A withholding tax, referred to as Relevant Contracts Tax ('RCT'), must be deducted from certain payments by principal contractors operating in the construction, meat processing and forestry sectors.
The scope of RCT
RCT is an extremely broad withholding tax that applies where a principal contractor makes a payment (or is deemed to make a payment) to a subcontractor, in the performance of a main relevant contract.
The key test is whether there is a relevant contract between the parties. If there is, any payment made under that contract (irrespective of the nature of the supply) is liable to RCT.
The only way to protect against exposure to RCT is to have separate contracts in place between the parties
Red Construction engages Blue Electrical to wire an office building. Blue Electrical provides the relevant services and also provides ongoing parts to the lighting system for five years. In year three Blue Electrical provides replacement parts for the building at a cost of €25,000.
The contract between Red Construction and Blue Electrical is a relevant contract (since it includes the installation of lighting). Therefore, all payments made under the contract, even those that do not relate to the installation, are liable to RCT including the payment of €25,000 in year three.
Had Blue Electrical entered into a separate contract for the supply of replacement parts the lighting system the payment in year three would not be subject to RCT. [Please note that payments for maintenance or repair of lighting systems is subject to RCT with effect from 31 March 2012].
RCT and payments to employment companies
A number of construction companies have been exposed to RCT on account of making payments to employment or umbrella companies.
This is because the definition of a relevant contract includes any agreement where a company furnishes staff who are engaged in construction activities.
Companies with such arrangements should review these as a matter of urgency.
Penalties for breaches of RCT
For breaches that occur on or after 1 January 2015 the penalty that applies is up to 35% of the value of goods and services, excluding VAT. Issues prior to that date potentially give rise to penalties of up to 75%.
How we can help
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