Understanding the Two-Thirds Rule for VAT in Construction

If you’re just getting started in the construction business, VAT can feel like a minefield. One rule that often catches people off guard is the “two-thirds rule.”

It sounds obscure, but it comes up all the time in the construction sector — especially when you’re quoting for jobs that include both labour and materials. If you get it wrong, you could charge the wrong VAT rate and end up with a nasty Revenue bill down the line.

In this article, we’ll explain the two-thirds rule in plain English, give some practical examples, and help you understand when it applies (and when it doesn’t).

What is the Two-Thirds Rule?

The two-thirds rule is part of Irish VAT law. It applies when a job includes both:

• A supply of services (like labour)
• A supply of goods (like materials)

If the cost of the goods (excluding VAT) is more than two-thirds of the total price, then the whole job is treated as a supply of goods for VAT purposes.

That means VAT is charged at the rate for the goods, not the reduced rate for construction services.

Where It Commonly Applies

In practice, this rule often affects construction jobs such as:

• Fitting kitchens or bathrooms
• Supplying and fitting windows or doors
• Installing fitted wardrobes or flooring

A Quick Example

Let’s say you’re a kitchen fitter.
You quote a client €6,000 (excluding VAT) to supply and fit a new kitchen.

• The materials cost you €4,500

Since €4,500 is more than two-thirds of €6,000, the two-thirds rule kicks in.

• Even though there’s a big labour element involved, Revenue considers this to be a supply of goods.
• You must charge 23% VAT (standard rate), not the 13.5% rate that usually applies to construction services.

When Does It Not Apply?

The two-thirds rule does not apply if:

• The materials are less than two-thirds of the price
• The job is strictly a labour-only contract
• The service falls under Relevant Contracts Tax (RCT) with reverse charge VAT
• The work is carried out between connected parties (in certain cases)

For example:
If you’re hired by a contractor under RCT rules to do first-fix carpentry, the two-thirds rule does not come into play.

Why Does It Matter?

Getting this wrong can lead to:

• Undercharging VAT (and having to pay the difference out of your own pocket)
• Confused clients if your VAT rate changes between jobs
• Risk of non-compliance if Revenue audits your VAT returns

In short: the two-thirds rule decides which VAT rate applies. And for construction businesses quoting mixed labour/material jobs, that can make a big difference to your pricing and margins.

How to Stay Right

To stay compliant:

• Know your costs: You need to know the breakdown of labour vs materials for each job.
• Apply the correct VAT rate: If the materials exceed two-thirds of the price, charge the VAT rate for goods (usually 23%).
• Keep good records: If Revenue ever checks, you need to show how you calculated your VAT.

If in doubt, check with your accountant. It’s better to get it right upfront than fix it later.

Final Thoughts

The two-thirds rule is one of those niche tax rules that can have a big impact, especially in construction.

If you’re new to business, make sure you understand it before quoting clients.
Better yet, put a system in place to track materials and labour separately, so you always know where you stand.

Need Help?

Need help getting VAT set up or figuring out what rate applies?
That’s exactly what we help clients with every day. Contact us for support.

This article is intended for informational purposes only and should not be considered a replacement for professional advice. The author(s) disclaim any liability for actions taken or not taken based on the content of this document. It is recommended to seek tailored advice before making any decisions related to the topics discussed in this article.