• Checks before paying gross
• Bulk request for Payment Cards

While Revenue has always maintained a significant amount of compliance activity in the construction sector, in November 2005 the Chairman of the Revenue Commissioners, Frank Daly, announced that Revenue were going to escalate that activity in 2006 by committing 25% of the audit and compliance resources to a national project to monitor the sector. This pull out section of Tax Briefing is dedicated to taxation issues arising in the Construction industry, gives highlights of the Revenue plans, clarifies the procedures for the correct operation of Relevant Contracts Tax (RCT), explains the new legislative changes introduced in Finance Act, 2006 and gives details of the various customer service initiatives supporting the sector.

There is no doubt about the importance of the Construction Industry in terms of the National Economy. It is very sizeable, accounting for €30bn or nearly a quarter of the Gross National Product in 2004. The net contribution to the Exchequer by way of Taxes and Levies is about €10 billion per annum.

The latest Construction industry indicators prepared for the Department of the Environment, Heritage and Local Government in April 2006 show:

• For the first time, employment in the Building and Construction sector exceeded 250,000 in Quarter 4 2005. The sector now accounts for almost 13% of total employment.

• Average weekly earnings grew by 8% in the sector in 2005

• Overall fixed investment in the Industry was up by 13.1% in 2005.

• While the number of dwellings granted planning permission in 2005 was down 2.3%, it predicts the level of housing output will be c. 83,000 in 2006.

• The level of housing completions in the 12 months to February 2006 represents a building rate of almost 20 dwellings for every 1,000 persons. The Western European average is 3 dwellings per 1,000.

• Housing loans paid out in Quarter 3 of 2005 reached a high of almost €5.5bn, with the number of loans issued also at a high of 27,011.

• Private housing rents increased by 3.9% in the year to February 2006.

Revenue has always maintained a significant presence in monitoring activities in the construction sector. Dealing with the sector on a national basis and co-ordinating the reporting compliance activities will illustrate the extent of this monitoring activity and help dispel any impression that may have been formed that we were, in some way, neglecting the sector.

Many developers, contractors and operators in the sector operate on a national basis, if not on an international basis. In the past most operators in the sector were confined to an area within a radius of their home or centre of activities. This is no longer the case. The workforce is now highly mobile and this mobility has caused problems in ensuring that all of the activities of an operator in the sector are properly compliant from a Revenue perspective.

There are a significant number of non-nationals now engaged in the sector including many from the Accession States. This is a relatively new development and has raised particular customer service and compliance issues from a Revenue perspective. These issues are common to each of the Revenue geographic regions and thus a national approach appears the best approach.

All Revenue activities in the construction industry will be within the parameters set down in the Audit Code of Practice. However it is important to note that Revenue will not be issuing letters offering a period of unprompted self-review for those in the sector. In advance of a Revenue intervention, taxpayers are advised to make unprompted disclosures of under declarations to Revenue immediately to avail of significantly reduced sanctions. Alternatively, taxpayers are reminded that they may still avail of the voluntary disclosure option prior to the commencement of a Revenue audit but should be advised that the sanctions are significantly greater.

During March 2006, Revenue and the Institute of Taxation participated in Open Forums held in Cork, Kilkenny, Athlone and Dublin. The Forums offered Revenue an opportunity to clarify the scope and purpose of the Construction Industry Project and gave practitioners an opportunity to raise and clarify matters of concern/interest to them. At these Forums, senior Revenue officials from the local Revenue regions made presentations of the main features of the Construction Industry Project and its application to their region. These presentations were followed by open questions and answers sessions. Over 1,000 agents, accountants and tax advisors attended the sessions at the 4 venues, which highlighted the level of interest in the project.

In addition to the 25% resource commitment, the key points of the 2006 project, in no particular order include:

1. The establishment of a national RCT monitoring group. This is made up of staff from each of the 4 Revenue Regions who are operating on a full time basis monitoring suspect cases and sharing and disseminating intelligence.

2. Until May 2006, non-resident contractors had their tax affairs dealt with in the Revenue Districts based on where the site they are working from was located. As non-resident contractors move from site to site this led to customer service, administrative and management issues. Having the registration of non-residents managed in a central location will ease these problems. The compliance control for all non-resident contractors has been centralised in a single location. This unit is based in the Dublin City Centre District. So, no matter where the building work is located, the compliance associated with a non-resident contractor will be managed from Dublin City Centre. Dublin City Centre may of course use local staff to assist in any interventions considered necessary.

3. There is a concentration on improving returns compliance for RCT 35's (annual return) and RCT 30's (monthly return). Specific compliance campaigns are being run for these, making greater use of Revenue's enhanced IT capability to improve the effectiveness in managing non compliance for returns and payments.

4. There is a global focus on the construction industry. It is not just about RCT but also includes the ancillary activities associated with the industry. This includes construction, project management, architects, property developers, infrastructure projects, supply chain of goods and services, civil engineering etc.

5. The taxes covered are any taxes or duties associated with the sector, fiduciary taxes and direct taxes. In terms of audit activity one can expect RCT and VAT to be combined in many of the audits. All audits will take place under the terms of the Code of Practice and audit letters will be issued.

6. There are a number of changes in the Finance Act, 2006 in relation to the legislation governing the administration of Relevant Contracts Tax (RCT) aimed at tightening control and discouraging fraud. These are described here.

7. More site visits are being carried out by Revenue staff and some of these are in conjunction with other State agencies or Government Departments and Regulatory bodies where it is considered appropriate. Specific attention is being placed on ensuring the correct classification of all workers on the site as either self employed subcontractors or employees (See section on Form RCT 1). Visits will include unannounced visits, visits where uniformed Revenue staff will be used in the course of the visits, simultaneous site visits on specifically selected active sites and "high visibility" visits which will include visits to large sites by cross District teams to carry out multiple enquiries - Principals, C2 holders, employees' PPSNs, fuel testing etc.

8. Revenue is monitoring all new C2 holders within 6 months of getting the C2 certificate. Initially each new case will be reviewed from the tax office records. If further action is required, a visit may be necessary which will usually take the form of a 1 to 2 hour assurance check. The books and records being kept will be looked at, to ensure that they meet Revenue requirements. The operation of RCT/VAT/PAYE will be looked at including the RCT 1 and RCTDC procedure if appropriate. The treatment of expenses and country money will also be examined. Any non-compliance issue will be followed up. The assurance check of itself is not an audit. The checks mentioned above are not exhaustive and will vary depending on the information already available to Revenue. In some cases, a visit may not be necessary.

9. Suitable cases are being identified for investigation with a view to prosecution particularly cases involving the use of false documentation.

10. From a customer service perspective, the RCT material on the Revenue website is being updated and certain items will be displayed in a number of different languages to reflect the changing composition of the workforce involved in construction e.g. Form RCT 1 and Form TR1. New folders have been placed on the website specifically for the construction project to improve access to up to date information.

11. Every effort is being made to improve the turn around time for issuing C2 certificates and Forms RCT 47 where all the relevant documentation and conditions have been complied with.

12. Technological advances continue to support all our activities, including better identification of cases posing a risk and cross checking of all data submitted to Revenue.

Site visits are usually unannounced. The Revenue team of officers will present themselves to the person in charge, produce their identification and outline the purpose of the visit. Some may be in uniform. The number of officers on site visits will vary having regard to the size of the operation, the need to keep disruption to a minimum and the number of other Government agencies involved.

All Revenue officers visiting sites will meet the Safepass requirements. Officers will carry their Revenue identification and authorisations, together with their Safepass cards.

The visit will include a check to ensure that all RCT obligations are being complied with including the correct classification of all workers on the site as either self employed subcontractors or employees. Sight of the books and records may be requested. Other tax obligations e.g. VAT registration, employers PAYE/PRSI, fuel testing etc. may also be reviewed.

As no formal audit letter will have issued, the normal unprompted disclosure provisions in the Audit Code of Practice will apply.

As part of Revenue's site visits, audits and assurance checks, officers will be seek to ensure 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 arrears and possible interest and penalty charges. Enquiries have already shown that many taxpayers have not made timely registrations for VAT. Given the current growth in the construction sector, it is unlikely that any full-time contractor will have a turnover less than the VAT thresholds and checking VAT registrations will feature strongly in Revenue enquiries. Where it is found that a contractor should have been registered for VAT, the VAT registration may be backdated and interest and penalties may also be charged.

As stated above, Revenue will also be looking at the status of contractors on site visits etc. If it is found that employees are being engaged rather than self employed contractors, the Principal may be obliged to register for PAYE/PRSI and this registration may be backdated leading to the imposition of penalties and interest. Revenue will also be looking closely at Principals and Subcontractors who employ workers engaged in the hidden economy. Back dated registration, interest and penalties will be applied in such cases.

Revenue will be increasing its use of Information Technology to identify areas of risk in the construction sector and this will feed into the audit, site visit and assurance check programmes.

• Automated collection and compliance procedures, including the raising of estimates and automatic issue of demands, are already in place. RCTDC and RCT 46/46A details are entered into systems giving a good real time overview of RCT operations at Principal or Subcontractor level. RCTDCs' activities are tracked by Principal and Subcontractor.

• The listings with the RCT 35 returns for 2005 are being data captured which, when fed into the systems, will enable Revenue to match the data contained on those returns with the data already captured from Forms RCTDC and RCT 46s. This will greatly enhance the ability to identify, target and focus in on areas/cases that may pose a risk to Revenue. To ensure that we can make the best use of this data Revenue will be looking at how the RCT 35/35L is being completed and, where there are omissions or inaccuracies, will be insisting on properly completed forms showing all relevant data, in future.

• Revenue's new risk analysis tools will set the risk in the construction sector in the context of risks from all sectors of the economy, and allow Revenue, where necessary, to look at specific areas of the construction sector itself.

• Revenue commenced the RCT 35 2005 compliance campaign in early July. A copy of the text of these letters can be found on the construction project webpage on the Revenue website at www.revenue.ie . A feature of this year's program is that the initial letter will issue centrally, but local offices will have access to more up to date filing information together with compliance information on earlier years. This will lead to a more focussed approach to our RCT 35 compliance campaign. Persistent non-filers will be identified and pursued. Any outstanding RCT 35s should be filed as soon as possible.

• In the past where the amount shown as deducted on the RCT 35 did not match the amounts declared and remitted on the monthly RCT 30s for the year, Revenue only pursued cases where there was a perceived under-deduction of tax. In a development to be released in July, Principals will be contacted where there is an apparent overpayment of tax and will be asked to verify the information provided and correct any of the monthly returns (RCT 30s) if necessary.

1. www.revenue.ie

Revenue has set up dedicated web pages relating to the Construction Industry Project in 2006. There are many articles/items already on these pages that will be of use to agents/advisors and their clients. In particular, registration and RCT forms will be posted there.

1. Examine the original C2 (certificate of authorisation), 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 Subcontractor'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 the local Revenue District on Form RCT 46 www.revenue.ie/forms/rct46_06.pdf for a relevant payments card for the Subcontractor. Form RCT 46 must be signed by both Principal and Subcontractor;

7. Return the C2 to the Subcontractor; and

8. Wait until the relevant payments card is issued from Revenue before making the payment. Every effort is made to issue payment cards as quickly as possible but there can be delays in issuing them as applications 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.

It should be noted 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 contractor to ensure that the C2 details (photograph, signature etc.) are carefully checked as C2 abuse cases are liable for prosecution.

As an alternative to the above steps 1-8, a Subcontractor may nominate a bank account into which all payments made by the Principal Contractor should be lodged.

If this is the case, the Subcontractor need not present the C2 in person. Instead it will suffice to give the Principal Contractor details of the card number and the nominated bank account. (The Subcontractor should have advised Revenue of the bank account in advance.) The Principal should enter the details on the Form RCT 46 and then undertakes 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.

Subcontractors should note that C2 holders are now subject to regular compliance checks and those falling into arrears run the risk of having their RCT 47 payments cards delayed, or in serious cases, having their C2 card withdrawn. It is important, then, that Subcontractors keep their tax affairs in order and up to date.

Where a contract is ongoing at the end of a year and the Principal already holds a payments card for the Subcontractor for that year, the Principal can apply to Revenue for a card for the following year by quoting the details of the Subcontractors valid C2. Form 46A is used for this purpose. Again, a Principal must deduct tax in the following year if a valid payments card has not been received for that year.

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.

• 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 on the Revenue website at www.revenue.ie/en/tax/rct/construction.html. The agreements set out expenses that can be paid tax-free once certain conditions are met.

Revenue carries out checks to ensure that all conditions relating to "country money" payments are met and that they are not being made to employees not covered by the schemes (e.g. office workers). Checks are also made to see if subsistence payments have been made to workers as payments in lieu of earnings (income replacement).

Employers should also note that changes in the way foreign sourced employment income is taxed came into effect on 1 January 2006. 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 and where employees work for someone other than their employer. They also 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 will be given in a later article or can be viewed on Revenue's website at www.revenue.ie/en/practitioner/ebrief/archive/2007/no-9_06.htm.

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 penalise any employer making best efforts to implement the new regime where, despite those best endeavours, there is delay in implementing the new regime.

Note that these changes apply to the Construction, Forestry and Meat Processing sectors.

This section clarifies the position of non-resident contractors by confirming that RCT applies where relevant operations under a relevant contract are carried out in the State. This is the case even where one or more of the following apply:

• Either or both parties to the relevant contract are non-resident or are not liable to tax in the State in respect of those operations

• The contract is executed outside the State, or

• The payments made under the contract are made outside the State.

This section introduced a number of changes affecting applicants for C2 certificates, Principal contractors making payments gross to certified Subcontractors and Subcontractors claiming repayment of RCT deducted by the Principal contractor.

The legislation puts beyond doubt that where an uncertified Subcontractor claims a repayment of RCT the claim is subject to the 4 year time limit provided for in Section 865 TCA 1997 for repayments generally.

It should be noted that an offset cannot be given in any case where a claim for repayment is out of time. No offsets are possible on foot of RCTDC's which are outside the four year time limit for repayment.

Future compliance requirement for C2 applicants
Prior to the Finance Act 2006, existing requirements meant that a C2 applicant and certain connected persons had to have a history of tax compliance for a specified period, called the qualifying period. This is usually the three tax years prior to the tax year in which the C2 is applied for and the period from the commencement of that tax year to the date of application. The Finance Act 2006 provides that, as well as a good track record over the qualifying period, Revenue must now have good reason to expect that a C2 applicant will be compliant in future in relation to tax payments, delivery of returns and the provision of information requested. This new provision mirrors a requirement already in place in relation to the keeping of business records. Therefore, in respect of applications for C2s made on or after 2 February 2006 Revenue must have good reason to expect that the applicant will not only maintain proper business records in the future, but will also pay and remit tax and make returns on time.

• Any company connected with the applicant or which would have been so connected but for the fact that the company has been wound up or dissolved without being wound up

• Where the applicant is a partnership, any company in which a partner or partners of that partnership, is or was able, or are or were able, directly or indirectly, either on their own or with a connected person or persons, to control more than 15 per cent of the ordinary share capital of the company

• Where the applicant is a company, any partner or partners of a partnership who is or was able, or who are or were able, directly or indirectly, either on their own or with a connected person or persons to control more than 15 per cent of the ordinary share capital of the company

These new requirements apply in respect of applications for C2s made on or after 2 February 2006.

The practice whereby Revenue apply a value limit on Relevant Payments Cards has now been placed on a statutory basis. This change takes effect as respects applications for Relevant Payments Cards made on or after 2 February 2006.

In all cases where such a limit is applied Revenue must write to the Subcontractors concerned and inform them of the limit imposed. The payments card will also show the limit. Subcontractors affected may request Revenue to increase, reduce or remove the limit and where Revenue agree to any change they must inform the Subcontractor in writing of this change.

The Subcontractor has the right to appeal any limit imposed or amended to the Appeal Commissioners and to the Courts.

If the Principal contractor breaches the limit and makes payments gross in excess of the limit he or she will be accountable for the tax which should have been deducted and will be liable to pay any such amount to the Collector-General.

(See copy of the notice being issued by Revenue to all Principal contractors advising them of this change).

As mentioned earlier, the compliance control and registration office for all non-resident contractors in the construction industry has been centralised in a single location. This unit is based in the Dublin City Centre District. So, no matter where the building work is located, the compliance associated with a non-resident contractor will be managed from Dublin City Centre:

Revenue Commissioners,
RCT/VAT Section,
City Centre District,
9/10 Upper O'Connell Street,
Dublin 1.

Telephone: 01-865 5000

This unit will

• Register all non-resident contractor/subcontractor cases for all relevant taxheads

• Process all C2 applications from these cases

• Liaise with other Revenue authorities as required

Applications for refund or offset on foot of RCTDCs will continue to be dealt with by International Claims Section (see below).

For C2 applicants, the qualifying criteria apply equally to resident and non-resident Subcontractors. In the case of an applicant who has been resident outside of the State at some time during the qualifying period, they must have complied with all of the comparable obligations imposed by the laws of the country in which they were resident. Non-resident contractors should submit their applications to the City Centre District.

Note that additional questionnaires must be completed by all non-resident applicants applying for a C2. These questionnaires are available from the above address or on the construction project webpage on the website at www.revenue.ie/en/tax/rct/non-resident-contractors.html.

International Claims Section are based in Nenagh and deal with claims for Tax Repayment or Exemption from non-residents who have suffered deposit interest retention tax (DIRT), tax withheld on dividends (DWT), professional services withholding tax (PSWT) and relevant contracts tax (RCT). The claims process generally requires certification by the tax authorities in the claimant's country of residence.

Non-resident "uncertified" Subcontractors

An uncertified Subcontractor is a contractor who does not hold a C2 or if a C2 is held, the Principal contractor has not been authorised to make payments gross. RCT is deducted from payments to these contractors and the Principal contractor must give them a certificate of deduction, Form RCTDC.

Claims for repayment or offset by non-resident Subcontractors should be submitted to:

International Claims Section,
Office of the Revenue Commissioners,
Government Buildings,
Nenagh,
Co. Tipperary.

Telephone: (067) 33533

Fax: (067) 32916

Individual applicants must complete a claims Form IC 1 (available on the Revenue website www.revenue.ie/forms/ic1.pdf). Company applicants must complete a claims Form IC 3 (available on the Revenue website www.revenue.ie/forms/ic3.pdf). The forms are also available from International Claims Section. The completed claim form should be certified by the tax office/revenue authorities in the country in which the Subcontractor was resident for tax purposes during the tax year in which the income was earned. The claim form can include details of any number of contracts.

Note that a questionnaire must be also be completed in respect of each contract undertaken by the non-resident uncertified Subcontractor. This questionnaire is available on the Revenue website at Questionnaire - Relevant Contracts Tax (MS Word, 38KB).