RCT guidelines and the VAT reverse charge
There have been a lot of changes for builders to cope with in the last few years when it comes to RCT and VAT. To make things a little easier, we’ve pulled together a few of the main points you need to know.
RCT stands for Relevant Contracts Tax and applies to payments made by the Principal Contractor to a Sub-Contractor under a relevant contract. It applies mainly to Construction Operations, but RCT also applies to Forestry Operations and Meat Processing Operations, though not to professionals such as architects and surveyors. Since January 2012, all of these contractors need to engage electronically with Revenue under the eRCT system.
VAT reverse charge subject to RCT for principal and sub-contractors
In relation to VAT specifically, the VAT Reverse Charge affects contractors providing construction services that are subject to RCT. Please note the following in particular, and the way the system works differently for Principal and Sub-Contractors. The charge the Sub-Contractor makes to a Principal Contractor does not include VAT.
- Instead the Principal Contractor calculates the VAT on the amount charged by the sub-contractor. They then pay the VAT directly to the Revenue Commissioners through his/her VAT return.
- VAT on construction services that are not subject to RCT will receive tax under the normal VAT system. For example, a builder who builds an extension for a private individual, or an electrician who installs a new alarm system in a shop should charge and account for VAT on the supply. The reverse charge does not apply to these supplies.
- A sub-contractor from outside the state, who only supplies in the state to Principal Contractors, is no longer required to be VAT registered in the State.
VAT system conditions
So far so clear, but in reality, a building firm may act as principal in one contract, as a sub-contractor in another, and may also be supplying services that are not subject to RCT under another contract, so you need to know exactly how the system operates:
- Reverse charge by the principal, accounts for the VAT on services from a sub-contractor.
- The charge for services by the sub-contractor does not include VAT on the services
- The VAT registered sub-contractor issues an invoice to the principal. The invoice shows all the same information as appears on a VAT invoice, except the VAT rate and VAT amount. It should also include the VAT registration number of the sub-contractor.
- ‘VAT on this supply to be accounted for by the Principal Contractor‘ should be included on the invoice.
- The principal contractor pays the sub-contractor for the services. This payment should not include VAT.
- If RCT is to be deducted, it should be calculated on the VAT-exclusive amount
- The principal contractor should include the VAT on the services they receive from the sub-contractor in his/her VAT return for the period in which the supply is made as VAT on Sales (T1).
- Where entitled to do so, the principal can claim a simultaneous input credit in his/her VAT return for the period.