Revenue Note for Guidance

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Revenue Note for Guidance

41. Two-thirds rule

Summary

This section is designed to prevent tax loss. It determines whether a supply is taxed at the rate appropriate to a supply of goods or a supply of services in cases where both goods and services are supplied together. The basic rule is that where the VAT-exclusive cost of the goods to the supplier exceeds two-thirds of the VAT-exclusive price charged to the customer, the supply is taxable as a supply of goods.

Details

(1) Where there is an agreement for the supply of services (apart from food), and where the value of movable goods within that supply exceeds two-thirds of the total value of the agreement, excluding transport costs, the total consideration is taxed at the rate appropriate to the goods.

(Note that in the case of a multiple supply (see section 2(1)) it is permissible to invoice separately for the supply of goods and services, e.g. where the supply of the goods is liable at 23% and the supply of the services is liable at 13.5%. However, where separate invoices are issued for such goods and services supplied together, the amounts shown on the invoices must accurately reflect the value of the goods and services in question.)

Example:

  • Washing machine repair, quoted price = €300 plus VAT
  • Cost of materials @ 23% (ex. VAT) = €220
  • Labour / profit = €80
  • 220/300 is more than two thirds, so tax chargeable = €300 × 23% = €69 VAT.

(2) If there are differently rated categories of goods involved, the total consideration is apportioned in the ratio of their respective values and is taxed at the appropriate rates.

(3) The provisions of subsections (1) and (2) also apply in the case of taxable transactions relating to immovable goods, including services consisting of building and maintenance work.

(4) The ‘two-thirds’ rule for goods supplied as part of a construction service contract between a subcontractor and a principal contractor covered by the reverse charge rule was set aside with effect from 1 September 2008. (The principal self-accounts for VAT for construction services received from that date – see section 16(3).)

The ‘two-thirds’ rule does not apply to supplies of construction services between connected persons that are subject to the reverse charge mechanism with effect from 1 May 2012 (see section 16(5)).

Relevant Date: Finance Act 2019