RCT rates and cash flow for construction companies in Ireland

Every RCT payment runs through Revenue's electronic system in ROSRevenue's online system for businesses and agents to register for taxes, file returns, make payments and manage their tax affairs, including corporation tax, VAT, PAYE and RCT.:

1. The principal contractor registers as a principal and notifies Revenue of the contract, after confirming the subcontractor's identity.
2. Before each payment, the principal notifies Revenue of the gross amount. Where the VATA tax charged on most goods and services supplied in Ireland, collected by VAT-registered businesses and paid to Revenue. reverse charge applies, this is the VAT-exclusive amount.
3. Revenue instantly issues a deduction authorisation showing the rate and the tax to deduct.
4. The principal pays the subcontractor the net amount and must give the subcontractor a copy or the key details of the deduction authorisation, including its unique reference number.
5. The principal files a monthly or quarterly deduction summary and pays the RCT to Revenue.
6. The tax deducted appears as a credit on the subcontractor's Revenue record.

Revenue runs rolling RCT rate reviews and sets each RCT subcontractor’s rate based on compliance. Its Tax and Duty Manual for subcontractors sets out the tests:

• 0%: the subcontractor operates from a fixed place of business in a permanent building, keeps proper records, has fully complied with its tax obligations for the previous three years, and Revenue expects it to keep complying. For a company, each director and anyone who controls more than 15% of the company must also meet these tests.
• 20%: the same tests, but compliance only needs to be substantially met. Revenue can take into account how far any non-compliance is being addressed.
• 35%: the subcontractor fails the tests above, is not registered with Revenue, or has one or more returns outstanding for 12 months or more.
• New registrations: the system starts a new subcontractor at 20%. Revenue can reduce this to 0% if it agrees the three-year history should be set aside.

If Revenue cannot verify a subcontractor's name and tax reference number, the system applies 35% until the subcontractor is identified and a rate review is done. The principal must tell the subcontractor in writing within 7 days, or before the next payment if sooner, that 35% will be deducted.

Fix whatever caused the higher rate, usually outstanding returns or payments for the company, its directors or larger owners, then ask for a review in ROS. If your rate goes up, Revenue sends a notice of determination to your ROS inbox, and you can see the reasons and request the review yourself:

1. Log in to ROS and, on the My Services tab, click Manage Relevant Contracts Tax.
2. Click Lookup/Review Deduction Rate and note your current rate.
3. Under Review RCT Deduction Rate, click Check to see the outstanding returns and payments behind the higher rate.
4. File the outstanding returns and pay what is due. Remember the 0% test also covers directors and larger owners.
5. Wait for the updates to reach ROS. Revenue says to allow at least 72 hours, and its ROS help guide says up to three working days.
6. Run the review again to confirm your new rate.

If you disagree with a determination, you can appeal in writing to the Tax Appeals Commission within 30 days of the date of the determination. While the appeal is pending, principals must still follow the deduction authorisations Revenue issues.

Mostly through offsets rather than a cash refund. RCT deducted is treated as a payment on account of the subcontractor company’s corporation taxThe tax Irish-resident companies pay on their profits. for the period. In practice, Revenue’s system offsets the credit automatically against other taxes once a return is filed and the liability falls due:

• PAYE: offset once the monthly payroll return is filed.
• VAT: offset once the VAT 3 return is filed.
• Corporation tax: offset once the annual CT1 is filed. To use the credit against preliminary taxAn advance payment of corporation tax made before the end of a company's accounting period., you must submit a preliminary tax declaration.
• Automatic offsets happen no later than seven days from the date the liability becomes due, and Revenue sends a statement of account to your ROS inbox.
• Periods covered by an instalment arrangement need a request through MyEnquiries for the offset.

Credit left over once the year's corporation tax is finalised goes first to preliminary tax for the next period and then against other liabilities. Revenue's manual says a repayment is not made until the CT1 is filed, a notice of assessment has issued and all other tax liabilities are cleared, and repayments are processed manually. That is why a company on 20% or 35% can be owed money by Revenue while short of cash for wages and materials.

Illustrative example

Many construction companies are both subcontractor and principal. As a principal you must register with Revenue, carry out all RCT transactions through ROS, notify contracts and payments before paying, give subcontractors the deduction details, file deduction summaries and pay the RCT you deduct. You must also decide whether each worker is an employee or a self-employed subcontractor. Revenue now applies the five-step framework from the Supreme Court's Karshan judgment, and getting it wrong can leave you liable for PAYE, PRSI and USC plus interest and penalties.

Paying a subcontractor without a correct deduction authorisation is an unreported payment and carries a penalty based on the subcontractor's rate:

• Subcontractor on 0%: penalty of 3% of the payment.
• Subcontractor on 20%: 10% of the payment.
• Subcontractor on 35%: 20% of the payment.
• Rate unknown: 35% of the payment.

RCT affects how much of each payment you keep. The Construction Contracts Act 2013An Irish law, in force for contracts entered into after 25 July 2016, that sets payment rules for construction contracts and gives a right to statutory adjudication of payment disputes. affects whether and when you are paid. It applies to most construction contracts, including subcontracts, with two main exceptions in section 2: contracts worth €10,000 or less, and contracts for a dwelling of 200 square metres or less where one party lives or plans to live in it. The parties cannot contract out of it.

Payment claim notices

Under section 4, the party doing the work can deliver a payment claim notice no later than 5 days after the payment claim date. It must state the amount claimed, the period, stage or work it covers, and how the amount was calculated. If the other party disputes it, it must respond no later than 21 days after the payment claim date, stating the amount it will pay, the reasons for the difference and how it worked out its figure. The undisputed amount must be paid by the due date.

Adjudication

Under section 6, either party can refer a payment dispute to adjudication at any time by serving a notice of intention. The parties have 5 days to agree an adjudicator, or one is appointed from the Minister's panel. The referral must follow within 7 days of the appointment, and the adjudicator must decide within 28 days of the referral, extendable by up to 14 days with the referring party's consent or longer if both agree. The decision binds both sides until the dispute is finally settled, and can be enforced through the courts with High Court leave.

• Check your RCT rate in ROS at least monthly and before tendering for large jobs.
• Keep the personal tax of directors and larger owners up to date, because it counts towards the company's 0% test.
• File PAYE and VAT 3 returns on time so RCT credits are offset quickly.
• Match every remittance to its deduction authorisation.
• Send payment claim notices within 5 days of each payment claim date, with clear calculations.
• Diary the 21-day response deadline and follow up the same week if nothing arrives.
• Use the working capital calculator to see how much cash a big contract will tie up.

Invoice financeAn umbrella term for funding secured on a company's unpaid invoices, so cash comes in before customers pay. for construction can be harder to arrange than in other sectors because of stage payments, retentionsA percentage of each payment held back by the client or main contractor until a project is complete or defects have been put right. and set-off rights, so compare providers carefully; our invoice finance guide explains the general product. For a wider view of the sector, see finance for construction companies. Some companies covering wages while an RCT credit comes through look at payroll finance, a specialist product, and our guide to overdraft alternatives compares other short-term options.

For a limited company with steady trading historyHow long a company has been actively trading, and the record of that trading shown in its filed accounts, bank statements and tax returns., a working capital loan or short-term business loan from one of the specialist lenders on our panel may help in some cases, for example to cover wages while a large stage payment or RCT credit comes through. Tell us what your company needs and we'll tell you honestly whether our panel can help, or where to apply instead. We do not charge your company a fee and never ask for payment upfront; lenders pay us commission when finance completes. Welcome Finance is a commercial finance broker, not a lender, and is not regulated by the Central Bank of IrelandIreland's financial regulator and part of the Eurosystem..