Relevant Contracts Tax

Clarification of Scope of Section 531(2) Taxes Consolidation Act, 1997

Background

Under Section 531(1)(b)(i) Taxes Consolidation Act [TCA] 1997, a person carrying on a business which includes the erection of buildings is required to operate Relevant Contracts Tax [RCT] on making payments to subcontractors. On foot of Section 31 of the Finance Act 2007, and in the case of relevant contracts entered into on or after 1 May 2007, this requirement also applies to a person carrying on a business which includes the development of land as defined in Section 639(1) TCA 1997. Apart from construction-type work, references in this article to land development include the carrying out of any engineering works or other works on land to adapt it for materially altered use and would generally relate to demolition and site-preparation type work.

The position therefore is that a person carrying on a business which includes the erection of buildings or the development of land is required to operate RCT on making payments to subcontractors. Under the legislation a person can come within the scope of the RCT system even if he or she does not take an active part in actually erecting buildings or in developing the land. All that is required for RCT to apply and for a person to be a principal contractor for RCT purposes under Section 531(1)(b)(i) is that -

• the person must be carrying on a business, and
• the business must include the erection of buildings or the development of land.

Property developers carry on a business of developing land. Thus, where a property developer engages a building contractor to erect a building or a contractor is engaged to clear land or a site for development, he or she is a principal contractor by virtue of Section 531(1)(b)(i) TCA 1997 - even though he or she does not take an active part in the actual work involved. This general position is, however, modified by Section 531(2) TCA 1997. The latter provision provides that a person will not be regarded as a principal contractor for RCT purposes by reason only of the fact that, in the course of his or her business, the person erects buildings for the person’s own, or his or her employees’, use or occupation or, (in relation to relevant contracts entered into on or after 1 May 2007) by reason only of the fact that the person develops land in relation to such buildings.

Clarification

The position outlined above was set out generally, in its pre-Finance Act 2007 form, in an article in the “Queries” Section of Issue 26 of Tax Briefing (April 1997). Arising from a number of enquires received on this matter recently, some further clarification is now provided.

It should be noted that the modifying effect of Section 531(2) TCA applies only in the limited circumstances where a person such as a property developer would fall to be treated as a principal contractor by reason only of the fact that he or she erects a building or develops land in relation to that building in the course of his or her business, where the building is for his or her own use or occupation, or for the use or occupation of his or her employees. It does not apply where the developer erects a building for sale or develops land in relation to such a building (though it may apply in circumstances where the building is developed with the sole intention of letting it [see below]). Neither does it apply in cases where a property developer, though erecting a building for the use of his or her employees or developing land for such a building is, for instance, a principal contractor for other reasons as, for example, would be the case where the developer -

• is also a building contractor or a land developer and is, therefore, carrying on a business which includes the erection of buildings or the development of land and thus a principal contractor anyway under Section 531(1)(b)(i), or
• is connected with a building company or a land development company and therefore a principal contractor under Section 531(1)(c) by virtue of this connection.

In summary, Section 531(2) applies to exclude from RCT a property developer who would otherwise fall within its scope by reason only of his or her involvement in the course of business in the erection of a building or the development of land in relation to such a building where the building is for use or occupation by the person or his or her employees. If the person is a principal for RCT purposes for any other reason, then Section 531(2) does not apply and RCT must be operated.

Developing Property for Letting

Revenue also stated in Issue 26 of Tax Briefing that it generally treats a developer as carrying on a business which includes the erection of buildings (and thus a principal contractor) where the developer’s intention is to develop the property for either sale or letting. However, it went on to say that it would regard the modification provided for in Section 531(2) TCA 1997 as applying to such a person who arranges to have a building erected with the sole intention of letting the building. Accordingly, such a developer or investor was not to be regarded as a principal contractor for the purposes of RCT. With effect from 1 May 2007 this modification will also apply to a developer or investor who develops land with the sole intention of letting any buildings subsequently erected on that land.

It has come to Revenue’s attention that some property developers are developing property to let under very long leases (99 and 999 year leases). The practice set out in Issue 26 of Tax Briefing, and outlined above, was never intended to apply in such cases. Revenue regards such leases as tantamount to a sale. Accordingly, it should be noted that the practice outlined has application only in the case of a person who arranges to have a building erected or develops land in relation to such a building with the sole intention of letting the building under a short lease. For this purpose, a short lease will be taken to be one that does not exceed 35 years. Only in such cases will a developer or an investor be treated as not being a principal for RCT purposes. This change of practice applies in respect of relevant contracts entered into on or after 16 July 2007.

Finally, it should again be noted that the practice just outlined in relation to buildings for short lease does not apply where the developer or investor would be a principal for RCT purposes for other reasons. It does not apply, therefore, where the developer or investor is also a building contractor, or develops land, or is connected with a construction company or a company engaged in land development. It only apples where the developer or investor is a principal by reason only of developing a property in the course of his or her business with the sole intention of letting that building under a short lease.

Contact Details:

Geraldine Keegan Power,
Direct Taxes Interpretation and International Division
Business Income Tax,
Ist Floor, Stamping Building,
Dublin Castle,
Dublin 2

Email: gkpower@revenue.ie

Aisling Malone,
Direct Taxes Interpretation and International Division,
Business Income Tax,
Ist Floor, Stamping Building,
Dublin Castle,
Dublin 2

Email: amalone@revenue.ie