In Ireland at the moment, the main VAT rates in use are 21% and 13.5%. As a rule of thumb, goods are charged at 21% and services are charged at 13.5%. There is a list of services that can be charged at 13.5% which can be found on the Revenue Commissioners website at www.revenue.ie

To correct some incorrect assumptions, the two thirds rule does not refer to labour being two thirds of the sale. If refers to cost of the goods or materials being used in the sale not being more than two thirds of the full selling price in order to be able to apply the two thirds rule.

Why should we be interested in the Two Thirds Rule, can't businesses claim back the VAT anyway.

Only business registered for VAT can claim back VAT charged to them. So if they are charged at 21% or 13.5% it makes no difference to them as the net charge will be the same, as they can claim back the VAT in either case.

But where the Two Thirds rule does have an effect is where you are supplying a business that is not registered or is not permitted to register for VAT.

Doctors in General practice are an example of a business who cannot register for VAT and so cannot claim back VAT. So if you can charge a Doctor VAT at 13.5% instead of 21% your price to them will be cheaper.

This also applies to the normal consumer. They are not registered for VAT and will be paying out the full price including VAT. There is no refund due back to them for VAT charged to them. So a lower VAT rate means a lower price they have to pay.

The most common use of the Two Thirds VAT rule is used in the Construction Business.

It is therefore important to understand when you can apply the two thirds rule and charge the lower rate of 13.5% VAT. Here is an example using a builder.

There must be an element of labour involved in the job. If the customer buys the parts from you and does the work themselves, then the parts must be charged at the higher rate of 21%.

If the builder is both supplying the goods and performing the labour, then the cost of the goods to the builder i.e. the price the builder bought the goods for can not be more than two thirds of the total job price excluding VAT.

So in the case of a job with a value of €300 where the goods cost €200 and the sum of the Labour charged and the profit come to €100.

In this case the VAT can be charged at the rate of 13.5% as the cost of goods of €200 are not more than two thirds of the €300 full price of the total job excluding VAT.

Remember the cost of the goods is not the cost to the customer, but the cost to the builder i.e. what price the builder paid for the goods.

If the goods had cost the builder €210 then the work would have to be charged at 21% as the €210 is more than two thirds of the value of the €300 (full price excluding VAT) €210 is 70% of €300 (Two thirds in Percentage terms is 66.66%) As 70% is greater than 66.66% the third thirds rule does not apply and 21% vat must be charged.

So remember, the cost of the goods or materials to the builder must not exceed two thirds of the value of the full selling price excluding VAT to the customer and there must be an element of labour performed.

(c) Nilsson Denver 2010