Extract from Tax Briefing – Issue 26 – April 1997
Relevant Contracts Tax
Question
Are persons who become involved in land development without taking any active part in the actual erection of buildings required to operate Relevant Contracts Tax under Section 17(2) Finance Act 1970?
Answer
Under Section 17(2)(b)(i) Finance Act 1970, a person carrying on a business which includes the erection of buildings is required to operate RCT on making payments to subcontractors. Under the legislation, a person can be within the RCT scheme even if he/she does not take an active part in the actual erection of buildings. The requirements are that:
- The person must be carrying on a business and
- The business must include the erection of buildings.
Land developers carry on a business of developing land. Thus, where a land developer engages a building contractor to erect a building, he/she is a principal contractor to whom Section 17(2)(b)(i) Finance Act 1970 applies. This general position is modified by Section 17(12) Finance Act 1970 which provides that the erection of a building which is to be used or occupied by a person carrying on a business or by that person’s employees will not result in the business being treated as a business which includes the erection of buildings.
Generally, Revenue treats a developer as carrying on a business which includes the erection of buildings where the developer’s intention is to develop property for either sale or letting. However, Revenue regards the modification in Section 17(12) Finance Act 1970 as applying to a person who arranges to have a building erected with the sole intention of letting the building. Accordingly, such an investor is not regarded as a principal contractor for the purposes of RCT.
Since principal contractors may be liable for RCT which should have been deducted, they should, where there is a doubt, check with their Revenue office whether they are obliged to operate RCT.