Revenue s Construction Industry Project. 1.0 Registration with Revenue as a principal contractor.

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1 Revenue s Construction Industry Project As part of the Construction Industry Project 2006, Revenue will be looking at the tax affairs of principals and subcontractors for all taxes. This article looks at some of the common errors made by principals that Revenue staff come across in audits, site visits and assurance checks, with a particular focus on Relevant Contracts Tax (RCT). Parts of the article will be of interest to subcontractors. Subcontractor s issues will be dealt with in more detail in the next issue. 1.0 Registration with Revenue as a principal contractor. Since 1 st December 2004, all principals who engage a contractor to carry out relevant operations under a relevant contract are obliged to specifically register with Revenue. All RCT forms will only be issued to those who are registered as principals on Revenue s records. If you are a principal and have not been receiving the standard forms you should register using Form P33 that is available on the Revenue website at If a principal fails to register with Revenue and makes payments without deduction of tax, they are liable for the tax they should have deducted. Penalties may be applied for the non-operation of RCT. Forms RCT 30: Every principal must complete a declaration for each month and remit any RCT deducted in that month to the Collector General. Form RCT 30 must be completed, even if no tax was deducted in the month. Form RCT 35: Every principal must complete and submit an annual declaration. Form RCT 35 should also be used to list all details of every subcontractor engaged during the year, whether or not tax was deducted. 2.0 Registration for all appropriate taxes (principal and Subcontractors) As part of Revenue s site visits, audits and assurance checks, officers check that all contractors are registered for the appropriate taxes. It is important that contractors register for the appropriate taxes in time to avoid running up backdated arrears, interest and penalty charges. 2.1 Income Tax, Corporation Tax: Before being registered for RCT, principals and subcontractors must first be registered for Income Tax or Corporation Tax as appropriate. Registration Forms TR1 (Individual) ( and TR2 (Company) ( are available on the website.

2 2.2 Value Added Tax: Contractors operating in the building sector are carrying on taxable activities and are obliged to register for VAT if their annual turnover exceeds, or is likely to exceed, 27,500. (Turnover is the amount received plus any RCT tax remitted to Revenue on behalf of the contractor.) VAT registered contractors are liable for VAT at 13.5 % on most activities in the building sector. Given the current growth in the construction sector, it is unlikely that any full-time contractor will have a turnover less than the threshold outlined above. Checking VAT registrations features strongly in Revenue enquiries. VAT registration is applied for using Forms TR1 and TR2 (see 2.1). Further information on the operation of VAT is available on Revenue s website, in particular Chapter 17 of the Guide to Value Added Tax ( Where it is found that a contractor should have been registered for VAT, the VAT registration will be backdated and interest and penalties charged. 2.3 Employer s PAYE/PRSI Revenue looks at the status of contractors on site visits etc. (see 3.0). If it is found that the workers are employees rather than self employed contractors, the principal is obliged to register for PAYE/PRSI and this registration will be backdated and penalties and interest charged. Employer registration is applied for using Form PREMREG which is available at ( Further information on the operation of PAYE/PRSI is available in the Employers section of the PAYE page at ( Revenue looks closely at principals and subcontractors who employ workers engaged in the hidden economy. Back dated registration, interest and penalties are applied. 2.4 Capital Taxes While specific registration for Capital Taxes (including Capital Gains Tax, Stamp Duties etc) is not required, the taxes are reviewed to ensure compliance. 3.0 Form RCT 1: Principal and Subcontractor Declaration Form Form RCT 1 is a declaration that is completed jointly by a principal and a subcontractor who are about to enter into a relevant contract, even where the subcontractor is a C2 holder. It is a declaration that both parties to the contract have examined the criteria for determining if a contractor is self employed or an employee and that they are satisfied that the contract is not a contract of employment. (The criteria are printed on the back of the Form RCT 1). The Form RCT 1 can be viewed at If a contractor is deemed to be an employee, then PAYE/PRSI must be operated on all payments made to that contractor (see point 6.0).

3 Form RCT 1 must be completed for each relevant contract unless there is an ongoing contract (e.g. a maintenance contract). However, if the subcontractor has to tender for a new contract, a fresh Form RCT 1 must be completed. In the case of a gang or group of subcontractors, each gang member (including the gang leader) must complete a Form RCT 1 jointly with the principal. Form RCT 1 must be retained as part of the principal s business records and be made available when requested by Revenue. In examining Forms RCT 1 Revenue looks at the criteria in determining whether or not the contractor has been correctly classified as self-employed contractor. For more information on determining the correct status go to ( Revenue staff examine Forms RCT 1 as part of their site visits and audits to ensure that the proper procedures are being followed, in particular that the subcontractor is not an employee and that both principal and subcontractors have jointly signed the forms. Legislation provides for penalties on the principal and subcontractor where the Form RCT 1 is not completed and on the principal where the form is not retained. 4.0 Principal makes gross payments to subcontractors : RCT 46/RCT 47 Process Before a payment can be made to a subcontractor without deduction of tax, the principal must have a valid payments card (Form RCT 47) for that subcontractor as well as a C2 (certificate of authorisation). Revenue officers often come across cases where the principal has made the payments gross without having a valid payments card. The principal is then liable for the tax that should have been deducted from the subcontractor. Interest and penalties may also be applied. Many principals seem to be unaware of this provision. A C2 card does not entitle the subcontractor to be paid gross. The principal must have a valid payments card (Form RCT 47) for the subcontractor. 4.1 Monetary Limit of Payments Cards: New legislation in 2006 allows Revenue to place a limit on the value of payments that can be made gross on a card. Any payments in excess of the amount shown on the card should be subjected to RCT at 35%. Otherwise, the principal is liable for the tax that should have been deducted. It is important that principals are careful when making gross payments and put systems in place to ensure that the correct procedures are followed. 4.2 Checks before paying Gross: A C2 must normally be presented in person to the principal. Where a principal engages a subcontractor who holds a C2 card, a Form RCT 46 must be completed, signed by both and submitted to Revenue by the principal. The following steps should be followed before making any gross payments:

4 1. Examine the original C2 - a photocopy will not suffice; 2. Check that the C2 bears the photograph of the person presenting it; 3. Check that the signature on the RCT 46 matches that on the C2; 4. Check that the sub-contractor s name on the RCT 46 is the same as that on the C2; 5. Check that the C2 is still in date; 6. If the C2 is in order, apply immediately to your local Revenue District on Form RCT 46 ( for a Form RCT47 for the subcontractor. Form RCT 46 must be signed by both; 7. Return the C2 to the subcontractor; and 8. Wait until the Form RCT47 is issued from Revenue before making the payment. Every effort is made to issue these forms as quickly as possible but there can be delays as they are subjected to Revenue s internal validation procedures. It is important, therefore, that the Form RCT 46 is completed and submitted when the contract is awarded or, well in advance of the date the first payment is due to be paid. Principals should be aware that a payments card may not issue at all in non-compliant cases and tax must be deducted in these cases. It is in the interest of the principal to ensure that the C2 details (photograph, signature, monetary limit etc.) are carefully checked, as C2 abuse cases are liable for prosecution. 4.3 Nominated Bank Account Cases: As an alternative to the above steps 1-8, a subcontractor may nominate a bank account into which all payments made by the principal should be lodged. If this is the case, they need not present the C2 in person. Instead they give the principal details of the card number and the nominated bank account. (The subcontractor should have advised Revenue of the bank account in advance.) The principal enters the details on the Form RCT 46 undertaking to make the payments due to the subcontractor into that account only. However, the principal still needs to have the payments card before making any gross payment. 4.4 Making the Payment: When the payment card arrives, payment can be made gross to the subcontractor named on the card while the card is valid (usually until the end of the year or until Revenue withdraw the card if before then), or, if applicable, until the limit shown on the card is reached. Details of each payment made should be recorded on the card at the date of payment. Any payments made prior to the card being received must be subjected to RCT at 35% and an RCTDC (certificate of deduction) issued to the subcontractor. Failure to do so results in the principal becoming liable for the tax that should have been deducted and interest and penalties.

5 4.5 Bulk request for Payments Cards: Where contracts are ongoing at the end of a year, the principal can apply for relevant payments cards in bulk by listing the names of the subcontractors on a Form RCT 46A, ( without seeing the actual C2 card. However, only those contractors whose contracts are ongoing at the end of the year should be listed, and, once again, payments should not be made gross in the new year until the card has actually been received. 4.6 Cancelled C2 s : From time to time Revenue may need to cancel a C2. When this is necessary, Revenue will notify all principals who hold a payments card for the subcontractor and request the return of the card. Any payments made after the date of receipt of the notice must be subjected to RCT at 35%. In summary, the conditions for making a gross payment are clear: the principal must hold a valid payments card, and the accumulated payments on the card cannot exceed any limit that might be shown on the card. The penalty for making the payment gross without a payments card is also clear: the principal is liable for any tax that should have been deducted, and for any interest and penalties that may have accrued. 5.0 Principal Deducts Tax at 35% - Tax Deduction Forms RCTDC s Forms RCTDC are given by a principal to a subcontractor where RCT tax has been deducted. Form RCTDC should always be given to the subcontractor at the time of payment, if not they are liable to penalties. The principal accounts for this tax deducted each month on Form RCT30. Principals can order supplies of these forms from their local Revenue office using the Form P33 ( These are secure certificates that contain a unique number. That number has been recorded in Revenue s systems against the principal to whom it was issued. A principal should never use an RCTDC that has been issued to another principal. Furthermore, access to the certificates should be controlled. They should be kept in a secure place. In the event of any certificates being lost, mislaid or stolen, the facts should be reported to the local Revenue office which will arrange to have the certificates cancelled. Where a principal ceases to trade, any unused certificates should be returned to Revenue. 6.0 General Operation of PAYE/PRSI on employees (Principal/ Subcontractors) Employees working in construction are taxed on their earnings in the same way as workers in all other industries. In relation to travel and subsistence payments, however, there are two unique agreements in place:

6 one for workers in the Construction industry, agreed between Revenue and the CIF, and one for the Electrical Contracting sector. Both are commonly known as Country Money. Details of the schemes are available at ( The agreements set out expenses that can be paid tax-free once certain conditions are met. Revenue check to ensure that all conditions relating to the payments are met and that they are not being made to employees not covered by the schemes (e.g. office workers). Another area of concern to Revenue is that subsistence payments might be made to workers as payments in lieu of earnings (income replacement), and this is looked at. Checks are made to ensure that all employees are on the PAYE/PRSI system and that PAYE/PRSI is properly being applied to all earnings. Where non-operation is discovered, the employer is liable for the PAYE/PRSI that should have been deducted. Interest and penalties will also apply. 6.1 Foreign Sourced Employment Income Employers should note that changes in the way foreign sourced employment income is taxed came into effect on 1 January Income that is attributable to the performance of duties in the State is now chargeable to tax under PAYE. The changes deal with scenarios where employees are paid by someone other than their employer; where employees work for someone other than their employer and they authorise the Revenue Commissioners to direct a party to a contract with an employer to make PAYE deductions. These changes apply to all sectors and are not confined to the construction industry. Further information can be viewed at Revenue recognises that the new regime in relation to the employments concerned may involve significant adjustments for the employers affected. Revenue will not seek to penalize any employer making best efforts to implement the new regime where, despite those best endeavours, there is delay in implementing the new regime. Any questions or comments on this article should be made through the Editor. is a valuable source of information on all tax related matters and now includes information on the Construction Industry Project Revenue's On-Line Service (ROS) provides the easiest and quickest way to meet your tax obligations.

7 Principal Contractor Checklist If you have become a principal for the first time, have you registered as a principal with Revenue? Have you registered for all appropriate taxes, such as Income Tax, Corporation Tax, Value Added Tax or Employer s PAYE/PRSI? Before taking on a subcontractor, have you consulted the guidelines on the back of the RCT 1 and correctly determined the status of the contractor as an employee or self-employed contractor? If the contractor is not an employee, have you completed the Form RCT 1 jointly with the subcontractor? If the contractor is a C2 holder, have you: Checked the C2 card Completed a Form RCT 46 jointly with the subcontractor Been issued with a valid payments card (RCT 47) Checked the monetary limit on the Card? Have you got a valid payments card (RCT 47)for all subcontractors you are making gross payments to? Have you issued a Form RCTDC for each subcontractor where tax was deducted? Are you operating PAYE/PRSI on all payments made to your employees, excluding the approved agreements on Country Money? Are you operating the approved Country Money scheme correctly? Are you making your monthly return (RCT 30) on time and remitting any tax deducted to the Collector General? Have you returned your Form RCT 35 for 2005? Have you reviewed your payments in respect of foreign work from 1 st. January 2006?