Irish Revenue are currently contacting both ‘Principals’ and ‘Subcontractors’ in relation to their Irish tax compliance, we note below some specific items which are worth noting for those who are within the scope of RCT.

By way of background, RCT is a withholding tax that is aimed at ensuring that those operating in certain sectors are tax compliant. For most, when RCT is mentioned the construction industry immediately comes to mind, however, its application is far greater than you may initially expect.

Also affected are the energy, telecoms, forestry and meat processing sectors. Specifically, RCT applies to payments being made by those defined as ‘Principal Contractors’ for services known as ‘Relevant Operations’ received from suppliers ‘Sub-contractors’. RCT legislation obliges Principals to operate a withholding tax system on amounts payable to Subcontractors engaged to supply certain services. The withholding tax rates are linked to the Subcontractors tax compliance record with Revenue and can be either 0%, 20% or 35%.

Where the RCT withholding regime is not operated correctly by a Principal penalties can be very severe – as high as 35% of payments made. For Subcontractors, the imposition of the tax withholding on payments receivable can lead to serious cash flow issues. As there can be costly implications it is important to be aware when you are acting as a ‘Principal’ or a ‘Sub-contractor’ for RCT purposes, to be cognisant of potential RCT consequences and to seek advice if in any doubt as to the application of RCT. Our dedicated team have provided a more detailed overview of this tax and its implications.

Revenue review of RCT rates for Sub-contractors

Every April, Revenue carry out a Bulk Rate Review (BRR) of all Sub-contractors in the eRCT system. This BRR (and any manual rate review) considers the general tax compliance position of each subcontractor. This annual automated review of the Subcontractor’s RCT rate will now also take account of outstanding VAT Annual Return of Trading Details (ARTD) when determining the applicable rate of RCT. The VAT ARTD is essentially a statistical return of the net values of sales/purchases at the various rates.

Ahead of the BRR this coming April, and as an action on this development, Revenue intend to write to approximately 400 contractors to remind them of their obligation in their capacity as Subcontractors to ensure that they are up to date with their VAT returns. Revenue will contact specifically those which are deemed to be most likely to be affected by this change – namely, those who have one or more outstanding VAT returns.

Failure to file these outstanding returns may result in Subcontractors moving to a higher RCT deduction rate following the BRR and thus it is advisable for all Subcontractors to ensure that all outstanding VAT returns are filed prior to the BRR this coming April.

Principal contractors repeatedly making unreported payments

One of the key obligations for a Principal operating RCT is to obtain a ‘Payment Authorisation’ before releasing a payment to a Subcontractor. Where a payment is released before a Payment Authorisation has been obtained an ‘Unreported Payment’ should be submitted by the Principal – this is when penalties can arise. It is important to note that a Principal who makes a relevant payment to a Sub-contractor other than in accordance with a Deduction Authorisation from Revenue in relation to that payment is liable to a penalty. The penalty applicable to an unreported payment is dependent on the subcontractor status and can range from 3% to 35% of each payment made. In addition, the failure to deduct RCT is a Revenue offence which may lead to prosecution.

Up to now where a Principal is submitting possibly hundreds of Payment Notifications and are generally tax compliant Revenue have (depending on particular circumstances in each case) taken a somewhat softer approach.

Revenue will shortly be writing to around 200 Principals, being those who have had 10 or more unreported payments in the last 12 months, with the aim of reminding them of their obligation to correctly operate RCT. Revenue has described this exercise as a “service for compliance” campaign. Now that the eRCT system is in place for seven years, is this a sign of Revenue adopting a harder stance?

So, are you RCT compliant?

Should you have any queries on the contents of this article or if you would like our assistance with ensuring that you are RCT compliant, the Deloitte RCT specialists can provide training, consultancy and compliance solutions to minimise risk and have significant experience and success in dispute resolution with the Revenue Authorities.

Please feel free to contact us should you have any queries.

Sandija Veigule
Assistant Manager, Tax and Legal
Office tel : +35314172787
Email : sveigule@deloitte.ie