply after 1 September 2008. What is the VAT position?

The subcontractor must issue the credit note including VAT. A subcontractor who
accounted for VAT on an invoice basis may make an adjustment in the VAT return in the
period in which the credit note issued to reduce liability by reducing the VAT on Sales
(T1) figure. If the subcontractor has no VAT on Sales in that period by virtue of all his
supplies being subject to reverse charge, he can, for practical administration, increase his
T2 figure by the amount of VAT on the credit note. The principal should also make an
adjustment in his VAT return in that period by reducing his T2 amount by the amount of
the VAT on the credit note.
How is retention money dealt with?

If a contract provides for a period of retention the invoice in respect of retention money
should be raised wthin 15 days of the end of the month in which the guarantee period
expires. VAT should be accounted for by reference to the date the invoice is raised or
should have been raised.


What is the two-thirds rule?

Where the VAT exclusive cost of goods supplied in the course of providing a service
exceeds two-thirds 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.


Some construction services come under the scope of RCT, but are subject to VAT at
21%. These include the hire and erecting of scaffolding, the hire and erecting of
temporary fencing, the hire of crane and driver, and the hire of site labour through
an agency (not to be confused with an employment agency). Will these be subject to
the reverse charge and at what VAT rate?

These services are subject to the reverse charge mechanism and the rate of VAT is 21%.
There are some construction services within the scope of RCT that are subject to VAT at
21%. The reverse charge mechanism does not change the rate of VAT (but see previous
question regarding change in two-thirds rule).


A builder (who is a subcontractor providing construction services to a principal)
receives construction services that are liable at 21% (e.g. hire of scaffolding). Should
the builder identify this item separately on the reverse charge invoice to his
principal?

No. The builder accounts for the VAT at 21% by reverse charge. He can claim a
simultaneous input credit. The hire of scaffolding is a cost incurred by the builder in
providing construction services to his principal. He does not invoice his principal in
respect of the hire of scaffolding. The liability at 21% stops with the builder.
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. The alarm company should issue a reverse charge invoice for the
installation and a VAT invoice for the maintenance.


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 & subcontractor have entered a relevant contract, the principal is obliged to
lodge the form with his Revenue district within 7 days of making the declaration. Where
the subcontractor has any doubts in relation to the bona fida 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
sub-contractors 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 sub-contractors 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.


Some construction contracts include the supply and installation of fittings including
floor coverings that are not stuck down over their entire surfaces and light fittings
that are not recessed. Are these supplies and fittings subject to the reverse charge?

No. Supply and installation of fittings are not services within the scope of the reverse
charge legislation. A supplier should issue a separate VAT invoice charging VAT at 21%
for the element of the contract which relates to supply and installation of fittings.

Other examples of fittings include:
   • Blinds (most types)
   • Clocks including time clocks such as flexitime equipment
   • Cooker hoods
   • Curtains
   • Electric and gas fires
   • Exhibition stands
   • Fitted carpets and lino, other than floor covering stuck down over its entire
       surface
   • Freestanding shop counters
   • Kitchen cookers
   • Lighting other than recessed lighting
   • Mirrors
   • Most shelving
   • Refrigeration units, including deep freezes
   • Safes (certain)
   • Seating, including cinema and church seating whether or not secured to the floor
   • Snooker tables and other games tables
   • Washing machines and dishwashers, including plumbed-in machines.


Do the new rules apply to professionals within the construction industry?

Reverse charge rules do not apply to payments to architects, quantity surveyors,
engineers or design teams.
Will the new rules affect entitlement to claim input credits?

No. A principal contractor who under the old rules was entitled to claim an input credit in
respect of VAT invoiced by a subcontractor is now entitled to claim an input credit in
respect of the reverse charge VAT. Some principals (e.g. local authorities, public bodies)
are not carrying on taxable activities and are therefore not entitled to input credits.


Why should the direct debit of a contractor, who is a principal contractor only, be
increased as a result of the new rules?

The principal’s liability to Revenue will increase by the amount of the VAT he would
have been due to pay over to the subcontractor under the old rules. Instead of paying the
VAT over to the subcontractor the principal is paying it directly to Revenue.
The VAT on the services received from the subcontractor must be included in the
principals VAT return under VAT on Sales (T1). The principal can claim a deduction for
the reverse charge VAT in T2 as he would have done if the VAT had been payable to the
subcontractor. The principal will not pay more VAT under the new rules but the way the
VAT is paid differs.


Haulage does not come under reverse charge rules. What happens if a construction
contract includes an element of haulage?

Where it is not practical to invoice separately for the haulage element of the contract
reverse charge should apply to the whole contract. For example, a subcontractor who gets
a contract to demolish a building, clear a site and transport the rubble should apply
reverse charge to the full consideration. If a subcontractor has a contract solely to
transport the rubble from a site this would be considered haulage and not subject to
reverse charge.


How is waste disposal from a construction site treated?

A contract for site clearance involving the removal of earth or rubble from the site and
the transportation of same to landfill is subject to reverse charge. For example, if a
subcontractor provides a digger with driver and a truck with driver to clear the site, load
the truck and transport the material to landfill, reverse charge will apply to the full
contract. A contract which is solely to transport the material to landfill is haulage and not
subject to reverse charge.

The hire of a skip for use in a relevant construction operation is subject to reverse charge.
How are design-and-build contracts treated?

A design/build contract is considered to be a composite supply. The principal supply is
the building. The rate of VAT applicable to such a contract is 13.5%. Where the contract
is a relevant contract between a principal contractor and sub-contractor reverse charge
rules apply to the full contract excluding any element of the contract relating to supply
and installation of fittings. The supply and installation of fittings should be invoiced
separately under normal VAT rules and the rate applicable is 21%. (updated 20 October
2008)

Is the supply and delivery of ready-to-pour concrete subject to reverse charge?

The delivery of ready-to-pour concrete by the supplier (irrespective of where or how it is
placed) is considered to be the supply of building material. It is not subject to RCT or
reverse charge rules. A haulier hired by either the contractor or the supplier to deliver the
concrete is subject to RCT but not to reverse charge. (updated 1 December 2008)


How are repair and maintenance contracts treated?

If the contract provides for a single consideration for the repair and maintenance then
reverse charge should apply to the full consideration. If the contract provides that a
separate charge should apply where repairs are necessary then only the consideration
applicable to the repairs is subject to reverse charge. Each case should be examined on its
own merit.

Repair would generally be considered to be an operation carried out to fix, mend or
restore the building/structure to its previous condition. Examples of repair include
replacement of glass in broken window, replace/fix broken tiles, mending faulty boiler.
Maintenance includes operations such as cleaning (internal & external) and painting
(other than painting of a newly constructed building). (updated 10 December 2008).


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

Where a contract involves payments in advance of completion (e.g. deposit, progress
payments, installments) the invoice must be raised within 15 days of the end of the month
in which such a payment is made. VAT should be accounted for in the return for the
period in which the invoice is raised or should have been raised. The principal may claim
input credit for the VAT on such payments for the same period. A claim by a sub-
contractor for payment in advance of completion should not take the form of an invoice.
(updated 13 January 2009)
How is retention money dealt with?

If a contract provides for a period of retention the invoice in respect of retention money
should be raised wthin 15 days of the end of the month in which the guarantee period
expires. VAT should be accounted for by reference to the date the invoice is raised or
should have been raised. (updated 13 January 2008)


If an invoice issued before and payment made is after 1 September 2008, what is the
VAT treatment?

If, prior to 1 September 2008, a sub-contractor raised a VAT invoice on completion of a
supply, the subcontractor is accountable for that VAT and the principal should pay the
VAT to the sub-contractor even where payment is made on or after 1 September 2008.
However, if, prior to 1 September 2008, a subcontractor raised a VAT invoice when s/he
should correctly have issued a progress claim (i.e. the supply was not complete) then it is
in order for the principal to account for the VAT if he is making payment on of after 1
September 2008. Where this situation arises the sub-contractor should issue a credit note
and make the adjustment in the relevant VAT return. (updated 13 January 2009)


How are settlement vouchers/self-billing arrangements treated?

Settlement vouchers or self-billing arrangements should only be used where there is
agreement between the principal contractor and the sub-contractor. Therefore, if a sub-
contractor raises a valid reverse charge invoice on completion of a supply the principal
cannot disregard this by accounting for VAT on the basis of self-billing/settlement
vouchers and VAT should be accounted for in accordance with the date of the invoice
raised by the sub-contractor. If there is no agreement to use settlement vouchers/self-
billing, where the sub-contractor raises a reverse charge invoice on completion of a
supply and the principal makes a payment which is less than the amount invoiced the
subcontractor should issue a credit note. (updated 13 January 2009)

Are site investigations subject to reverse charge?

The term “site investigations” covers a wide variety of services that are carried out in
advance of or during building projects. Each contract should be examined on it’s own
merit. In determining whether a contract for site investigations is a construction operation
and therefore subject to RCT and reverse charge VAT rules, a number of factors need to
be considered
        (a) Is the work an integral part of, or preparatory to, the overall construction
            operation? Are the investigations of a kind which are imposed on the principal
            by way of regulation (such as archaeological investigations or environmental
            impact studies) or are they investigations of a kind without which it would not
            be possible to design/construct the building (e.g. geo-technical)?
        (b) Does the contract involve a considerable degree of labour intensive fieldwork?
       (c) Does the contract involve professional services (i.e. consultancy services of
           engineers, geologists etc that would be subject to Professional Services
           Withholding Tax in certain circumstances. See Guide to Professional Services
           Withholding Tax on www.revenue.ie)

If the investigations carried out are such that without them the design/construction of the
building (leaving aside investigations which are imposed on the contractor by regulation)
could not actually proceed, these investigations are considered to be an integral part of, or
preparatory to, the construction operation. Work that is ancillary to the project or
imposed on the contractor would not be considered construction operations. If the work is
more of a professional services nature and the fieldwork is a very minor part of the
investigations then RCT and VAT reverse charge would not apply to any part of the
contract. Where there is a significant amount of fieldwork (i.e. drilling, excavation etc)
involved and the activity is integral, or preparatory, to the construction operation then
RCT and VAT reverse charge will apply to the full consideration where a single invoice
is issued for the fieldwork and professional services. It should be noted, however, that
professional services are subject to VAT at 21.5% and they should be clearly identified as
professional services when shown on a reverse charge invoice.


Examples of site investigations:

Archaeological digs are not considered an integral part of, or preparatory to the
construction operation and are therefore not subject to RCT or reverse charge.

Geo-technical work involving excavation, drilling and other fieldwork to provide
information necessary for the design and/or construction of a building or structure would
generally be considered an integral part of, or preparatory to, construction. A contract for
geo-technical services may involve significant fieldwork with some laboratory work and
consultancy. Where the fieldwork is the significant part of the contract the full contract is
subject to RCT and reverse charge. Any professional services included in the reverse
charge invoice are subject to VAT at 21.5%. (updated 2 February 2009)


How should the VAT Return of Trading Details (RTD EUR) form be completed?

The principal contractor should enter the value of the construction services received from
the subcontractor in Column 1 at either the 13.5% or 21.5% rate as appropriate. A
principal who is entitled to input credit in respect of these services should make a
corresponding entry in Column 4 at the appropriate rate. The subcontractor should enter
the value of construction services supplied to principals in Column 1 at 0%. (updated 2
February 2009).
Do Voluntary Housing Associations come under the scope of RCT and VAT reverse
charge?

Voluntary Housing Associations are principal contractors within the scope of RCT. They
are obliged to register for and to operate RCT on payments to subcontractors. As
principal contractors in receipt of construction services they are also obliged to register
for VAT in order to account for VAT on construction services received from
subcontractors. (updated 11 June 2009)

				
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