RCT is a withholding-tax system that applies to certain payments in construction, forestry, and meat-processing, and is designed to ensure that sub-contractors comply with their tax obligations.
RCT pertains to payments from principal contractors to sub-contractors for services categorised as 'relevant operations'.
Both principals and sub-contractors must be registered with Revenue for RCT purposes.
Caught
A very wide range of construction operations are caught by RCT.
Examples include:
- Repair, demolition, site-preparation and clearance services,
- Refurbishment or fit-out projects,
- Wind-farm construction,
- Contracts providing installation services,
- Typical building-trade services supplied within the construction sector,
- Operation and maintenance contracts that include repairs,
- Agency services related to the provision of labour for construction work,
- Scaffolding hire with erection services.
A principal is required to withhold tax from payments made to sub-contractors at the rate applicable to that sub-contractor.
The withholding tax rates, of 0%, 20% or 35%, depend on the sub-contractor's tax-compliance record and registration status.
RCT also applies to non-resident principals or sub-contractors.
If work is conducted in Ireland, a principal should deduct RCT from the gross payment.
Principals operating RCT must obtain a deduction authorisation before releasing payments to sub-contractors.
For sub-contractors, having the tax withheld can lead to significant cash-flow challenges. If a sub-contractor has obtained a 0% RCT rate from Revenue, the principal, while still submitting a payment notification receiving a deduction authorisation, will then make the payment to the sub-contractor without deducting RCT.
To be eligible for a 0% rate, sub-contractors must maintain an up-to-date compliance record with Revenue.
Surcharge penalties
Surcharge penalties for incorrect operation of the eRCT system vary based on the compliance level and authorisation rate of the sub-contractor, and are 35%, 20%, 10% and 3%.
These percentage amounts are based on the payments, not the actual tax liability, and must be self-assessed.
The RCT system also affects how VAT is applied between principals and sub-contractors. Typically, the supplier of goods or services applies VAT.
However, in the construction industry and when RCT is applied, the recipient of the goods or services (the principal)pays VAT directly to Revenue.
VAT reverse charge
The principal accounts for VAT as if it were the service provider, a practice known as VAT reverse charge.
Outside of the RCT system, an additional key consideration is whether the sub-contractor is a sub-contractor, and not an employee.
Determining who is an employee can be a complicated legal matter that can give rise to different tax issues.