Tax advisors to the left of me, Revenue to the right, here I am, stuck in the middle with RCT! has been saved
Tax advisors to the left of me, Revenue to the right, here I am, stuck in the middle with RCT!
The uptick in the economy has brought with it an increased focus by Revenue on the correct application and operation of the draconian withholding tax that is relevant contracts tax (RCT).
By way of brief summary RCT applies to payments made by those considered to be ‘Principal Contractors’ for services known as ‘Relevant Operations’ received from suppliers referred to as ‘Subcontractors’. RCT legislation obliges Principals to operate RCT withholding tax on payments made to Subcontractors by real-time input of Contract Notifications and Payment Authorisations via the eRCT system available on Revenue Online Services (ROS). Principals should never make payments to Subcontractors without having registered the relevant contract and received confirmation as to the appropriate withholding tax rate (via the receipt of a Payment Authorisation/Notification) attaching to the underlying payment to be made to the Subcontractor. The rates of withholding are dependent on the Subcontractors tax compliance record with Revenue and can be 0%, 20% or 35%.
Although it is a withholding tax aimed at ensuring that those working in certain sectors (primarily Construction, Forestry and Meat Processing sectors) are tax complaint, misdemeanours in this space can be extremely costly. This is particularly so when there has been a blatant failure to operate RCT, with Revenue enforcing strict adherence to the letter of the RCT legislative provisions, even in instances where it has been operated but has been done so incorrectly. It is therefore very important that taxpayers who fall within the scope of RCT are fully versed with their obligations with regard to accurately operating this withholding tax as often taxpayers fall into the remit of RCT unbeknownst to themselves.
Tenant carrying out Category A Landlord’s works
Increasingly Tenants enter into lease arrangements with Landlords which see Landlords agreeing to make payments to the Tenant with a view to inducing them to enter into a lease arrangement. To this end, it is commonplace for the Landlord to agree to pay towards the demised premises being finished out to the desired specification of the occupant. The obligation to operate RCT in respect of this arrangement arises by virtue of the Tenant being ‘stuck in the middle’ of construction supply chains as a result of the Landlord’s contribution to fit-out works (frequently referred to as Category A works) carried out by the Tenant.
Given that tenants/taxpayers/occupants usually enter into one building contract with their building contractor and they do not differentiate between Category A/Landlord’s works and their own fit-out works, the entire contract as entered into by the Tenant with the contractor comes within the remit of RCT (notwithstanding the fact that the Tenant will ultimately be using the leased premises for the purposes of their trade). Accordingly, the Tenant in these circumstances is unable to avail of the commonly available ‘own use exemption’ - whereby the builder or developer of a building developed solely by the occupant (and the person paying for the works) for their own occupation and benefit is not considered to be a Principal for RCT purposes. Therefore, in circumstances where the Tenant is carrying out fit-out works on behalf of the Landlord, the Tenant, as Principal must operate eRCT on all payments made to the Subcontractor. In addition, the Landlord, if they themselves are a Principal for RCT purposes must also operate RCT on the payment being made by them to the Tenant.
Revenue regularly carry out eRCT bulk rate reviews, with the most recent one taking place in April 2019. The purpose of this review was for Revenue to reconsider if the RCT rate attaching to active Subcontractors was still in fact appropriate bearing in mind their tax compliance record since the previous review was carried out. To this end, due to instances of non-compliance or perhaps improved compliance (the more desirable outcome!) a considerable number of Subcontractors have been reclassified under a different eRCT withholding rate.
Whilst all affected Subcontractors and Principals have been appropriately notified (and can take steps towards trying to re-instate a more favourable rate of withholding) this automated Revenue exercise highlights the importance of operating RCT on a real-time basis as RCT rates linked to “live” Subcontractors can, and do, change on a regular basis, even outside of the usual annual bulk eRCT rate review. A Principal cannot rely on the RCT withholding tax rate quoted on a Payment Authorisation from last year or last month or even yesterday for that matter! Hence the importance of obtaining the appropriate RCT payment confirmation on a real-time basis in advance of making any payment to the Subcontractor.
The cornerstone of eRCT is the obligation for a Principal to appropriately operate this withholding tax prior to payments being made to Subcontractors. Therefore, in advance of making any payment to a Subcontractor, a Principal must obtain a Payment Authorisation before they can make the necessary payment. Failure to follow this requirement strictly can result in taxpayers incurring considerable penalties.
In particular, where a payment is made to a Subcontractor without having obtained a Payment Authorisation, as soon as this mishap has been identified, the Principal is obliged to submit an ‘Unreported Payment’ notification via ROS to inform Revenue of this historic payment. Submission of a Payment Authorisation in this manner brings with it the risk of sanction by way of penalties and, as failure to deduct RCT is a Revenue offence, can ultimately result in prosecution. Penalties attaching to Unreported Payments depend on the RCT status of the Subcontractor who has received the payment and can range from 3% to 35% for each separate payment made.
Historically, Revenue applied a more lenient approach to this aspect of RCT with taxpayers usually not being subjected to penalties on Unreported Payments where they generally were tax compliant. However, in more recent times, Revenue have begun to strictly enforce the full rigors of RCT legislation with them now automatically applying penalties against any Payment Authorisations earmarked as Unreported Payments.
While penalty assessments can be appealed, taxpayers need to have a bona fide rational and strong basis for seeking for the non-application and/or mitigation of underlying penalties assessed. To this end, education and appropriate training for those charged with the operation of RCT is essential now more than ever in a bid to try prevent, and ultimately circumvent, any eRCT operational failings which could result in significant costs being incurred due to technical non-compliance.
Merger & Division Legislation (Companies Act 2014) - Are you aware of the RCT implications?
In August 2019 Revenue issued Tax and Duty Manual Part 38-00-01 which deals with ‘Tax Matters Relating to the Companies Act 2014’. The focus of this Revenue operational manual is to provide guidance on tax administration and compliance matters arising from the changes that this legislation brought about in regards to mergers and divisions of companies. The fact that this 26 page manual devotes over 4 pages to RCT is indicative of the importance of this Revenue guidance document from a practical perspective for those dealing with mergers and divisions where RCT is in scope. The practical implications of the mergers and divisions legislation from an RCT perspective will be explored further in the next edition of Indirect Tax Matters.
Deloitte has extensive experience in dealing with all aspects of RCT, in particular regarding RCT compliance obligations, provision of bespoke RCT training, process and procedure documentation, Revenue interventions and audit assistance together with dispute resolution, submitting appeals, making mitigation requests and RCT submissions as well as advising on the RCT implications of mergers or divisions.
If you “got the feeling that something ain’t right” and you are “wondering what it is” you should do when you find yourself stuck in the middle of an RCT quandary please contact Ciara McMullin, Alan Kilmartin or any of our RCT specialists.