The uptick in the economy has brought with it an increased focus by Revenue on the withholding tax that is relevant contracts tax (RCT). Ciara McMullin explains.

Although RCT is a withholding tax aimed at ensuring that those working in certain sectors (primarily construction, forestry and meat processing) are tax compliant, all businesses need to be aware of RCT as misdemeanours can be extremely costly, mainly when there has been a blatant failure to operate RCT or it has been incorrectly applied.

What is RCT?

RCT applies to payments made by those considered ‘principal contractors’ for services known as ‘relevant operations’ received from suppliers referred to as ‘subcontractors’. Legislation obliges principals to operate RCT on payments to subcontractors by real-time input of contract notifications and payment authorisations via the eRCT system. Once within the scope of RCT, a principal contractor should ensure the principal never make payments to subcontractors without registering the contract and receiving confirmation as to the appropriate withholding tax rate. Rates can be 0%, 20% or 35% and are dependent on the subcontractor’s tax compliance record with Revenue.

Tenant carrying out landlord’s Category A works 

Increasingly, tenants enter into lease arrangements with landlords which see landlords agreeing to make payments to the tenant for work to be carried out (for example, towards the premises being finished out) to induce them to enter into a lease. The obligation to operate RCT in respect of this arises for the tenant by virtue of being ‘stuck in the middle’ of a construction supply chain.

Given that occupants usually enter into one building contract with their building contractor and do not differentiate between landlord’s works and their own fit-out works, the entire contract comes within the remit of RCT. The tenant, in these circumstances, is unable to avail of the ‘own use exemption’. Where the tenant is carrying out fit-out works on behalf of the landlord, they are considered the principal and they must operate RCT on all payments made to the contractor. If the landlord is also a principal, they must also operate RCT on the payment they make to the tenant. 

Real-time operation 

Revenue regularly carry out eRCT bulk rate reviews, most recently in April and September 2019, to consider the appropriateness of the RCT rates for active subcontractors, bearing in mind their tax compliance record. A considerable number of subcontractors have been reclassified under a different withholding rate, highlighting the importance of operating RCT on a real-time basis as rates are linked to ‘live’ data. Subcontractors rates can, and do, change regularly and, therefore, a principal cannot rely on the RCT withholding tax rate quoted on a payment authorisation from last year (or even yesterday, for that matter!).

Unreported payments

The cornerstone of RCT is the obligation for a principal to appropriately operate this withholding tax. In advance of making any payment to a subcontractor, a principal must obtain a payment authorisation. Where a payment is made to a subcontractor without having obtained a payment authorisation first, the principal is immediately obliged to submit an unreported payment notification to Revenue, bringing with it the risk of sanction by way of penalties and, can ultimately result in prosecution. Penalties depend on the RCT status of the subcontractor who has received the payment and can range from 3% to 35% of each unreported amount paid to the subcontractor. In short, a principal must always ensure that they have a payment authorisation in advance of making a payment to a subcontractor. 

Historically, Revenue applied a somewhat lenient approach to this aspect of RCT if the principal was generally tax compliant. More recently, however, Revenue has begun to enforce legislation strictly and apply penalties automatically. While assessments can be appealed, taxpayers need to have a bonafide basis for seeking non-application and/or mitigation of penalties.

Merger & Division Legislation (Companies Act 2014)

In August 2019, Revenue issued Tax and Duty Manual Part 38-00-01 which includes guidance on tax administration and compliance with regards to mergers/divisions of companies and devotes over four pages to RCT, indicating the importance of this guidance from a practical perspective for those dealing with mergers and divisions where RCT is in scope.

Ciara McMullin is a Senior Indirect Tax Manager in Deloitte.