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Not just the Construction Industry?

When Relevant Contracts Tax (RCT) is mentioned thoughts immediately turn to the construction sector however the application of RCT is far greater than you may initially expect.

When Relevant Contracts Tax (RCT) is mentioned thoughts immediately turn to the construction sector however the application of RCT is far greater than you may initially expect.

RCT is a withholding tax which applies to payments being made by those defined as ‘Principal Contractors’ for services ‘Relevant Operations’ received from suppliers ‘Subcontractors’.  As there can be costly implications for either the recipient or supplier of the services due to RCT it is important to be cognisant of potential RCT consequences and to seek advice if in any doubt as to the application of RCT.

In this article we explore who can be a Principal or a Subcontractor for RCT purposes but first we will give a very brief overview of RCT compliance and the consequences of not getting it quite right.

RCT compliance and consequences

All RCT compliance is conducted using the Revenue Online System (ROS), the most important stage is Payment Notification. Before each and every payment made to a supplier for services provided under a relevant contract (i.e. where any RCT type services are provided to a ‘Principal’) the details of the proposed payment should be submitted via ROS which will provide a Payment Authorisation indicating how much, if any, RCT needs to be deducted from the proposed payment and remitted directly to Revenue. Ensuring that a Payment Authorisation is obtained prior to releasing the funds to the supplier is the key to managing RCT risk.

Set out below are the RCT rates a supplier may have assigned to them by the Revenue Commissioners.  A penalty will apply when an authorisation is not obtained prior to a payment being made to a supplier and the level of penalty payable is linked to the supplier’s RCT deduction rate as follows;

Suppliers RCT rate                         Penalty applicable

0% deduction rate                         3% of the relevant payment

20% deduction rate                      10% of the relevant payment

35% deduction rate                      20% of the relevant payment

Unknown/not registered             35% of the relevant payment

When there is a failure to operate RCT correctly it is normally down to one of three primary reasons,

  1. the business was not aware it was considered a Principal Contractor and there was a complete failure to operate RCT
  2. the services being received were not correctly identified as being subject to RCT
  3. payment authorisation was not obtained at all, or in time, prior to the payment being made

Who needs to consider RCT?

RCT typically applies in three main industry sector, construction, meat processing and forestry and many in these sectors will be familiar with and aware of their RCT obligations. However, there are many other situations where a business or individual can find themselves having to deal with RCT either as a Principal or as a Subcontractor. 

Legislation provides that the following are Principal Contractors;

  • Individuals that are connected to a company whose business includes the erection of buildings or the development of land
  • Businesses who manufacture, treat or extract materials for use in construction activities
  • Local authorities, public utility societies and housing associations
  • Government Ministers
  • Boards and bodies established under statute
  • Board or bodies established under royal charter and funded mainly by the Oireachtas
  • Those carrying on any gas, water or electricity work
  • Those carrying on any hydraulic power, dock, canal or railway work
  • Those carrying out the installation, alteration or repair of telecommunications systems.

If we consider the first category above, individuals connected to a business involved in the erection of buildings or development of land, this can result in additional persons or businesses being considered to be Principal Contractors just through a connection with someone engaged in construction activity.  By way of example, Jane is the main shareholder and is a director of a small construction company. She is also in partnership with her friend Anna running a number of clothing stores around the country. The partnership is investing significant funds in redeveloping a number of stores.  Due to Jane’s connection to a construction company the Partnership is also considered a Principal Contractor and should be operating the RCT system. Jane will also have to operate RCT on construction type services received in respect of residential lettings that she owns.

There is an additional category which can catch many businesses and individuals unaware which brings them within the scope of RCT as a Principal. Where you agree to carry out works which are relevant operations and you engage another person to do those works, you, as a middleman, are deemed to be a Principal contractor. ‘Relevant operations’ are very broadly defined and we will cover this is a future article.  However, for the purposes of this article, you should consider any hands on physical installation, repair or building type activity as falling within the scope of RCT. To illustrate how the above may apply the following parties would be considered to be Principal Contractors;

  1. A tenant is carrying out construction/refurbishment type works on a leased building and agrees to engage its contractor to do works for the landlord for which the landlord will reimburse the tenant. As the tenant has agreed to do works for another person and is subcontracting those works it will be considered to be a Principal for RCT purposes.
  2. Similarly a landlord who is being paid by a tenant to carry out construction type works and is using a contractor to actually do the works could also be considered a Principal for RCT purposes.
  3. A US multinational engages a US Alarm supplier to supply and install new alarm systems in various locations worldwide. The US alarm supplier utilises its UK based company for work to be carried out in Ireland, the UK entity subcontracts an Irish company to carry out the works. In this case, both the US and UK alarm companies would be considered to be Principal contractors and should be operating RCT on payments for the Irish works.

Note there are a number of Revenue concessions and statutory exemptions available which can preclude some persons or some services from being considered falling within the scope of RCT depending on the particular circumstances pertaining.

Service suppliers

Although the onus, and potential exposure, for operating RCT rests with the Principal contractor the application of RCT obviously has an impact on suppliers receiving payment. There are some suppliers who may not have provided their services to a Principal before and the application of RCT can be unexpected. Due to the very broad nature of services within the scope of RCT I have set out just a few examples below;

  • Hire of a crane or other plant and machinery with an operator
  • Supply and install services
  • Building repair services
  • Maintenance contracts which include repairs
  • Haulage services
  • Cleaning services during or on completion of a construction project
  • Supply and erection of scaffolding
  • Some site investigations and geotechnical work
  • Supply of staff to be used for construction work

Suppliers who find themselves working for a Principal need to consider a number of RCT and VAT issues, as follows;

  1. What rate of RCT is being applied and can a lower or the zero rate be achieved meaning that payments can be received with a lower or zero RCT deduction being required.
  2. Have any RCT type services been subcontracted with the result that the Supplier is also now a Principal contractor and should be operating RCT on payments that it makes to its suppliers
  3. What are the VAT consequences of supplying RCT services

VAT and RCT – is there a saving to be achieved

When an RCT construction type service (with the exception of haulage services) is provided to a Principal Contractor then specific VAT reverse charges rules apply. The supplier of the service should not charge VAT on its invoice to the Principal and the Principal is obliged to ‘self-account’ for the VAT due.

The application of this VAT rule can provide a cash flow saving to both the supplier – who no longer has to pay the VAT to Revenue which may be due before he has received payment from the supplier, and also for the supplier, who no longer pays the VAT amount to the supplier instead including it as VAT due to Revenue under reverse charge rules but in most cases can take a simultaneous deduction making it VAT cash neutral.

RCT is often a complex area in terms of determining who is a Principal and which services are within scope. Our Indirect Tax Team has extensive experience assisting clients in identifying whether they are within the scope of RCT, dealing with registrations, compliance and carrying out reviews/dealing with Revenue audits. We would be delighted to assist you in assessing your RCT position to ensure compliance.

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