Can the significant financial implications of RCT be minimised?
The article “Not just the Construction Industry?” featured in the August 2017 edition of Indirect Tax Matters. It explored the wider application of Relevant Contracts Tax (RCT), providing a number of examples of how RCT can apply to pretty much any business. Given the difficulties and confusion with regards to RCT encountered by Irish resident businesses, in this article, we direct our attention to non-resident businesses. These businesses can easily find themselves ‘caught’ by the RCT provisions.
Once within the scope of RCT, the operation, or failure to operate RCT procedures can have significant financial implications to any business. RCT can present cash flow issues for suppliers and a risk of penalties for those procuring RCT type services. To put this in a context, for the recipients of the services subject to RCT (i.e. Principal Contractors) it can potentially eliminate the entire projected profit (and more) to be earned from a particular contract, due to the draconian penalties which can range from 3% up to 35% of the relevant payments made to suppliers of certain services under a contract (e.g. a €500k contract could attract a penalty of up to €175k). For the suppliers of the services subject to RCT (i.e. Sub-contractors), tax of up to 35% withheld on receipts can remain trapped for several months (potentially even over a year), resulting in significant cash flow difficulties.
Due to the potentially significant financial implications, it is essential that all businesses seek timely advice if in any doubt as to the application of RCT.
When does RCT apply to non-resident contractors?
By definition, RCT is a withholding tax deducted by a Principal Contractor when making payments to a Sub-contractor who has been contracted to carry out Relevant Operations in Ireland. Ireland, for RCT purposes, includes Irish territorial waters but unlike VAT which only operates within the territorial waters of the State RCT extends to areas over which Ireland has exploration or exploitation rights. As such, regardless of the residence of the Principal or the Sub-contractor, RCT would automatically apply to any part of operations carried out in Ireland and its 200 mile off-shore economic zone, even though a non-resident company may not be obliged to register and account for any other taxes in Ireland. The below examples illustrate how non-residents may be caught by the RCT provisions as either Principal or a Sub-contractor:
- Sub-contractor - a non-resident company enters into a construction related contract works for which are performed in Ireland (e.g. ground checks, building, renovation, fit-out, alarm installation etc.) and supplies own workforce to perform these Relevant Operations.
- Principal Contractor – a non-resident company enters into a construction related contract works for which are performed in Ireland and it then sub-contracts another company (Irish or non-resident) to perform the Relevant Operations.
In a more complex scenario a non-resident company enters into a construction related contract works for which are performed in Ireland. A UK based subsidiary is used to perform these works, this subsidiary in turn subcontracts some or all of the work to an Irish company to carry out Relevant Operations. In this case, both the non-resident company and its UK subsidiary would each be considered Principal Contractors and would be obliged to register and operate RCT on payments for the works performed in Ireland.
The above are only a few of the examples of how non-resident businesses can be brought within the scope of Irish RCT provisions and only refer to the construction related operations which account for the majority of the Relevant Operations. However it should also be noted that certain other services which are performed within the meat processing, forestry or telecommunications sectors can be subject to the same provisions.
Businesses should be mindful that where they are in a supply chain which includes RCT services it is possible that they could be considered to be both a Principal and a Sub-contractor at the same time. In this scenario they would be obliged to operate the RCT process on payments they make to suppliers, possibly withhold tax in a similar manner to RCT which is being operated on payments they receive from their principal from which tax may have been withheld thereby creating cash flows issues.
When it is determined that a particular contract is within the scope of RCT and whether the company is considered a Principal or Sub-contractor (or both), the next step is to ensure that the relevant RCT provisions are complied with to either reduce the chance of potential penalties (in the case of Principals) or to minimise the amount of tax to be withheld, potentially down to zero deduction (in the case of Sub-contractors). Apart from the obligation to register for Irish RCT, set out below are the main administrative requirements for Principals and Sub-contractors.
Following initial registration for RCT, Principals should also ensure that they are registered to use the Revenue Online System (ROS). The RCT system is conducted completely online and will require access to the Revenue Online Service (ROS) in order to meet the compliance obligations which can be summarised as follows:
- Contract Notification - a Principal must notify Revenue when entering into an a new contract with a Sub-contractor
- Payment Notification - before making any payments to the suppliers under a relevant contract the Principal must notify Revenue of the payment to be made. Revenue will respond by authorising the Principal to make the payment but to withhold tax at the appropriate rate, which can be 0%, 20% or 35% of the payment to the Sub-contractor.
- Deduction Summary - a Principal must review the Payment Notifications submittedto Revenue during each period and amend or confirm that the details are in order by the 23rd of the month following the period end.
Principal contractors must ensure that the above steps are followed for each new contract and all payments made under same. Failure to input contract notification and subsequently obtain payment authorisation from Revenue prior to payments made are in most instances likely to result in penalties ranging from 3% to 35% of the payments made. The penalty rate applicable is dependent on the Sub-contractors RCT deduction rate. An additional penalty or ‘surcharge’ of €100 will apply for filing/confirming the deduction summary after the due date. Keeping in mind the severity of the penalties, it is essential that Principals have a complete understanding of what services RCT applies to and the various requirements under the RCT provisions. Adequate procedures must be put in place to comply with same from day one which, for ease of operation, may also be outsourced to the tax agents who will ensure timely compliance and assist with any uncertainties that may arise.
When a Sub-contractor registers for RCT, they will be allocated a deduction rate (i.e. percentage to be withheld by the Principal on any payments made under a Relevant Contract). The standard deduction rate which typically applies on registration for RCT is 20%, however depending on the Sub-contractor’s tax compliance record this can be adjusted to 35% (in cases of persistent non-compliance) or 0% (where an application to Revenue is made and a good compliance record is evident).
In effect, being allocated a 20% or 35% deduction rate will result in corresponding amounts being withheld by the Principal from any payments made under a Relevant Contract. The cash deducted in respect of RCT is paid directly to Revenue by the Principal and is held as a credit on the Sub-contractor’s Revenue RCT account and should be available for offset against other Irish tax liabilities. Any excess will remain on the account and should be available for refund when the business has filed its Irish corporation tax or income tax return for the relevant period. It is normally only then that a refund will be issued by Revenue.
In the event that the RCT withheld in this way poses a significant strain on the business, there is the potential to apply for a refund of the RCT at earlier stage, particularly for non-resident businesses who can demonstrate that neither Irish Corporate or Income Tax will be due. There are a number of forms and questionnaires required in addition to letters from the tax authorities from the non-resident businesses country of residence in order to avail of this facility.
Obtaining an RCT refund
In a worst case scenario, if the Sub-contractor has not been made aware of the requirement to register for Irish RCT and the Principal has withheld RCT on the payments under the contract (which would be 35% of the payment in the case of unregistered Sub-contractors), the tax withheld would remain ‘trapped’ until such time a formal claim is made to Irish Revenue for a refund. There is a statutory four year time limit to submit the claim. The Subcontractor should be aware that Revenue will review the activities in Ireland to determine whether the Subcontractor should have also registered as a Principal and applied an RCT deduction to any payments it has made in addition to ensuring that any other Irish taxes, such as VAT, Payroll Taxes, Corporate or Income Tax have been applied appropriately before an RCT refund will issue.
As it can be seen from the above, RCT withheld by a Principal can result in significant cash flow costs for a Sub-contractor. It is therefore important that a Sub-contractor maintains a good compliance record and seeks professional advice regarding the possibility of applying for a 0% deduction rate at the earliest possible time. In cases where tax has already been withheld and remains on the Revenue RCT account, involvement of experienced tax advisors can not only speed up to the refund process but will also assist in early identification and mitigation of any other potential Irish tax issues which may have gone unnoticed before a claim is submitted to Revenue.
Should you have any queries on this article’s contents or would like our assistance with dealing with any RCT issue, please contact Alan Kilmartin.