Updated September 2026 · 10 min read
General information for Irish trade businesses, not tax advice. Confirm anything that affects your business with your accountant or Revenue.
Quick answer: Revenue's two-thirds rule is a plain arithmetic test. If the goods you use on a job cost you more than two-thirds of what you charge for the whole job, both figures excluding VAT, then the rate that applies to the goods applies to the entire job, labour included. In trades terms, a job you expected to bill at 13.5% becomes a 23% job. It is the cost to you that counts, not what you charged for the materials, and the rule does not apply at all to a subcontractor invoicing a principal contractor under the reverse charge. Most businesses meet this rule for the first time when an accountant raises it on a job that was finished months ago.
Verified against Revenue's published guidance, September 2026.
What the rule says
Revenue's test compares two numbers, both excluding VAT: what the goods cost you, and what you charge the customer for the whole job.
In Revenue's own words: "If the cost of the goods used in carrying out the work exceeds two-thirds of the total price, the rate which applies to the goods then applies to the entire transaction."
Revenue's worked example on that page is a guitar repair rather than a trade job, but the arithmetic is the same whatever the work is. The job is quoted at €300 plus VAT. The materials cost €220 excluding VAT. Labour, overheads and profit make up the remaining €80. Two-thirds of €300 is €200, the materials cost more than that, so the VAT chargeable is €69, which is the whole €300 at 23%.
Two details in that wording do most of the damage in practice.
It is the cost to you, not what you charged for the materials. If you buy a cylinder for €900 and put it on the invoice at €1,200, the test uses €900. A healthy markup on materials pushes the job further away from the threshold, not closer to it, which is the opposite of what most people assume.
It is the whole job, not the materials line. The rule does not split the invoice. If the test is met, the goods rate applies to everything on it, labour included.
Exactly two-thirds is fine
Revenue's test is worded as "exceeds". A job where the goods come to exactly two-thirds of the charge is on the compliant side of the line.
Charge €3,000 excluding VAT with materials at €2,000 excluding VAT and that is exactly two-thirds, so the rule is not triggered. Charge €3,000 with materials at €2,000.01 and you are one cent over, and the test is met.
That sounds like hair-splitting until you are the business sitting on the boundary in an audit.
The jobs the rule does not apply to
Revenue lists the services that are not subject to the two-thirds rule. Three of them, in Revenue's words:
- "Repair and maintenance of motor vehicles and agricultural machinery."
- "Construction services where principal contractors account for VAT on the receipt of construction services from sub-contractors."
- "Construction services between two connected parties."
The second one is the one that matters to most trades reading this, and it is worth understanding why it is there rather than just that it is.
Relevant Contracts Tax, or RCT, is the system where a main contractor withholds tax from payments to a subcontractor in construction and pays it to Revenue directly. Where a subcontractor is working for a principal contractor under a relevant contract, the reverse charge applies: the subcontractor does not charge VAT on that invoice at all, and the principal accounts for it on their own return. There is nothing for the two-thirds rule to test, because the subcontractor is not applying a VAT rate in the first place.
This matters because a subcontractor can be doing reverse-charge work and ordinary VAT-able work for the same principal in the same period. Being a principal contractor is one part of the test, not the whole of it. Whether any particular job is a relevant construction service is a judgement about the contract, and it is not something arithmetic can answer.
Why it is normally caught too late
To run the test you need the cost of the goods to you, excluding VAT, on that specific job.
Most field service software knows what you charged. It does not know what you paid. So the ratio cannot be calculated inside the system that raised the invoice, and the first person who can calculate it is the accountant, working from purchase records after the period has closed.
By then the customer has been given a price, the invoice has gone out, and the VAT has been returned.
Where JobFlow fits
We build JobFlow, Irish job management software, so read this knowing that. JobFlow holds both numbers, because cost prices sit on the price list and purchases are recorded against the job. That makes the test computable while the quote is still on screen.
When the figures on a quote meet Revenue's test, a line appears under the totals saying that materials are more than two-thirds of the price and that the 13.5% rate may not apply to this job. It appears while the quote is being built, before a price has been given to anyone and long before anything reaches a VAT return.
It warns. It never re-rates. It does not switch the lines to the standard rate, does not block the save, does not block the send, and changes nothing on the quote. You choose the VAT rate. The product tells you what Revenue's test says about the numbers you typed.
That is deliberate. Whether a supply is a relevant construction service is a judgement about the contract, not about the arithmetic, and a warning that quietly re-rated a quote would be worse than no warning at all, because you would never learn it had happened.
It stays silent rather than guessing. If any material line has no cost against it, the warning does not appear, because a partial materials figure understates the ratio and a quiet "you are fine" built on half the costs is worse than no answer. The check waits until the cost picture is complete. It also only looks at jobs carrying the 13.5% reduced rate, since that is the rate Revenue's test is about.
It is suppressed entirely where the construction reverse charge applies, for the reason above.
What it does not do
It does not decide whether RCT applies to a job. It does not decide whether a supply is a relevant construction service. It does not pick your VAT rate, and it is not a substitute for your accountant.
What it does is make sure that if the arithmetic is against you, you find out while you can still do something about it.
Where the cost figures come from
The warning depends on cost tracking, which is a setting each business turns on for itself under Settings, then Money, then Costs & profit. It is off by default. With it off, the cost columns, the profit figures and the two-thirds warning do not appear anywhere in the product.
Cost figures are visible to admins and office staff only. A buy price, a markup or a margin never appears on a field staff phone or anywhere a customer can see.
Costs come from three places: a cost price and markup on each price list item, an hourly cost rate alongside the charge-out rate for labour, and purchases recorded against the job with a receipt photo from the van.
If you see the warning
Do not re-rate the job on the strength of a warning from a piece of software, including this one. Check the figures, check whether the job is what you think it is, and if you are not sure, ask your accountant before the price goes to the customer. That is a five minute conversation when the quote is open and an expensive one when the return has gone in.
The rest of this series covers the neighbouring ground: which VAT basis you are on decides when the VAT falls due, what a valid VAT invoice has to show decides what goes on the paperwork, and the RTD explained covers the annual return that catches businesses out at year end. If it is the pricing side you are working on rather than the tax side, how to price a job is the one to read.
FAQ
What is the two-thirds rule?
It is a test Revenue applies to a job where you supply goods and carry out work with them. In Revenue's words, if the cost of the goods used in carrying out the work exceeds two-thirds of the total price, the rate which applies to the goods then applies to the entire transaction. Both figures are taken excluding VAT.
Is it what I paid for the materials or what I charged for them?
What the goods cost, not what you charged. Revenue's own worked example takes the cost of materials excluding VAT against the quoted price excluding VAT. A healthy markup on materials moves a job away from the threshold rather than towards it, which is the opposite of what most people assume.
What if materials come to exactly two-thirds of the price?
Revenue's test is worded as exceeds. A job where the goods cost exactly two-thirds of the total price is on the compliant side of the line. One cent over and the test is met.
Does the two-thirds rule apply to subcontractors working for a principal contractor?
No. Revenue lists the services that are not subject to the two-thirds rule, and construction services where principal contractors account for VAT on the receipt of construction services from sub-contractors is on that list. Those supplies are reverse charge, so the subcontractor is not applying a VAT rate at all. Construction services between two connected parties are also excluded, as is the repair and maintenance of motor vehicles and agricultural machinery.
Can software work out the two-thirds rule for me?
Software can do the arithmetic if it holds both figures, which means it has to know what the materials cost you and not just what you charged. It cannot decide whether a supply is a relevant construction service, whether the reverse charge applies, or what rate belongs on the job. Treat any software warning as a prompt to check with your accountant, not as an answer.
Sources
- Revenue, "Two-thirds rule". The test itself and its "exceeds" wording, the worked example at €300 with €220 of materials giving €69 of VAT, and the list of services that are not subject to the rule, including construction services where principal contractors account for VAT on the receipt of construction services from sub-contractors.
This is general information, not tax or legal advice. VAT rules, rates and treatments change, and your own circumstances matter. Confirm your position with your accountant or with Revenue directly at revenue.ie.