Overall tax compliance impact on Relevant Contracts Tax

Irish Revenue periodically conduct a Relevant Contracts Tax (RCT) Bulk Rate Review (BRR) for all contractors in the eRCT system to ensure the RCT rate is set at an appropriate level based on each individual contractors tax compliance record. Revenue normally carry out this review twice a year, however, due the impact of Covid19 on various sectors the reviews scheduled for September 2020 and March 2021 were not carried out. We understand that Revenue have scheduled the next BRR to be carried out over the next few weeks in September 2021.

There currently are three applicable RCT withholding tax rates: 35% for unregistered contractors or those with a poor tax compliance record; 20% for registered contractors with a reasonable tax compliance record (or those who choose not to apply for a ‘zero’ rate); and a zero rate for registered contractors with a good overall tax compliance record. The RCT rate applicable can be amended by Revenue at any point in time, either up or down, to ensure/encourage overall tax compliance is maintained to a good standard.

RCT legislation requires persons who are within the definition of a ‘Principal’ to notify Revenue before payments are to be made to a contractor for certain services, and in some cases the principal will be instructed by Revenue to deduct tax from the amount payable to contractors/subcontractors engaged by the principal to carry out relevant operations in Ireland, this include operations in Irish territorial waters and any area over which Ireland has mineral exploration and exploitation rights. Where tax is withheld from a payment, it is payable directly to Irish Revenue by the 23rd day following the RCT period end; this is typically monthly but can be quarterly.

Where RCT applies, the Principal contractor must notify Irish Revenue of the contract itself and obtain a Payment Authorisation in advance of all payments made under the contract, even where the zero-rate of RCT applies, which is an administrative burden. Incorrect operation of the RCT system can lead to penalties for the Principal ranging from 3% to 35% of the payments made depending on the contractors’ applicable RCT rate.

The tax withheld is available from Revenue to the subcontractor as either a credit for other taxes which may be due or, if there are none, as a refund following the end of the contractor’s accounting period – this can obviously present a cash flow issue for some subcontractors. It is therefore in the subcontractors’ interest to maintain a good compliance record across all Irish taxes and apply for a ‘zero’ RCT rate status in order to receive payments in full without tax being withheld in the first place.

Although RCT is a withholding tax and should not represent a cost to any business, apart from an administrative cost or cash flow cost, there are severe penalties for a Principal for incorrect operation of the withholding tax and, therefore, its operation should be managed carefully.

The Revenue Online System (ROS) provides a “self-review” function whereby a contractor can check their current RCT rate which will also provide details of any tax outstanding payments or returns that may negatively affect their RCT rate. We would recommend that contractors utilise this now to ensure that all tax affairs are up to date and that they are not negatively impacted by the rate review. Principals should be cognisant that their contractors RCT rate may change and have adequate procedures in place to manage the compliance process.

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.