Relevant Contracts Tax (RCT) - Clarification on Connected Party Rules (Section 531(1)(c) TCA, 1997) and Construction Operations Carried out in a Private Capacity by a Sole Trader or Partnership

Introduction

This article sets out to clarify Revenue's position in relation to the operation of RCT by persons who are connected with construction, forestry and meat processing companies and to provide guidance to taxpayers and tax practitioners on this issue. It also provides clarification regarding the obligations of builders operating as sole traders or in partnership in respect of construction operations carried out in a private capacity.

RCT and Connected Persons

Section 531 (1)(c) TCA 1997 provides that a person connected with a company involved in a construction, land development, meat processing or forestry business must operate RCT on payments made by that person to a subcontractor in the performance of a relevant contract. This connected person rule is an anti-avoidance provision introduced in 1981 to counteract the avoidance of the operation and application of RCT through corporate restructuring. A 'connected person' for this purpose covers both companies within a corporate group where one subsidiary is a principal under Section 531 1(b) and directors/shareholders with a controlling interest in such companies subcontracting as individuals or as part of a partnership.

It was recognised that this provision had inadvertently brought certain parties within the scope of RCT, in a way that was never the intention of the legislation. For example, a large Corporate Group with many subsidiaries could have one subsidiary involved in construction operations or the development of land. Under the connected persons rule, this would have been sufficient to require every other company in the Group to operate RCT in respect of any subcontractors engaged by them to carry out minor construction operations, electrical installations, plumbing work etc. Similarly, a person connected with a company involved in meat processing or forestry was, strictly speaking, required to operate RCT in respect of construction operations they carried out in a private capacity.

Finance Act 2008 Amendment

Section 35 of the Finance Act 2008 introduced a new subsection into Section 531 TCA (subsection (2A)) that was designed to exclude some connected persons from the RCT provisions in respect of construction operations carried out in their own premises. Where the connection was with a meat processing or forestry company, the obligation to operate RCT in respect of construction work carried out in their own premises was removed from all persons connected with the company. Where the connection was with a company involved in construction or land development activities, the obligation was only removed from connected companies.

In this context, it is important to note that the obligation to operate RCT was only removed in respect of work carried out in the connected company's own premises. Where such connected companies were involved in letting out property, they were obliged to continue to operate RCT in respect of construction operations carried out in such property. As the 2008 Finance Act only removed the RCT obligation from companies where the connection was with a construction company, directors/shareholders with a controlling interest in construction companies were obliged to continue to operate RCT in respect of construction operations carried out in a private capacity and partnerships involving such directors/shareholders were also obliged to operate RCT in respect of all construction operations carried out on their behalf.

New Treatment

(1) Companies, Shareholders & Directors

Revenue is prepared to regard the 2008 modification of the RCT legislation (introduced in Section 35 of the Finance Act 2008) as applying in certain limited circumstances to construction work carried out in premises that have been let out -

• by persons connected with companies in the meat processing or forestry businesses, and
• by companies connected with companies in construction and land development businesses.

The type of work which will qualify for this treatment (i.e. the obligation to operate RCT will not apply) is minor repair or improvement work to rented property where the total value of contracts awarded per property in any tax year in respect of such repairs or improvements does not exceed €20,000 (incl. VAT). Any contracts awarded in any tax year which would bring the total value of such contracts over the €20,000 threshold (per property) will continue to be subject to the operation of RCT in the normal way. A situation could arise where a contract is entered into during a tax year on the basis that it qualifies for this treatment i.e. the total value of the contract plus any earlier such contracts awarded does not exceed €20,000 (incl. VAT). However, if it subsequently becomes clear (at any stage after entering into the contract) that the value of the contract will/is likely to exceed the original contract price to the point that the contract will bring the total value of contracts entered into in the relevant tax year over the threshold of €20,000 per property, normal RCT requirements will apply to the contract from that point onwards.

[See example in respect of Property D below.]

The new approach outlined above will also apply in respect of minor repairs or improvements carried out in a private capacity on their own home (including outhouses and pleasure gardens), or private lettings, or other incidental private work (e.g. erection of a memorial monument) by a director/shareholder with a controlling interest in a construction company.

Example 1

A company connected to a construction company has four rental properties. In 2009, the company engages subcontractors to carry out repairs and other minor work in each of the four properties.

Property A
The total value of contracts entered into in 2009 in respect of minor repair/improvement work is €12,000 - no RCT obligation.

Property B
The total value of contracts entered into in 2009 in respect of minor repair/improvement work is €18,000 - no RCT obligation.

Property C
The total value of contracts entered into in respect of minor repair/improvement work up to 12 September 2009 is €15,000 - no RCT obligation. A contractor is engaged on 3 October 2009 to carry out works estimated to cost €8,000. This will clearly bring the value of the contracts over the €20,000 threshold. As a consequence, the principal should operate RCT on all payments in respect of this latter contract. Any splitting of contracts to avoid RCT will invalidate application of the new approach set out in this article.

Property D
The total value of contracts entered into in respect of minor repair/improvement work up to 31 July 2009 is €9,000 - no RCT obligation. A contractor is engaged on 1 September 2009 to carry out works estimated to cost €10,000 - no RCT obligation at the time of entering into the contract. During the course of work on the latter contract, it becomes clear that the overall value of the contract will exceed the original estimate of €10,000. At the point where it becomes clear that the total value of contracts entered into in 2009 will exceed the threshold of €20,000, normal RCT requirements will apply from that point onwards.

(2) Sole Traders & Partnerships

Building contractors operating as sole traders or in partnership are reminded of their obligations regarding the operation of RCT. A builder who is a sole trader or in partnership is a principal under Section 531(1)(b)(i) TCA 1997 as s/he is 'a person carrying on a business which includes the erection of buildings'. S/he must operate RCT in respect of all payments made to subcontractors who carry out construction operations for him/her, including construction operations carried out in a private capacity (i.e. non-business related construction activities). However, the new approach outlined in Paragraph 1 above (i.e. minor repairs or improvements where the total value of contracts in respect of such work does not exceed €20,000 (incl. VAT) per property in a tax year) will also apply in the case of a sole trader or partnership in respect of such work carried out in a private capacity on their own home (including outhouses and pleasure gardens) or private lettings, or in respect of other incidental private work (e.g. erection of a memorial monument).

General

Where the new approach above applies (i.e. where RCT is not operated in respect of certain minor work), records relating to payments in respect of such work should be maintained by the principal and retained for inspection by Revenue. Accordingly, all relevant invoices should be retained for a period of six years and must clearly show the address of the property or properties involved the date of the relevant contract and the dates of all payments made.

This new approach represents a pragmatic approach in relation to the operation of RCT. However, Revenue reserve the right to impose the strict technical treatment set out in the legislation where, in the opinion of Revenue, there is a deliberate attempt to avoid the general operation of RCT, or there is an attempt or intention to avoid or evade tax by any of the parties to a contract.

This new approach applies in respect of relevant contracts entered into on or after 20 April 2009. For 2009 'tax year' for the purposes of the application of the new treatment outlined above means the period 20 April to 31 December 2009.

Where companies or individuals have a doubt as to whether RCT applies in any particular circumstances or to any particular works, they should contact their local Revenue office for advice.