Radical changes to relevant contracts tax (RCT)/C2

A radical change to the current RCT/C2 regime was announced in Budget 2011. Under the current system principal contractors must deduct tax at 35% from payments to subcontractors unless the subcontractor holds a C2 card and the contractor holds a RCT payments card for that subcontractor.

The Minister for Finance announced on Budget Day that the current system would be replaced by a new 3 tier system, with tax being deducted at 0%, 20% or 35%.

Finance Act 2011 confirmed the changes announced in the Budget and gave some further detail on the new scheme. It has yet to come in to force and Revenue will develop regulations on how it will operate in practice.

The main points of the new regime are:

  • 3 rates of withholding tax: 0%, 20% and 35%
  • Mandatory electronic filing (no paper based system)
  • The rate applicable will depend on the subcontractor’s tax compliance record
  • The current repayments system will be replaced by an offset system
  • Advance notification of payment to be made to Revenue
  • Revenue notifies the contractor of which rate to apply

I foresee the new system causing cash flow difficulties for subcontractors. Not only may they have to wait for the principal contractor to pay them, they will now have to wait for a notification from Revenue of what rate will apply. Revenue hasn’t given any indication of how this will operate in practice. One would hope that, as the new system will be electronic, the process will be automated. Cash-flow difficulties caused by delays in payment may be further exasperated as, if tax has been deducted, a refund will not be made until a notice of assessment has been issued, ie a tax return filed.

Contractors need to consider how this new regime will impact on their business. For example, only 30% of contractors currently file online so many will need to invest in a computer. What training will they need? How much will this cost? If their accountant looks after the RCT will their fees increase if there is to be more interaction with Revenue?

Subcontractors need to be reviewing their tax compliance over the last 3 years and trying to determine what rate will apply to them. With the scrapping of the refund system there is an obvious incentive to qualify for the zero rate. They should be ensuring their record keeping is up to scratch and filing a tax return as soon as possible after the year-end (rather than waiting for the deadline).

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