Relevant Contracts Tax - Clarification about Claiming Offsets/Repayments

Background

Relevant Contracts Tax [RCT] legislation provides that where a sub-contractor does not provide the principal contractor with a valid C2 certificate, or where the subcontractor provides the principal contractor with a valid C2 and the principal contractor does not hold a Relevant Payments Card in respect of the subcontractor, the principal contractor is obliged to deduct tax at the rate of 35% from all payments which he or she makes to the sub-contractor in respect of a relevant contract. The principal contractor returns the deducted tax to Revenue and issues the sub-contractor with a Form RCTDC as proof that the tax has been deducted. The general position then is that the Form RCTDC enables the subcontractor to use the tax deducted to satisfy his or her tax liability for the year in respect of which the payments received from the principal contractor are taken into account for tax purposes by the subcontractor and to offset any balance against other taxes and/or to receive a repayment

Scope of Provisions

Section 531(5) of the TCA 1997 provides that where a subcontractor who is chargeable to tax for a chargeable period has suffered an RCT deduction from a payment made to him or her by a principal contractor, the deducted tax is to be treated as a payment on account of the subcontractor's liability to tax on trading profits (being the trade in respect of which the payment giving rise to the deduction was made) for that chargeable period. The RCT deducted is, therefore, treated as a down payment on the sub-contractor's liability to tax on trading income or profits for the chargeable period.

Where the amount of RCT deducted is in excess of the sub-contractor's liability, including any liability for other taxes (VAT, CGT, etc), the excess may be repaid to the sub-contractor. However, Section 531(5A) of the TCA provides that any such repayments are subject to the four-year time limit in Section 865 TCA 1997. Accordingly, a claim for any such repayment must be made within four years of the end of the chargeable period to which the claim relates. Therefore, a sub-contractor claiming a repayment of tax deducted under the RCT system is not entitled to a repayment where the RCTDC is submitted outside the four-year period.

RCTDCs received late

As just indicated, a claim for repayment of tax on foot of an RCTDC must be made within four years. However, by virtue of Section 531(5) mentioned above, a subcontractor is entitled to have the tax deducted (and to the extent it is evidenced by the amount set out in the RCTDC) treated as a payment on account in respect of his or her tax liability, if any, on trading income or profits (being the trade in respect of which the deduction made from the payment arose) for the chargeable period in question. This is the case even in circumstances where the sub-contractor submits the Form RCTDC outside the four year time limit for repayments. In such a case, while it is not possible to repay any excess tax deducted over the subcontractor's tax liability on trading profits (from the trade which gave rise to the deduction) for the chargeable period, the sub-contractor is entitled to have tax contained in the RCTDC taken into account and credited against any outstanding tax liability on trading profits (from the trade which gave rise to the deduction) for the particular chargeable period. However, any balance remaining on the RCTDC after allowing such credit for outstanding tax liability on trading profits is lost. This is because a repayment is prohibited due to the lateness of the claim for repayment. Neither can any such balance be offset against any tax liability for the chargeable period from any income source other than the trade in question or against a tax liability for another year due to the limited scope of Section 531(5) of the TCA.

Finally, such a balance cannot be offset against any liabilities to other taxes that the sub-contractor may have. This is because Section 1006A of the TCA, the main offset provision, only allows for an offset in circumstances where a repayment is due to a taxpayer. Thus, where the four-year repayment time limit has expired a repayment in not due and therefore tax overpaid cannot be offset.

Example

Subcontractor submits a Form RCDTC on 5 June 2008. The RCTDC relates to a chargeable period ending on 31 December 2003. The RCTDC is outside the four-year time limit. The amount of tax deducted contained in the RCTDC is €100,000. The subcontractor also submits a return in respect of the chargeable period showing a liability of €105,000. The subcontractor requests Revenue to offset the amount shown on the RCTDC against his liability for the chargeable period.

The liability for the chargeable period breaks down as follows:

Liability from trade of bricklayer
€90,000

Liability from rental Income
€15,000

The subcontractor is entitled to have €90,000 contained in the RCTDC credited against his outstanding liability on his trading profits from his trade of bricklayer. The balance of €10,000 remaining on the RCTDC is lost.

Operational Date

These arrangements will apply in respect of claims for offset or repayment of RCT received after 31 March 2006 (operational date for Section 531(5A)) but which had not been dealt with by close of business on 20 June 2008.