RCT and VAT for Schools
Revenue indicated, at the beginning of 2012, that a school board of management, being a body established by statute is a “Principal Contractor”. This means that the board of management of such schools is now responsible for complying with RCT requirements and applying the VAT "reverse charge" when making payments to the contractor. The Revenue introduced a mandatory electronic RCT system on 1 January 2012 for all principal contractors in the RCT system, so all filings and notifications must be done online through the Revenue ROS system.
How does it operate? When undertaking a building contract, the board is the “Principal Contractor” for the purposes of this legislation. The board of management is therefore responsible for notifying the contract to the Revenue prior to commencement of construction, notifying each payment to the Revenue prior to making individual payments to the Contractor and paying the RCT deducted (if any) to the Revenue. The board must ensure that it obtains a Deduction Authorisation from the Revenue before any payment is made to the contractor. This will specify the rate of tax (there are three possible rates: zero %, 20% and 35%) to be deducted from the contractor.
The “reverse charge” VAT mechanism also applies to contracts subject to RCT. Therefore, the board of management has to be registered for VAT, account for VAT on all payments made to contractors and is required to make bi-monthly VAT returns. The contractor will invoice the board on a VAT exclusive basis so the board must apply to the Department of Education and Science for funding to cover both the amount stated on the invoice and the VAT which will be paid to the Revenue on the bi-monthly VAT return. It should be noted that the scope of RCT and the VAT "Reverse Charge" for schools extends to repairs.
What does the board of management have to do?
Common Mistakes made in accounting for RCT and the "VAT reverse charge".
1. Not being registered: Given the scope of RCT and the VAT reverse charge it is unlikely that any school would not carry out relevant operations in any particular 12 month period. The Board has a duty to protect itself (and its patron) against financial risk.
2. Not including repair items for RCT or VAT reverse charge. Any repair to a structure or system requiring the fitting of a part is a relevant operation and RCT and VAT should be operated on it.
3. Confusing the deduction rate for RCT with the VAT. VAT is a seperate charge to RCT and in most cases VAT will be at 13.5% on relevant payments. If you are unsure why not email us.
4. Paying VAT to the Contractor. Where the payment is a relevant payment for RCT, the VAT reverse charge applies. The contractor's invoice should not show any VAT; it should instead state that "VAT on this invoice is to be accounted for by the Principal Contractor". The school then calculates the amount of VAT itself (normally 13.5%) and pays that amount directly to Revenue every two months.
5. Adopting a blanket deduction rate for RCT. The RCT deduction rate varies for each contractor and may vary from payment to payment. You must notify Revenue prior to making each payment and apply the deduction rate given by them to that payment.
6. Applying RCT and the VAT "reverse charge" to payments to professionals. Payments to professionals such as architects and engineers are not relevant payments for the purposes of RCT or the VAT reverse charge.
7. Entering the VAT reverse charge in the T2 box (VAT on Purchases) in the VAT 3 form. The VAT reverse charge should be entered in Box T1 (VAT on Sales). In effect the school is acting in place of the contractor for the purposes of making the return and, if the contractor was filling in the form, they would place the amount in Box T1.
8. Omitting to make the VAT 3 returns. VAT returns must be made even where there is no VAT to be accounted for in a particular period.
9. Don't forget to file your annual Return of Trading Details, also know as an RTD. This form will become available to you when you are completing the final VAT return of the school's accounting year. Simply enter the total of all net invoices in the relevant row in Column 1.
How does it operate? When undertaking a building contract, the board is the “Principal Contractor” for the purposes of this legislation. The board of management is therefore responsible for notifying the contract to the Revenue prior to commencement of construction, notifying each payment to the Revenue prior to making individual payments to the Contractor and paying the RCT deducted (if any) to the Revenue. The board must ensure that it obtains a Deduction Authorisation from the Revenue before any payment is made to the contractor. This will specify the rate of tax (there are three possible rates: zero %, 20% and 35%) to be deducted from the contractor.
The “reverse charge” VAT mechanism also applies to contracts subject to RCT. Therefore, the board of management has to be registered for VAT, account for VAT on all payments made to contractors and is required to make bi-monthly VAT returns. The contractor will invoice the board on a VAT exclusive basis so the board must apply to the Department of Education and Science for funding to cover both the amount stated on the invoice and the VAT which will be paid to the Revenue on the bi-monthly VAT return. It should be noted that the scope of RCT and the VAT "Reverse Charge" for schools extends to repairs.
What does the board of management have to do?
- Where not registered for VAT: Fill out form TR1 to register for RCT and VAT if not already registered.
- Where not already registered for ROS: Register online for ROS (Revenue Online Service).
- Obtain contractor’s tax reference number and proof of identity.
- Where payments to a single contractor exceed €2,600 per annum then tax clearance should be obtained.
- Prior to commencement of construction, notify the Revenue of the contract (Contract Notification).
- Prior to discharging any payment to the contractor, notify the Revenue of the payment (Payment Notification).
- Obtain a Deduction Authorisation from the Revenue specifying the RCT to be deducted from the contractor.
- Provide the contractor a copy of the deduction Authorisation.
- Deduct the applicable amount of RCT from payments due to the contractor.
- File RCT returns and pay the deducted amount to the Revenue.
- Apply to the Department of Education and Science for the VAT inclusive amount of each payment due to the contractor notwithstanding that the invoice received will be on a VAT exclusive basis.
- File bi-monthly VAT returns and pay the VAT to the Revenue.
- Ensure that the monthly return for RCT is correct and keep a schedule of payments to contractors.
Common Mistakes made in accounting for RCT and the "VAT reverse charge".
1. Not being registered: Given the scope of RCT and the VAT reverse charge it is unlikely that any school would not carry out relevant operations in any particular 12 month period. The Board has a duty to protect itself (and its patron) against financial risk.
2. Not including repair items for RCT or VAT reverse charge. Any repair to a structure or system requiring the fitting of a part is a relevant operation and RCT and VAT should be operated on it.
3. Confusing the deduction rate for RCT with the VAT. VAT is a seperate charge to RCT and in most cases VAT will be at 13.5% on relevant payments. If you are unsure why not email us.
4. Paying VAT to the Contractor. Where the payment is a relevant payment for RCT, the VAT reverse charge applies. The contractor's invoice should not show any VAT; it should instead state that "VAT on this invoice is to be accounted for by the Principal Contractor". The school then calculates the amount of VAT itself (normally 13.5%) and pays that amount directly to Revenue every two months.
5. Adopting a blanket deduction rate for RCT. The RCT deduction rate varies for each contractor and may vary from payment to payment. You must notify Revenue prior to making each payment and apply the deduction rate given by them to that payment.
6. Applying RCT and the VAT "reverse charge" to payments to professionals. Payments to professionals such as architects and engineers are not relevant payments for the purposes of RCT or the VAT reverse charge.
7. Entering the VAT reverse charge in the T2 box (VAT on Purchases) in the VAT 3 form. The VAT reverse charge should be entered in Box T1 (VAT on Sales). In effect the school is acting in place of the contractor for the purposes of making the return and, if the contractor was filling in the form, they would place the amount in Box T1.
8. Omitting to make the VAT 3 returns. VAT returns must be made even where there is no VAT to be accounted for in a particular period.
9. Don't forget to file your annual Return of Trading Details, also know as an RTD. This form will become available to you when you are completing the final VAT return of the school's accounting year. Simply enter the total of all net invoices in the relevant row in Column 1.