VAT is complicated enough for a standard service business. For tradespeople in Ireland, there is an additional layer: the rules about which VAT rate applies are different from most other sectors, and the condition that determines whether you charge 13.5% or 23% — the two-thirds rule — is something that many trades businesses have never been clearly explained.
Getting this wrong does not just mean an awkward phone call from Revenue. If you have been charging the wrong VAT rate, you are either undercharging (and therefore personally liable for the shortfall to Revenue) or overcharging (and exposing yourself to customer complaints and repayment obligations). Either is avoidable. This is one of several tax topics covered in our business startup guides for trades and SME owners.
The Basic VAT Rate Question for Tradespeople
When a tradesperson — a plumber, electrician, builder, painter, roofer, tiler — provides a service, the standard VAT rate that would normally apply is 23%. However, construction services in Ireland are rated at 13.5%, which is significantly more favourable for the customer (and therefore for your competitiveness on price-inclusive quotes).
The question is: does your service qualify as a “construction service” at 13.5%, or is it a regular supply of services at 23%?
For most core construction activity — building, extending, renovating, repairing, or maintaining a building or structure — the 13.5% rate applies to the labour element. The materials used in that work are also generally rated at 13.5% when supplied as part of the construction service.
But here is where it gets specific.
The Two-Thirds Rule: What It Actually Means
The “two-thirds rule” is Revenue’s test for determining whether a supply by a tradesperson should be treated as a supply of services (and therefore rated at 13.5% for qualifying construction work) or a supply of goods with ancillary services (and therefore rated at the materials’ VAT rate, typically 23%).
The rule works as follows:
If the cost of the goods (materials) incorporated into a job represents less than two-thirds of the total invoice value (i.e., labour makes up more than one-third), the entire supply is treated as a supply of services. The VAT rate applied to the whole invoice is the service rate — 13.5% for qualifying construction work.
If the cost of the goods represents two-thirds or more of the total invoice value (i.e., the job is predominantly materials), the supply is treated as a supply of goods. The VAT rate on the materials element is the materials rate (23% for most goods not specifically rated lower), and the labour element is still rated at the construction service rate.
In practice, for most trades work — a plumber fitting a bathroom, an electrician rewiring a house, a builder doing an extension — labour represents more than one-third of the total charge. The two-thirds rule does not apply, the entire job is a supply of services, and the 13.5% rate applies to the whole invoice.
The two-thirds rule becomes relevant when a job is very heavily materials-dominated — for example, supplying and fitting a specific piece of equipment or a highly specified product where the supply and installation cost of the product itself dwarfs the labour element.
A Practical Example
A plumber is engaged to replace a boiler and fit new radiators throughout a house. The plumber’s invoice breaks down as follows:
Labour: €800. Boiler: €1,200. Radiators and pipework: €600.
Total: €2,600.
Materials cost (€1,800) as a proportion of the total invoice (€2,600) = 69%. This is more than two-thirds.
In this case, the two-thirds rule is triggered. The VAT treatment is:
Materials (€1,800): rated at the appropriate goods rate — 23% for the boiler and most heating components, generating €414 in VAT. Labour and services (€800): rated at 13.5% for construction services, generating €108 in VAT.
Total VAT on the invoice: €522.
Now change the scenario slightly. The same job, but the customer supplies the boiler themselves. The plumber’s invoice is now:
Labour: €800. Radiators and pipework: €200.
Total: €1,000.
Materials cost (€200) as a proportion of total (€1,000) = 20%. This is less than two-thirds.
Now the entire supply is a supply of services. The 13.5% rate applies to the whole €1,000 = €135 in VAT.
The difference in VAT between these two scenarios illustrates why understanding the two-thirds rule matters — both for how you quote and invoice, and for how you ensure your VAT return is accurate.
When Do Tradespeople Need to Register for VAT?
The VAT registration threshold for a service business in Ireland is €40,000 per year in taxable turnover. For a tradesperson whose income is primarily labour-based and therefore classified as services, the €40,000 threshold applies.
If your annual turnover exceeds €40,000 — and for most full-time self-employed tradespeople, it does fairly quickly — you are legally required to register for VAT.
One important nuance: the threshold applies to your taxable supplies, which includes the VAT-inclusive value of your work. A sole trader charging €40,000 net (exclusive of VAT) is already above the threshold on gross receipts.
Many tradespeople who have been operating for a few years have quietly drifted above the registration threshold without realising it. Our complete guide to starting a business in Ireland covers VAT registration timing in the wider context of getting your business set up correctly. Revenue cross-references income tax return turnover figures against the VAT register. If you are declaring trading income of €60,000 on your income tax return but are not registered for VAT, that discrepancy will eventually attract attention.
VAT and New Buildings vs Existing Buildings
There is a further distinction that catches tradespeople working on new builds rather than repairs and renovations. Services supplied in connection with the construction of a new building can be zero-rated (0% VAT) in certain circumstances, rather than rated at 13.5%. This applies to the construction of new residential buildings.
Repairs, renovations, and works on existing buildings are rated at 13.5%. Services in connection with new commercial buildings are rated at 13.5%.
If you regularly work on new residential developments, the zero-rating for new build construction may apply to your services. This is a specific and important distinction — charging 13.5% on services that should be zero-rated means you are overcharging your customer and collecting VAT you shouldn’t be collecting.
The Reverse Charge Mechanism for Construction
For VAT-registered subcontractors working for VAT-registered principal contractors in the construction sector, a reverse charge mechanism applies. Under this system, the VAT on the supply is accounted for by the principal contractor (the customer) rather than the subcontractor (the supplier). The subcontractor issues an invoice without charging VAT and notes “reverse charge applies.”
This mechanism, introduced specifically for the construction sector, was designed to prevent VAT fraud. It requires that both parties are VAT-registered in Ireland and that the supply is a construction service.
If you are a subcontractor and your principal is asking you to invoice without VAT under a reverse charge arrangement, this is correct — provided both parties are VAT-registered. Issuing a reverse-charge invoice to a non-VAT-registered customer, or to a private individual, is incorrect and creates a VAT liability.
Getting It Right
The VAT rules for tradespeople are more nuanced than they might appear, and the cost of getting them wrong can be significant — both in terms of VAT under- or overcharged to customers, and in terms of Revenue compliance exposure.
If you are not confident that your current VAT treatment is correct — particularly around the two-thirds rule, the rate for new builds versus renovation, or the reverse charge — it is worth having your accountant review a sample of recent invoices. If you are also dealing with subcontractors, our guide to RCT for Dundalk builders and subcontractors covers the withholding tax obligations that apply alongside VAT. Revenue regularly examines VAT compliance during audits of construction businesses. If you are selected, here is what to expect from a Revenue audit. The review cost is trivial compared to the cost of a Revenue inquiry into years of incorrect VAT accounting.
Paddy Malone FCA AITI
Paddy is the principal of Malone & Co. Chartered Accountants in Dundalk. A Fellow of Chartered Accountants Ireland and a Chartered Tax Consultant with the Irish Tax Institute, he has been advising businesses across County Louth and the North-East for over 35 years.