Schools tax obligations for construction operations.
The Board of Management (BOM) of a school when engaging a contractor (including a self-employed individual) to complete a construction project are obliged to:
- Register and account for VAT, and
- apply RCT (Relevant Contracts Tax) to payments made to contractors.
In my experience schools are not always familiar with this requirement, nor do they fully understand how to fulfil their obligations. It is with this in mind that I’ve decided to put together this summary of the requirement and some practical examples of what type of activities it would apply to. If you wish to read more on this area then please refer to the Revenue Statement of Practice.
Why must school apply these taxes as they aren’t businesses?
A school BOM is deemed to be the principal contractor for the purposes of RCT. Additionally, a school BOM, is a Public Body and is therefore obliged to register and account for VAT on a “reverse charge” basis, when in receipt of construction services.
These obligations placed on school BOM’s help improve the efficiency of the tax collection system and in turn, assist in reducing the opportunities for tax default within the construction sector.
What exactly does the school BOM have to do?
RCT – When making a payment to a contractor (including a self-employed individual) for construction services the school must firstly notify revenue on the amount of the payment they plan to make. The ROS system will give immediate notification to make a deduction of
- 20% or
from the payment to the contractor. Note that all payments and deductions should be taken from the invoice figure excluding VAT (see VAT section below for further details).
Should a deduction be required then the amount of the deduction is to be forwarded to Revenue by the 23rd of the month following payment to the contractor.
VAT – An invoice from a subcontractor for construction services should not include VAT; the following text should appear on the invoice ” VAT on this supply is to be accounted for by the principal contractor”.
The BOM must “reverse charge” itself VAT at 13.5% and pay this VAT to the Revenue. VAT is normally due for payment on 23rd of the following month after the end of a two-month period.
A school BOM receives an invoice from a contractor of €1,000. No VAT has been charged. The school plans to pay the invoice in full on 10th October 2017. On entry of the payment notification on the RCT system in ROS, Revenue state that a deduction of 20% is to be made. The payment details will be as follows:
10/10/2017 Payment to contractor of €800 ( €1,000 less 20%)
23/11/2017 Payment to Revenue of €200 regarding the 20% RCT deduction.
23/11/2017 VAT 3 return and payment of €135 (€1,000 @13.5%) for the VAT period Sept-Oct.
Confusion over what exactly do construction operations include?
Construction operations refers to “… the construction, alteration, repair, extension demolition or dismantling of buildings or structures…”.
In effect, it could apply to most types of work which take place at school however a degree of judgement can be applied by the BOM to determine whether the VAT reverse charge provisions should apply. For example, if the expenditure is of a low value then the invoice may be paid in full, including the VAT.
Note that any maintenance contracts would be outside the scope of these provisions.
Examples of the what it applies to.
Painting of the whole school Applicable
Grass-cutting Not applicable as part of a maintenance contract
Erection of fencing or a shed Applicable
Any heating, plumbing, electrical works Applicable
Alarm installation Applicable
Cleaning Not applicable as maintenance in nature
Unblocking drains Not applicable as maintenance in nature
Replacement of door/ window Applicable
Installation of broadband/ networking capabilities Applicable.
I hope that this makes the situation clearer for school Boards of Management. The above is a summary, therefore please check this Revenue link for further details.
If you require any assistance in this area or indeed on any area of taxation please contact C. McFadden & Co. t/a the Tax Man.