If you work as a subcontractor in Ireland, or if you hire subcontractors yourself, you need to understand Relevant Contracts Tax. It catches a lot of tradespeople out, usually because no one explained it to them when they started.
Here is what it is and what you need to do.
What Is RCT?
Relevant Contracts Tax is a withholding tax that applies to payments made to subcontractors in the construction, forestry, and meat processing sectors. For most tradespeople, it is the construction element that matters.
When a principal contractor pays a subcontractor, they are required to withhold a percentage of the payment and pay it directly to Revenue on the subcontractor’s behalf. The amount withheld depends on the subcontractor’s tax compliance status.
Who Does RCT Apply To?
RCT applies when there is a principal contractor and a subcontractor relationship. The principal contractor is the party who contracts with the end client. The subcontractor is the party the principal contractor brings in to do part of the work.
If you are a painter working directly for a homeowner, RCT does not apply. If you are a painter working for a building contractor on a construction project, RCT very likely applies.
The definition of construction work is broad. It includes building, alteration, repair, extension, demolition, landscaping, civil engineering, and a range of related activities.
The Three RCT Rates
Revenue assigns subcontractors one of three deduction rates based on their tax compliance status:
Zero percent. Applies to subcontractors who are fully up to date with their tax obligations and registered for RCT. Revenue withholds nothing and you receive the full payment. This is what you should be aiming for.
20 percent. Applies to subcontractors who are registered but have some gaps in their compliance history. The principal contractor withholds 20 percent and pays it to Revenue.
35 percent. Applies to subcontractors who are not registered for RCT or who have significant compliance issues. This is the highest rate and the one that causes the most pain.
The withheld amount is not lost. It is credited against your annual tax liability. But having 35 percent withheld from every payment creates a serious cash flow problem for most businesses.
How the RCT System Works in Practice
Everything runs through Revenue’s eRCT system online.
When a principal contractor engages a subcontractor, they notify Revenue of the contract through ROS. Revenue responds with the deduction rate that applies to that subcontractor.
When a payment is made, the principal contractor notifies Revenue through ROS. Revenue then issues a Deduction Authorisation which specifies how much to withhold. The principal contractor pays that withheld amount to Revenue and pays the remainder to the subcontractor.
The subcontractor receives a credit for the withheld amount which can be offset against their income tax liability.
What You Need to Do
If you work as a subcontractor in construction, register for RCT through ROS. Keep your tax affairs up to date. File your tax returns on time and pay what is owed. This is the only way to achieve and maintain the zero percent rate.
If you are a principal contractor who engages subcontractors, you are legally responsible for operating RCT correctly. Failing to do so means Revenue can pursue you for the tax that should have been withheld.
If you are not sure whether RCT applies to your situation, ask your accountant. Getting it wrong in either direction has financial consequences.
Written by Maebh Collins
ACA qualified, Dundalk-based. I build websites and write SEO content for trade businesses across Ireland and the UK. If you have questions, get in touch.