A number of Revenue Guidance Documents have been introduced following Finance Act 2014 being signed into law on 23rd December 2014.
5. Relevant Contracts Tax – Revised Penalties from 1st January 2015 for the failure of a Principal Contractor to operate R.C.T. correctly on relevant payments to a contractor – eBrief no. 110/14 (24th December 2014)
Before we examine this guidance document, I will briefly explain the Relevant Contracts Tax system in Ireland.
What is Relevant Contracts Tax (R.C.T.)?
R.C.T. is a tax that applies to the following industries in Ireland:
3. Meat Processing
R.C.T. applies to payments made by a Principal Contractor to a Subcontractor under a Relevant Contract i.e. a contract for a Subcontractor to carry out relevant operations for the Principal Contractor.
Important Points to Note:
1. An employment relationship does NOT exist i.e. the Subcontractor is NOT an employee of the Principal Contractor.
2. The Subcontractor provides his/her own labour or the labour of other individuals when carrying out the relevant operations for the Principal Contractor.
So, how does this tax work?
Before 31st December 2011, the Principal Contractor was required to deduct withholding tax from the gross payments made to a Subcontractor under a relevant contract and submit this tax to the Irish Revenue Commissioners on the Subcontractor’s behalf. At the time there was only one rate and that was 35%.
The Principal provided the Subcontractor with a Certificate outlining the tax paid on his/her behalf (Form RCTDC 45) and the Subcontractor could then receive a credit or in some cases a refund of this tax withheld once he/she filed an annual Income Tax Return.
The Principal was required to file a monthly Return of tax deducted (RCT 30) and pay the relevant RCT deducted to Revenue. The Principal Contractor was also obliged to file an Annual Return of Gross Payments and Tax Withheld on an RCT 35 which had to be filed by 23rd February following the year end.
If, however, the Subcontractor had a Certificate of Authorisation or a C2, the Principal could pay the Subcontractor without deducting R.C.T.
On 1st January 2012 the rules changed with the introduction of three rates of withholding tax:
1. Zero rate for Subcontractors who previously held a C2
2. 20% for Subcontractors who were registered for tax and had a record of substantial tax compliance
3. 35% for Subcontractors in all other situations.
Back to eBrief 110/14
Section 17 Finance Act 2014 introduced a revised sanction for situations where the Principal Contractor fails to operate RCT on relevant payments to Subcontractors. The level of penalty will depend on the percentage of tax withheld from the Subcontractor’s payments.
From 1st January 2015 the Principal will be liable for the following penalties in the event of non operation of R.C.T.:
1. If the Subcontractor is registered with Revenue and usually liable to a deduction of zero percent, the Principal will be liable to a civil penalty of 3% of the relevant payment.
2. If the Subcontractor is registered with Revenue and is tax compliant and therefore liable to a RCT deduction rate of 20% then the Principal will be liable to a civil penalty of 10% of the relevant payment.
3. Where the Subcontractor is registered with Revenue but is not tax compliant and, as a result, all payments are liable to an RCT deduction rate of 35%, the Principal will be liable to a civil penalty of 20% of the relevant payment.
4. Where the Subcontractor is not registered with Revenue i.e. the individual to whom the payment was made is not known to Revenue, then the Principal will be liable to a civil penalty of 35% of the relevant penalty.
What about filing obligations?
In all the above four situations the Principal Contractor will be required to submit an Unreported Payment Notification to Revenue.
Next: Part VI – 6. Capital Gains Tax – Finance Act 2014 – Vodafone Shareholders – eBrief no. 107/14 (24th December 2014).