The new Relevant Contracts Tax System

Subject to the signing of a Ministerial Order, Revenue plan to introduce a new RCT system from 1 January 2012. The new RCT system, while leaving the essentials of the withholding tax intact, fundamentally reforms the way RCT operates and how principals in particular engage with Revenue.

The new system is electronic which means that from 1 January 2012 principals (or their accountant) must engage electronically with Revenue. This requirement is separate from any mandatory efiling requirement. Principals therefore must be registered for Revenue’s Online Services (ROS) to use the new eRCT System.

 Another fundamental change is the introduction of a 20% rate of deduction for subcontractors who are substantially compliant. The principal will be authorised by Revenue to deduct tax at the appropriate rate from each payment to the subcontractor. The rate that is applied to a subcontractor will depend on the subcontractor’s compliance record. In general however, subcontractors who currently qualify for a C2 card will be at the zero rate in the new system, provided they continue to keep their affairs up to date. Most subcontractors currently at 35% will be at the 20% rate in the new system. The 35% rate is being retained for those subcontractors that are unknown to Revenue or who have failed to address serious compliance issues.

Subject to a number of transitional measures applicable in 2012 only, an overview of the changes to take effect from 1 January 2012 is as follows:

Electronic system for RCT principals

All contacts between principals and Revenue will be through a new electronic RCT Service. All principals must be registered for ROS, even if they have previously been given an exempt status from mandatory e-filing, unless they have engaged their accountants to perform all RCT functions in the new system.

 Subcontractors are not required to register for ROS, but if they do, they will be able to view all transactions on their RCT account through the online RCT Service, and avail of 24/7 self service options.

Contract notification

The principal must notify Revenue of each contract through the online RCT Service, providing basic information in relation to the contract. When notified of a contract, Revenue will inform the subcontractor of the details supplied by the principal and will also indicate the subcontractor’s RCT rate.

Payment Notification

The principal must notify Revenue in advance through the RCT Service of each gross payment to be made to each subcontractor. When using the Payment Notification process, the principal will be presented with a list of subcontractors with active contracts; therefore a contract must be notified to Revenue before a Payment Notification can be made.

Deduction Authorisation

Revenue will respond to a Payment Notification with an online Deduction Authorisation which authorises the principal to deduct the tax, if any, from the gross payment notified. The principal must give the subcontractor a copy of the Deduction Authorisation and Revenue will automatically credit the RCT deducted to the subcontractor’s tax record.

If a principal makes a relevant payment to a subcontractor without having notified Revenue of the payment and been issued with a Deduction Authorisation, the principal will be liable for tax at 35% on that payment, together with a penalty of up to €5,000.

Deduction Summary/Returns

After the end of the principal’s return period (monthly or quarterly), Revenue will collate the information from the payment notifications for the period and prepopulate a Deduction Summary which will show details of each payment notified to Revenue in the period. Amendments can be made to the details on the Deduction Summary up to the return filing date. There will be no annual return (currently RCT 35) in the new system.

Subcontractors

Subcontractors will be advised, in advance of 1 January 2012, of the rate which will apply on commencement of the new RCT system. The subcontractor will subsequently be advised of any changes to their RCT rate as determined by Revenue from time to time.

For any further guidance or advice on the new RCT system, please contact our office now!