How new VAT system in the construction industry affects the public sector

The Revenue Commissioners have recently introduced new rules in relation to how principal contractors & their sub-contractors in the construction industry account for VAT on the supply of construction services.

From 1st September 2008 onwards, where a principal contractor receives construction services from a VAT-registered sub-contractor, the principal is obliged to account for the VAT to the Revenue Commissioners on the supply of these services to him.

This is a change from the old system where the “principal contractor” paid VAT to the sub-contractor as part of the total cost of the services received.  

Significantly, “principal contractors” for the purpose of the new rules includes all government departments, local authorities, boards established under statute and certain other public bodies, which are required to operate relevant contracts tax (RCT).

For public sector bodies who receive construction services, this means they may have to register for VAT to enable them to pay the VAT to the Revenue Commissioners that previously, the body would have paid directly to the sub-contractor.

Public sector bodies are generally not entitled to reclaim any VAT on expenditure. The new rules have not changed this.
 
The new rules are important for public sector bodies as the definition of “construction services” is quite broad. It includes any alterations, repairs or extensions carried out to a building as well as the installation of heating and lighting systems, fire and burglar alarms and telecommunications systems, among others.

An example of how the new system will work in practice is as follows:

  • A local authority engages a VAT-registered electrician to carry out some repair work. The cost of the work is €1,000 plus VAT.
  • The electrician issues an invoice to the local authority for €1,000. The invoice indicates that VAT is to be accounted for by the local authority.
  • The local authority pays the electrician €1,000 less any RCT (if applicable).
  • The local authority must then register for VAT (if not already registered), and pay VAT of €135 (€1,000 at 13.5%) directly to the Revenue Commissioners through its bi-monthly VAT return.

For further information or advice, please contact Siobhan O’Neill at soneill@crowleysdfk.ie or phone 01 6790800 / 021 4272900.