Code of Practice for Revenue Auditors: Relevant Contracts Tax (RCT)

Payments made gross to C2 holders (a) without an RCT 47 (payments card) or (b) in excess of the RCT 47 specified limit as set out in Section 531(12)(e)TCA, 1997, as introduced by Section 44(1)(d) Finance Act, 2006.

1. Introduction

The following changes and clarifications are being made in relation to RCT audits and qualifying disclosures of the failure to deduct RCT where, in exceptional cases, payments are made gross without a relevant payments card (RCT47). They also apply to payments made gross in excess of the specified limit as introduced in Section 44(1)(d) Finance Act, 2006. They apply only to cases where the subcontractor held a valid C2 at the time of the gross payment.

As reiterated most recently in Tax Briefing 64 (August 2006), the payments card procedures are central to the operation of RCT for C2 holders. The existence of a valid C2 alone is not sufficient to allow the principal make gross payments to the subcontractor. The principal will be held liable for the RCT that should have been deducted in the absence of a payments card, or on payments made in excess of the specified limit on the payments card – together with interest and applicable penalties.

However, in the exceptional circumstances set out in sections 2 to 6 below, and only in these circumstances, Revenue will be prepared to amend the normal audit settlement regime already set out in the Code of Practice for Revenue Auditors (“the Code”).

The opportunity is also taken in this note to clarify the operation of Tax Briefing 29 (section 6 below) and the circumstances in which a certificate of deduction may be issued to a sub-contractor in the context of an audit or qualifying disclosure (section 7 below).

The operation of these new arrangements will be monitored on an ongoing basis and will be reviewed as and when required.

2. Technical issue: mistaken belief that the contract is not a “relevant contract”

Where a principal contractor makes a gross payment to a subcontractor in the genuinely mistaken belief that the contract is not a “relevant contract” for RCT purposes, each case will be examined on its own merits. Tax, interest and penalties will not be imposed in bona fides cases. Factors to be taken into account will include the complexity of the technical issue and if the treatment concerned was based on an interpretation of the law that could reasonably have been considered, as likely as not, to be correct.

3.“No loss of Revenue”

Paragraph 11.1.1 of the Code provides that, where a taxpayer proves, to the satisfaction of the Revenue auditor, that “no loss of VAT” could be claimed, the penalty for non-operation of VAT will be mitigated to the lesser of 3% of the VAT underpaid or €60,000, whichever is the lesser, provided there has not been a general failure by the taxpayer to operate VAT or there are no suppressed supplies. The relevant VAT and interest is, of course, also payable.

The paragraph 11.1.1 penalty treatment is being extended to apply, in similar circumstances, to penalties in audit settlements involving non-operation of RCT with valid C2 holders. The RCT and interest is, of course, also payable.

4.“No loss of Revenue” - Group Cases

Paragraph 11.1.2 of the Code provides that interest and penalties are not generally pursued in respect of VAT on intra-group transactions involving “no loss of VAT”. The VAT is, of course, payable.

The paragraph 11.1.2 “Group Cases” treatment for interest and penalties is being extended to apply, in similar “no loss of RCT” circumstances, to audit settlements involving RCT on intra-group transactions with valid C2 holders. This is subject to the additional requirement that both group companies involved had been otherwise tax compliant at the time the relevant transaction(s) took place. The RCT is, of course, payable.

5. Exceptional failure to deduct RCT which is rectified within one month after the RCT35 filing deadline

When the RCT35 is being completed, any instances of payments incorrectly made gross to a valid C2 holder without an RCT47 payments card or in excess of the specified limit on the card, should come to light at that stage and should be regularised. In that context, where:

1. There has been an exceptional failure to deduct RCT (see below);
2. The circumstances are such that an overall loss of revenue is improbable; and
3. There is a qualifying disclosure to Revenue of the failure to deduct RCT within one month after the RCT35 filing deadline,

Revenue will not seek to impose the tax, interest or tax-geared penalties. A fixed penalty will apply, however, for each breach of the Regulations under Section 1052(1)(b) TCA, 1997. The case may be subject to an assurance check. Making a qualifying disclosure in these circumstances will not result in an audit. However, an audit of either the principal's or the sub contractors’ returns may arise based on normal selection procedures.

To qualify as an exceptional failure to deduct:

• The failure must be very exceptional, isolated, not involve any failure to operate RCT generally or not involve suppressed receipts/payments and be one-off;
• The principal must have taken adequate steps to prevent a recurrence; and
• The principal must be generally tax compliant.

The disclosure and accompanying payment of the relevant penalty should be sent to the Revenue District within one month after the RCT filing deadline. The Form RCT35L should be sent to the Office of the Collector-General by the normal filing date.

6. Clarification of Tax Briefing 29

Tax Briefing 29 (December 1997) indicated that Revenue would not seek to collect RCT in exceptional circumstances where a payment is made gross prior to receipt of a relevant payments card, and the tax affairs of both the principal and subcontractor are fully up to date at the time payment is made.

To avoid any doubt, this treatment will only apply in future in the very narrow and exceptional circumstances where Revenue has received an application for a payments card before a payment is made and, through no fault of the principal, there is a delay on Revenue's part in issuing the payments card.

7. Certificate of deduction

In the context of an audit or qualifying disclosure involving payment of RCT that should, in the absence of a payments card, have been deducted on payment to a subcontractor with a valid C2, the principal will be permitted to issue a certificate of deduction (RCTDC) to the subcontractor. Similar arrangements will apply where gross payments are made in excess of the specified limit on the card. The subcontractor may only claim refund or set-off within the statutory four-year time limit.

8. Undertaking of future compliance

It will be a condition of any of the concessional treatments outlined at sections 3 to 5 above and 9 below that the principal contractor will give a written undertaking that the correct procedures will be fully complied with thereafter.

9. Operation of these revised arrangements

Unless otherwise stated, the arrangements in this note will come into effect from 8 February 2007, as regards audits that are notified on or after that day.

As regards audits, notice of which had been given but which had not been settled before 8 February 2007, the taxpayer may choose whether the settlement is to be made under the terms of the arrangements set out in this note or previous published arrangements.

The arrangements in this note will come into effect immediately as respects qualifying disclosures or self-corrections under the Code.

Settled cases will not be re-opened.