Relevant Contracts Tax (RCT) and VAT Reverse Charge for Schools in Ireland
These are two separate but connected charges. Relevant Contracts Tax is a with-holding tax which has operated since the 1980s on payments made by principal contractors to sub-contractors. The principal contractor (in this case the school) is obliged to with-hold tax at the notified rate from any payments it makes to sub-contractors it engages. The school then pays the with-held RCT directly to Revenue usually every month. The tax with-held is available to the sub-contractor to pay its tax liabilities. RCT presently operates at 3 different rates; 0%, 20% and 35%. In general, most sub- contractors will be at the 0% rate. The 20% and 35% rates apply to contractors who are not fully tax compliant. Please note that failure to operate this notification system prior to payment leaves the school liable to automatic penalties which can be up to 35% of the payment amount.
The VAT reverse charge is a mechanism whereby Revenue collect the VAT due on individual contracts from the Principal Contractor instead of from the sub- contractor. Most contracts in the construction sector will be at 13.5%. Traditionally, the person carrying out the work would have charged VAT to the school and the tradesperson would then have paid this to Revenue every two months. Under the new system, this VAT is not now paid to the tradesperson but instead the school pays it directly to Revenue every two months.
RCT and the VAT reverse charge apply to the following operations (whether grant-aided or not):
1. Construction – general building work and installation of systems (plumbing, electrics, air conditioning, etc.)
2. Repairs – repairs to the fabric of the building or systems installed therein. Most plumbing, electrical and repair work falls within this category.
3. Alterations – painting, the fitting of doors, carpets, blinds, and shelving all fall in to this category.
4. Telecommunications Systems – e.g. Installation of a phone system.
Maintenance and cleaning are not within the scope of RCT nor the VAT reverse charge. The main difference between maintenance and repairs is the fitting of a part.
Boiler Service with parts replaced:
Plumber invoices the school for €500 + VAT.
Under the old system:
The plumber would be paid €567.50 (i.e. €500 plus €67.50 VAT).
Under the new system:
The plumber is paid €500 less any RCT to be deducted. VAT is calculated by the school and paid directly to Revenue with their bi-monthly VAT return.
The invoice is notified to Revenue for RCT purposes through the ROS system in two stages:
1. Contract Notification: An online form is filled out with details of the work to be carried out, the total amount of the contract and the sub-contractors details. Revenue advise the RCT deduction rate that presently applies to this contractor. 2. Payment Notification: A simpler online form is filled out detailing the amount of this particular payment. Some contracts will have multiple stage payments. Revenue respond immediately with the tax deduction rate to be applied to this particular payment. Please note that deduction rates can change!
If the RCT rate is 0%, then the plumber is paid €500.
If the RCT rate is 20%, then the plumber is paid €400 and the school pays Revenue €100 with their monthly RCT return.
If the RCT rate is 35%, then the plumber is paid €325 and the school pays Revenue €175 with their monthly RCT return.
In each of these three circumstances, the VAT liability remains at €67.50 and the school pays this amount directly to Revenue with their bi-monthly VAT return. The actual cost to the school therefore remains the same in all three scenarios.
On the 1st of January, a contract is agreed between x school and y contractor to build a shed for €10,000 + VAT. The VAT rate will be 13.5%.
The school notifies Revenue that a contract has been undertaken through ROS.
The contractor completes the job on the 15th of February and invoices the school for €10,000. No VAT is shown on the invoice and the statement "VAT on this supply is to be accounted for by the principal contractor" is included on the invoice.
The school now notifies Revenue that a payment of €10,000 is about to be made through ROS. Revenue authorise the school to deduct 20% in this case.
The school now pays the contractor €8,000 (i.e. €10,000 less 20%).
On or before the 23rd of March, the school makes a RCT return to Revenue of this payment and pays the RCT of €2,000 to Revenue through the ROS system.
In addition, on or before the 23rd of March, the school makes a VAT return to Revenue through ROS and pays the VAT of €1,350 to Revenue through the ROS system.
In this example the cost to the school is €11,350 (i.e. contractor payment of €8,000 + RCT payment of €2,000 + VAT payment of €1,350). That total cost will remain the same regardless of the deduction amount authorised by Revenue.
From the contractor’s point of view, they will receive the payment of €8,000 directly. They will also receive a credit on their tax account of €2,000 which can be offset against their annual tax liability. They will not have any VAT to pay as the school now pays this directly to Revenue.
Schools should note that Revenue are notified annually of all grants paid to schools by Government Departments or their agencies.
Our VAT/RCT compliance service operates as follows:
1. We charge €200 per annum. (Rate correct as at 14th of June 2022).
2. Where necessary, we will register the school for RCT and VAT.
3. We carry a tax agent link to the Revenue Online Service (ROS) and will access the ROS system on the school’s behalf.
4. We advise on the tax implications of individual invoices.
5. We liaise with Revenue on your behalf.
6. We make the contract notifications to Revenue.
7. We make the payment notifications to Revenue.
8. We file the periodic RCT returns and arrange the payment of deducted RCT to Revenue on your behalf.
9. We file the periodic VAT returns and arrange payment of VAT to Revenue on your behalf.
10. We maintain a schedule of payments to contractors for relevant operations and calculate the VAT reverse charge on same.
11. We file the Annual VAT Return of Trading Details (RTD) with Revenue.
12. This service is provided remotely – we correspond with you by email.
Please note that this service is based upon appropriate information being provided to us by the school – we cannot notify a contract or payment of which we have no knowledge! We advise our clients to contact us if they have any doubt about the relevance of a particular operation.
Eoin Brennan F.C.A. Upper Third Chartered Accountants
051 873913 or 086 8370141 – email: firstname.lastname@example.org