Relevant Contracts Tax (RCT) is a tax which applies to certain payments made to subcontractors in certain industries mainly construction but also forestry and the meat processing industry.

Historically, RCT was an onerous administrative function for businesses requiring both the principal contractor and subcontractor having to complete a number of forms. The proposed changes being introduced are a method of streamlining and modernising the current RCT regime by replacing the current paper based RCT System with a more sleek electronic system, with mandatory electronic filing being introduced. Following this development, the current C2 system will be abolished.

The current RCT rate of 35% for non C2 holders is being replaced with a new three rate system, being 0%, 20% or 35%. The rate to be applied will depend on the subcontractor's compliance record.

How will the New Regime Operate?

The Principal Contractor will be required to notify Revenue with details relating to each Relevant Contract they will now enter into. Before a relevant payment can be made to a subcontractor, the principal will be required to notify Revenue electronically of their intentions to make a payment to the subcontractor and the amount of the relevant payment.

Upon receipt of the details, Revenue will issue a “deduction authorisation” to the principal by electronic means. The “deduction authorisation” will specify the rate of RCT that shall be deducted from the payment made to the subcontractor.

Revenue shall keep and maintain a register of principals.

Niamh Higgins is Senior Tax Manager with FPM.

New Rates of RCT

Zero rated subcontractor:

• No RCT is required to be deduced if subcontractor is granted zero status by Revenue.
• This will apply on the same basis as currently applies to an existing C2 holder.
• In addition to the current regulations, the subcontractor must have complied with all their tax obligations throughout the previous three tax years.
• If the sub contractor is non resident they must have complied with the tax obligations in their home country for the previous three years
• Partnerships will not qualify for the zero rate of RCT unless all partners have complied with the three year test.
• Companies will not qualify for the zero rate unless each director of the company and any beneficial owner have throughout the previous 3 years complied with all tax obligations in relation to payment of taxes, interest and penalties, the delivery of returns and supplying information to Revenue.

Standard Rate Subcontractor:

• The 20% standard rate will apply to subcontractor's who are registered with Revenue and have complied substantially with their tax obligations in the previous three years.
• In respect of partnerships all partners will be reviewed to ascertain their compliance history.

35% Rate Subcontractors:

• The 35% rate will be the default rate, where the subcontractors do not qualify for the 0% or 20% rate.
• Revenue has indicated that this rate will apply where subcontractors are not registered with Revenue or where there is no history of compliance.

Returns and Payments of RCT by Principal Contractors

Returns of relevant payments must be made by the Principal Contractor giving details of all relevant payments made during that period and the returns must be submitted electronically.

Principals who make payments to subcontractors without the correct authorisation or do not comply with the with the terms of the deduction authorisation shall be liable to pay tax to Revenue at the 35% rate on the amount of the relevant payment, and be liable to a penalty equal to the lower of €5,000 or the amount of tax payable at the 35% rate unless the principal submits details of the relevant payment for the period concerned on or before the due date of the return.

The principal may issue a copy of the “deduction authorisation” in relation to the payment to the subcontractor.

• Interest on late payments to be calculated at a rate of .0274% per day or part there of, from the due date until date of payment.
• If a subcontractor is aggrieved by the determination of Revenue they have 30 days to appeal in writing to Revenue.
• Late returns and amendment to returns may be subject to a surcharge of €100.

The reverse charge method of principals accounting for VAT for activities falling within the RCT regime will continue to apply for the new RCT regime.

Refunds of RCT

Under the new legislation, Subcontractors will no longer be able to submit repayment claims for tax withheld during the year. Any RCT deducted will be treated as an income tax or corporation tax payment on account. However, subcontractors may be able to apply for an offset of tax suffered and their tax can now only be allocated against other open tax liabilities if the subcontractors preliminary tax obligations are satisfied.

If there are any remaining refunds due then the subcontractor will only be able to claim a refund for the tax withheld when their income tax or corporation tax return is submitted to Revenue and all their tax affairs are up to date and all liabilities are cleared in full. This may encourage subcontractors to file income tax or corporation tax returns early if they have outstanding refunds due to them.

The importance for subcontractors, going forwards, is that they ensure they keep their compliance up to date as they will not want to be disqualified from the 0% or 20% rate for non compliance.

Conclusion

The proposed changes will not come into effect until a commencement order is made.

Revenue are required to produce regulations providing specific details as to how the new regime will be operated and they hope to introduce the new system as soon as it is practical in 2011. In the interim, the existing RCT regime will continue to apply.

Moving to an online system should be a positive move as the system the UK Revenue currently use works effectively and it will help increase the speed of decision making and help to reduce the administration burden on compliant tax payers.

Please note that the above is merely an overview of the new system to be introduced. RCT can be a complicated matter and specialist advice should be obtained prior to acting.

Niamh Higgins is also Senior
Tax Manager with PM Chartered Accountants
Email: n.higgins@fpmca.com