Relevant Contract Tax (RCT)

Posted on 6 May 2014 by Accountant

What is RCT?

Relevant Contract Tax (RCT) is a tax deduction system, which applies in the construction, forestry and meat processing industry.

The RCT system has similar logic as PAYE/PRSI system where Employer deduct tax from Employee’s gross salary and pay him only net pay. In RCT system there is “Principal Contractor” (who represents Employer in PAYE system) who deduct tax from payments to “Sub-Contractor” (who represents Employee in PAYE system).

Employer is responsible to deduct tax from payments to employees and similarly Principal Contractor is responsible for correct tax deduction from payments to Sub-Contractors.

Who is Principal Contractor?

A Principal Contractor is a self-employed person or a company who ordered certain services from a sub-contractor. We will call him “Principal” from now on in this article for shorter name.

Who is Sub-Contractor?

Sub-Contractor is a self-employed person or a company who is doing job (delivering services) for a Principal.

Principal and Sub-Contractor at the same time

Many businesses can be Principals and Sub-Contractors at the same time. Many businesses pay other businesses for construction work, but are themselves paid by other businesses too. When they are working as a Principal, they must follow the rules for Principals and when they are working as a Sub-Contractor, they must follow the rules for sub-contractors.

What’s Relevant Contract?

Relevant Contract is an agreement between Principal and Sub-Contractor, that the Sub-Contractor will deliver (or carry out) “Relevant Operations”. Sub-Contractor will arrange labour and mostly material as well. It is always relationship between self-employed persons and companies in various combinations (self-employed vs. self-employed, self-employed vs. company or company vs. company).
Where a person is an employee of the Principal a “relevant contract” does not exist between them. PAYE is operated on payments to the employee in the normal way.

What are Relevant Operations?

Relevant Operations are in three categories: construction, forestry and meat processing.

  1. Relevant Construction Operations:
    • The construction, alteration, repair, extension, demolition or dismantling of buildings, walls, roadways, docks/harbours, railways, power lines, telecommunications apparatus, inland waterways, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage.
    • The installation, alteration or repair in any building of systems of heating, lighting, air conditioning, sound proofing, ventilation, power supply, drainage, sanitation, water supply, burglar alarms, fire-protection or telecommunications.
    • The external and internal cleaning of buildings (other than normal maintenance) carried out as part of their construction, alteration, extension, repair or restoration.
    • Preparatory works before construction such as site clearance, earth moving, excavation, tunneling and boring, drilling, extraction of minerals or natural gas, laying of foundations, erection of scaffolding, site restoration, landscaping, the provision of roadways and other access works.
    • The haulage for hire of materials, machinery or plant for use in construction operations.
  2. Relevant Forestry Operations:
    • The planting, thinning, lopping or felling of trees in woods, forests or other plantations, the maintenance of woods, forests and plantations and the preparation of land including harvesting.
    • The haulage or removal of thinned, lopped or felled trees.
    • The processing (including cutting or preserving) of wood from thinned, lopped or felled trees in sawmills.
    • The haulage for hire of materials, machinery or plant for use in forestry operations.
  3. Relevant Meat-Processing Operations:
    • The catching and the slaughter of cattle, sheep or pigs, domestic fowl, turkeys, guinea fowl, ducks or geese.
    • The division (including cutting or boning), sorting, packaging, rewrapping or branding, the application of methods of preservation (including cold storage) to the carcasses, the loading or unloading of the carcasses, the rendering of the carcasses of slaughtered cattle, sheep or pigs, domestic fowl, turkeys, guinea fowl, ducks or geese.

RCT does not apply to professionals such as architects, surveyors etc.

RCT Administration

There are special rules for payments made by Principal to Sub-Contractor.

RCT applies to both resident and non-resident contractors.

Principal needs to deduct tax at the rate of 0%, 20% or 35% from payments to Sub-Contractor. Revenue will instruct Principal what tax rate to use for tax deduction from payment.

General rules for RCT Rates:

  1. Zero Rate Sub-Contractor – 0%
    The 0% rate will apply to sub-contractors who satisfy (among other conditions) full tax compliance for the previous three years.
  2. Standard Rate Sub-Contractor – 20%
    The 20% rate will apply to sub-contractors registered for tax with a record of substantial tax compliance.
  3. Default Rate Sub-Contractor – 35%
    The 35% rate will apply to sub-contractors who are not registered for tax in Ireland or who have an inadequate tax compliance record.

It will be important for foreign sub-contractors to consider Irish tax registration at an early stage in the project to avoid deductions from sales payments at 35%.

RCT Tax Repayments/Offset

RCT tax deducted is mainly used against preliminary tax and income/corporation tax duties. RCT can be offset against other tax duties as PAYE/PRSI and VAT. RCT is no extra tax for self-employed or companies, it is prepayment tax for income/corporation tax for year/period in which it is deducted.
For foreign sub-contractors who do not have tax liabilities in Ireland, it should be possible to ask Revenue for a refund of RCT deducted.
RCT can be repaid annually after filing income/corporation tax return if the repayment is due for that year.

Online system called e-RCT (electronic RCT) is currently in place. Online system is mainly used by Principals because they have most administration duties, but sub-contractors can benefit from online system as well.

Administration duties for Principal Contractors

      1. Contract Notification
        The Principal must notify Revenue online (through ROS) about going into a relevant contract.
        Details required:

        • Sub-contractor’s name and tax reference number,
        • If the sub-contractor has fixed place of business (Yes/No),
        • Contract Details:
          • Nature of work,
          • Location of work,
          • Start and End date of work,
          • Estimated value of contract.

        Where a Principal has multiple contracts with the same sub-contractor, the Principal will be required to register each contract separately.
        Revenue will then confirm the contract notification and will advise the Principal of the current rate of RCT for the sub-contractor.

      2. Payment Notification
        Before making each relevant payment, the Principal must notify Revenue online (through ROS) about the intention to make a payment and indicate the gross amount of that payment.
        It will not be possible to notify a payment on-line unless the contract has been registered.
      3. Deduction Authorisation
        When Revenue receive a payment notification, they will immediately issue a “Deduction Authorisation” to the Principal for each payment with the rate of tax to be deducted. This authorization relates specifically to the payment notified and you will find it in your ROS inbox.
        The Principal needs to deduct tax according to the deductteion authorization. Principal needs to give a copy/details of the deduction authorization to the sub-contractor. RCT_PaymentDeductionStatement_Screenshot
        You can download a template of RCT Payment Deduction Statement (in Excel, OpenOffice or PDF format) for €3 here.

 

    1. RCT Return
      After the end of each period (monthly or quarterly), you need to file RCT Return online (through ROS). All the payments you have notified for that period will be available for RCT return. If the return requires amendment, you can amend it, filed the RCT return and arrange for payment on, or before the due date.
      Principals must pay the relevant tax due online by 23rd of the month after the end of the period covered by the return.
      There is €100 surcharge (penalty) if the deduction summary is made or amended after the due date. Interests will be charged for late payments made by principals.

If Principals do not comply with the deduction authorization for each payment, they will be liable to pay:

  • RCT at 35% and
  • a penalty of the lesser of €5,000 or 35% of the relevant payment.

Checklist for Principals

  1. Register for Revenue On-line Service (ROS)
  2. VAT
    • Principal must calculate and account for the VAT on construction services received from sub-contractors. The method of accounting for VAT in such cases is known as reverse charge.
    • VAT Return: Enter VAT on construction services received at T1 on VAT 3. If VAT is deductible (subject to the normal rules) enter VAT on construction services received at T2 also.
    • Invoices received from sub-contractors in respect of construction services should not include VAT. If VAT is included, pay the amount due net of VAT and account for the VAT under the reverse charge.
    • No VAT should be paid over to sub-contractors on invoices
    • Invoice from sub-contractor should show all details that would appear on VAT invoice except VAT rate and VAT amount.
    • Invoice should show “VAT on this supply to be accounted for by the principal contractor”.
    • Invoice should show sub-contractor’s VAT number unless:
      1. sub-contractor is not registered due to turnover being under the threshold for registration,
      2. sub-contractor is not established in the State and is not registered for VAT in the State.
    • The Principal must always account for VAT on construction services received from sub-contractors who are established outside of the State irrespective of whether that sub-contractor is VAT registered and irrespective of his/her turnover.
  3. RCT should be deducted (where required) from the net amount paid.
  4. The two-thirds rule does not apply where reverse charge applies.

Technology Failures

RCT system is based on computer and online technology.

Advice what to do in case of technology failures.
If a principal is unable to give notification about payment to Revenue due to technology system failure, he can do as follows:

  • Principal can do a payment with tax deduction at the rate last notified to the principal for particular sub-contractor or deducts tax at a rate of 35%.
    The safest option to avoid any penalties and questioning is to deduct 35% of tax from payment to sub-contractor.
  • When technology come back to working order, Principal needs to immediately notify Revenue about the payment, which was already made.

Administration duties for Sub-Contractors

The new RCT system does not require sub-contractors to register on-line with Revenue. But there are advantages to being registered for ROS (Revenue Online System). For example, it will be possible to view all transactions on the sub-contractor’s RCT account online, benefit from 24/7 self service options, view the RCT rate and request a RCT rate review.

You can find a guide how to register for ROS here.

Sub-contractors must give sufficient information to Principals to help them to make the online contract notification to Revenue.
Details required:

  • Sub-contractor’s name and tax reference number,
  • If the sub-contractor has fixed place of business (Yes/No),
  • Contract Details:
    • Nature of work
    • Location of work
    • Start and End date of work
    • Estimated value of contract

Where a Principal deducts RCT tax, Revenue will treat sub-contractor as having paid the tax to Revenue. Revenue will give details of the amount of tax deducted to sub-contractor. The deducted tax will be a payment on account of income tax or corporation tax for the period in which the tax was deducted.

Checklist for sub-contractors

  1. Issue an invoice to Principal
  2. VAT
    • If sub-contractor is registered for VAT, invoices issued to Principals in respect of construction services should not include VAT. Invoice need to show: “VAT on this supply to be accounted for by the principal contractor”. Principal will account for the VAT on construction services directly to Revenue.
    • Invoices issued to customers who are not Principals should include VAT as normal.
    • A sub-contractor who only works for Principal will be in a VAT repayment situation.
    • Sub-contractors not established in the State are not required to register for VAT if they provide only construction services to Principal. They will need to register to qualify for repayment of Irish VAT suffered.
    • If they provide construction services to customers other than Principal, they must register for Irish VAT.
    • The two-thirds rule does not apply where reverse charge applies.
  3. Principal are customers who have to operate the RCT scheme – deduct tax.
  4. Sub-contractors needs to register for VAT where the value of services exceeds (the registration threshold) €37,500.

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