I have a construction company specializing in one off housing. I am engaged by contractors to do work for them and also by the house owners in which case I use my own subcontractors. I am very confused by the new scheme for VAT between principal contractors and subcontractors. How does it work?
You are correct that as from September 1 2008, there has been a major change in how principal contractors and sub-contractors in the construction industry operate VAT.
Firstly the new system applies to principal contractors and sub-contractors involved in construction operations to which Relevant Contracts Tax (RCT ) applies. It seems from your question that you must be very familiar with the RCT rules but in summary RCT requires a principal contractor to deduct tax at 35 per cent from payments to a sub-contractor unless the principal contractor holds a Relevant Payments Card (RCT 47 ) for that sub-contractor in which case no deduction is required.
As regards VAT, prior to September 1 2008, a sub-contractor issued an invoice to a principal contractor which included VAT. The principal paid the sub-contractor and the sub-contractor paid the VAT to the Revenue Commissioners.
From September 1 2008, a sub-contractor issues an invoice to the principal contractor with all the usual information except that does not include VAT. The invoice should contain the statement “Vat on this supply to be accounted for by the principal contractor.”
The principal contractor calculates the VAT on the amount charged by the sub-contractor and pays the VAT directly to the Revenue Commissioners through his/her own VAT return. This is often referred to as the reverse charge. The principal can claim a simultaneous input credit in its VAT return for the period for the VAT accounted for under the reverse charge mechanism
Please note that VAT on construction services that are not subject to RCT will continue to be taxed under the normal VAT system. For example, if you build a house for a private individual, you will charge and account for VAT on the supply.