Background

On Budget day, 7 December 2010, the Minister for Finance announced that significant reforms will be made to the Relevant Contracts Tax (RCT) system to enhance its effectiveness, reduce opportunities for fraud and help decrease the administrative burden for businesses and Revenue. Details of the new system were included in the Finance Bill 2011, and are now set out in Sections 530A to 530V of the Taxes Consolidation Act 1997.

Subject to the signing of a Ministerial Order, Revenue plan to introduce the new system from 1 January 2012. New regulations to underpin the operation of the new system will also be made in advance of the commencement date.

The current RCT system was introduced in 1970. Despite some amendments such as extending the scope of the tax and changes to certain procedures, the system has not changed much over the years.

Revenue undertook an internal review of RCT in 2010. The review team considered whether there was still a need for the tax and if so what changes could be introduced to address issues raised by external stakeholders during the construction project 2006–2009 and concerns raised within Revenue as to the efficiency and effectiveness of the tax. The review also gave Revenue the opportunity to look afresh at the technological advances that could benefit all RCT stakeholders.

The Foundations-unchanged

The new RCT system, while leaving the essentials of the witholding tax intact, will fundamentally reform the way that RCT operates and how Principals in particular engage with Revenue. As an electronic self service system, it will substantially reduce the compliance burden for principals. It forms part of a wider Government agenda of substantially reducing the administrative burden for business. A key objective has been to maximise the use of resources within Revenue and within the construcrtion, meat processing and forestry sectors.

The volume of paper generated in the current system is in excess of 1 million items per annum. The new system will eliminate this paperwork. From Revenue's perspective, it will provide Revenue with real time information that will reduce the opportunities for fraud and facilitate a more focussed compliance approach allowing Revenue to concentrate its resources on tackling the non-compliant, thus levelling the playing field for compliant operators.

Another fundamental change is the introduction of a 20% rate of deduction for subcontractors who are substantially compliant. Where a subcontractor has suffered RCT (currently at 35%) they can seek to have it offset against other taxes or apply to have the tax repaid. Since the introduction of the VAT Reverse Charge for construction in 2008, most subcontractors have had a substantially reduced VAT liability. The knock-on effect for RCT is that, by and large, subcontractors are ending up in a permanent repayment situation. This situation is neither desirable nor sustainable. As part of the reform of RCT, Revenue reviewed the rate of the witholding tax and concluded that a 20% rate was appropriate as it more closely reflected the overall tax liability of the subcontractor. This in effect will be a 43% reduction in the tax being deducted resulting in a significant cash flow benefit for the subcontractor.

RCT currently operates on the basis that principals can make gross payments to the subcontractor where the principal holds a payments card for that subcontractor. Otherwise, tax must be deducted at 35%. In the reformed system, the principal will be authorised by Revenue to deduct tax at the appropriate rate from each payment to the subcontractor. The rate that is applied to a subcontractor will depend on the subcontractor's compliance record. In general however, subcontractors who currently qualify for a C2 card will be at the zero rate in the new system, provided they continue to keep their affairs up to date. Most subcontractors currently at 35% will be at the 20% rate in the new system. The 35% rate is being retained for those subcontractors that are unknown to Revenue, (e.g. they have not registered with Revenue or have not given the principal contractor sufficient information to allow Revenue's systems identify them), or who have failed to address serious compliance issues.

While there are fundamental changes to the way that RCT operates, the key elements of the tax have not been changed. The scope of RCT remains the same. Where advised by Revenue, the principal must withold tax from payments made to subcontractors. A periodic return must be made, or be deemed to have been made, and the appropriate tax remitted to Revenue.

The following is a high level overview of how the new system will operate from 1^st January 2012.

Electronic system for RCT principals

All contacts between principals and Revenue will be through a new electronic RCT Service. All principals must be registered for the Revenue Online Service, even if they have previously been given an exempt status from mandatory e-filing, unless they have engaged a tax advisor/agent or bookkeeper to perform all RCT functions in the new system.

From 1 January 2012 principals can engage directly with Revenue through ROS online or offline applications or indirectly through the use of third party or in-house software. Principals need to ensure that their systems are compatible with the new RCT system.

Subcontractors are not required to register for ROS, but if they do, significant benefits will accrue for them. They will be able to view all transactions on their RCT account through the online RCT Service and avail of 24/7 self service options.

Contract notification

In the new system, the principal must notify Revenue of each contract through the online RCT Service, providing basic information in relation to the contract. Subcontractors must give sufficient information, in particular their name and tax reference number, to the principal to allow the principal notify the contract and identify the subcontractor for Revenue purposes. Subcontractors will also be asked to provide proof of identity to the principal, for example, a copy of their passport, driver's licence or details of their tax registration, etc. The principal will be obliged to retain documentary evidence of proof of identity.

When Revenue has been notified of a contract, Revenue will inform the subcontractor of the details supplied by the principal and will also indicate the subcontractor's RCT rate. If any of the details are incorrect, the subcontractor should first raise the matter with the principal or alternatively contact his/her local Revenue District.

Provision will be made to cover situations where a principal is unable to use the RCT Service due to a technology failure.

Payment Notification

Under the new scheme the principal must notify Revenue in advance through the RCT Service of each gross payment to be made to each subcontractor. When using the Payment Notification process, the principal will be presented with a list of subcontractors with active contracts. Therefore a contract must be notified to Revenue before a Payment Notification can be made.

There will be a facility to upload payment notifications in batches to the RCT Service.

Provision will be made to cover situations where a principal is unable to use the RCT Service due to a technology failure.

Deduction Authorisation

Revenue will respond to a Payment Notification by sending a Deduction Authorisation to the principals ROS inbox. The principal will receive the Deduction Authorisation from the Revenue RCT Service immediately.

The Deduction Authorisation will authorise the principal to deduct the tax, if any, from the gross payment notified. The principal must give the subcontractor a copy of the Deduction Authorisation with that payment (or, if the subcontractor is in agreement, provide details of the Deduction Authorisation in respect of the payment to be made to the subcontractor).

Where a principal makes a relevant payment to a subcontractor without having notified Revenue of the payment and been issued with a Deduction Authorisation, the principal will be liable for tax at 35% on that payment, together with a penalty of up to €5,000.

When a principal notifies Revenue of a relevant payment, Revenue will automatically credit the RCT deducted to the subcontractor's tax record.

Deduction Summary/Returns

After the end of the principal's return period (monthly or quarterly), Revenue will collate the information from the payment notifications for the period and pre-populate a Deduction Summary. The Deduction Summary will show details of each payment notified to Revenue in the period. A Deduction Summary will issue to each Principal Contractor even if no payments were notified in the period.

Unless the principal is required to add payments to or amend payments on the Deduction Summary, the Deduction Summary will, on the return filing date, be deemed to be the return for the period.

Where the principal has made payments without without giving advance notice to Revenue and receiving a Deduction Authorisation, details of these payments should also be included on the electronic return required to be submitted to Revenue.

Amendments can be made to the details on the Deduction Summary up to the return filing date.

There will be no annual return (currently RCT 35) in the new system.

Subcontractors

Subcontractors will be advised, in advance of 1 January 2012, of the rate which will apply on commencement of the new RCT system. The subcontractor will subsequently be advised of any changes to their RCT rate as determined by Revenue from time to time.

The subcontractor can have their RCT rate reviewed, either by using the RCT Service options within ROS or contacting their local office.

Normal appeal provisions apply to rate determinations.

Key Points to note

• Principals must engage electronicaly with the new system. This requirement is separate from any mandatory efiling requirement. Principals therefore must be registered for Revenue's Online Services to use the RCT Service unless their tax advisor/agent or bookkeeper has been engaged to perform all RCT functions in the new system.
• Where inhouse or commercial accounting software is being used by principals, they will need to ensure that any such software is fully compatible with the the requirements of the new RCT system.
• Some transitional arrangements are being considered and full details will be made available on Revenue's website.
• Information on the new system is available on www.revenue.ie.
• Revenue wrote to all principals in July and are writing to them again again in October
• Principals will be able to access the contract notification process from the end of November.
• While the redesigned RCT system itself will not place an obligation on Subcontractor's to engage electronically with Revenue, many will be brought into this space by the mandatory e-filing obligations which are being rolled out by Revenue as part of a wider e-agenda. Subcontractors using the online RCT service will have access to options such as monitoring RCT credits
• Regulations which will set out many of the details of the new RCT system will be issued prior to the new system going live.

Summary

Whenever change is being implemented, the challenge is to demonstrate that the new system represents significant benefits for all stakeholders. The redesign of the RCT will take maximum advantage of the new opportunities presented by moving to a simplified, self-service electronic system. It will create operational efficiencies for businesses and for Revenue. With the removal of paper transactions from the system, filing processes will be streamlined and errors and delays associated with a paper based system will be eliminated. The real time information will enhance the accuracy and timeliness of management information allowing more efficient use of resources in pursuing compliance and targetting customers with the highest risk of evasion. This should reduce unproductive interventions with businesses.

Over the last ten months, Revenue has engaged extensively with the major stakeholders. Feedback has been mainly very positive. Indeed it was pointed out by one industry representative that we were underselling the benefits.

Tax advisors and agents are encouraged to engage with their clients to ensure that they are ready to manage the transition to the new arrangements.