A Guide to Avoiding the Most Common RCT & VAT Pitfalls for Non-Resident Principal Contractors

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An area that has continued to cause challenges and risks for businesses is the operation of Relevant Contracts Tax (RCT) and VAT.

The most common mistakes we see being made in this sector are by non-resident principal contractors who engage a subcontractor to carry out construction works in Ireland.

This article will focus on the most common pitfalls that we see occurring within this sector by non-resident principal contractors and the steps that can be taken to avoid making costly mistakes.

1. Compliance Obligations for Non-Resident Principal Contractors

When a non-resident principal contractor engages a subcontractor to carry out construction works in Ireland, the RCT system must be applied to payments made to the subcontractor.

The first potential pitfall for a non-resident principal contractor is not taking the reasonable care to familiarise themselves with their tax obligations under the RCT regime. In such a case, the non-resident principal contractor will eventually be contacted by Revenue, informing them of their failure to operate the RCT regime. This usually occurs following the commencement of the works in Ireland, at which point the mistakes have already been made and costly penalties can be imposed by Revenue.

As such, it is very important that a non-resident principal contractor is aware of their tax obligations prior to the commencement of any construction works in Ireland so that the necessary administrative steps can be taken to ensure that they are set up for the RCT system and fully compliant in operating RCT on payments to subcontractors.

The administrative steps to be taken by a non-resident principal contractor include registering for RCT on Revenue’s Online Service (ROS) and operating the RCT regime throughout the duration of the project in Ireland (further detail on this below).

2. Operation of the RCT System

Once a principal contractor is registered for RCT with Revenue, there are a number of steps that must be taken each time a principal contractor enters into a relevant contract with a subcontractor and each time a payment is made to the subcontractor. These steps are summarised as follows:

a. Contract Notification

  • The first step is to input a “Contract Notification” through Revenue’s online RCT system. A principal contractor must notify Revenue each time it enters into a new relevant contract with a subcontractor. The Principal will then receive a contract reference number and an indication of the applicable RCT deduction rate for the subcontractor.

b. Payment Notification

  • Before making a payment to a subcontractor, the principal must notify Revenue’s online eRCT system of the intention to make the payment and provide details to Revenue of the gross amount to be paid. This process is known as “Payment Notification”. This must be done for each payment made to the subcontractor.

c. Deduction Authorisation

  • Revenue will issue a deduction authorisation to the principle contractor which will specify the rate and amount of tax to be deducted from the payment to the subcontractor. This process is known as “Deduction Authorisation”. The principle is required to provide a copy of this authorisation to the subcontractor.

d. Deduction Summary (RCT Return)

  • Revenue’s eRCT system prepares a pre-populated period end return known as a “Deduction Summary (i.e. RCT Return)”, which is based on the deduction authorisations issued during the period. The due date for payment of the RCT withheld is the 23rd day after the end of the period covered by the return.

The most common pitfall we see occurring in practice are inconsistencies in notifying Revenue of each and every payment made to a subcontractor by the principal contractor. This can be a costly mistake for the principal contractor as the penalties Revenue can impose for failure to operate the RCT system in this way range between 3% to 35%, depending on the RCT deduction rate applicable to the subcontractor.

To put this into perspective, if a subcontractor has been assigned a 35% RCT deduction rate and the principal contractor makes a payment of €25,000 to the subcontractor without first notifying Revenue of the payment and deducting the appropiate withholding tax, Revenue can impose a penalty of €8,750 (i.e. 35% of the invoice value) on the principal contractor for its failure to operate the RCT system.

These penalties can become very costly for a business where they fail to operate the RCT system on high value invoices.

3. Operation of RCT and Reverse Charge VAT

Typically, VAT is normally charged by the person supplying the goods or services. However, under the RCT regime, the person receiving the goods or services (the principal contractor) calculates the VAT due on the invoice from the subcontractor and pays it directly to Revenue. This is referred to as Reverse Charge VAT and it is common area in which mistakes are made by non-resident principal contractors.

The following should occur when a subcontractor invoices a principal contractor for construction services that are subject to RCT:

  1. The subcontractor raises an VAT invoice with the zero rate of VAT applied;
  2. The invoice should include the VAT registration number of the principal contractor and include the narrative “VAT on this supply to be accounted for by the principal contractor”;
  3. The principal contractor calculates the VAT due on the invoice value and records it as VAT on sales (Box T1) on its VAT return. Where it is entitled to do so, the principal contractor can claim a simultaneous VAT input credit (Box T2) on the VAT return, thus resulting in a VAT neutral position.

Although the RCT system can seem like a heavy administrative burden on a business, it can be managed relatively smoothly with the proper administration. Our tax specialists look after all administrative issues regarding RCT, provide effective advice and answer questions you may have regarding RCT.

Should you require any assistance, please contact us.

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Avoiding VAT Pitfalls on Property Transactions

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  • VAT pitfalls on property transactions
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Crowleys DFK are currently running a series of CPD accredited VAT on Property briefings for solicitors in Cork and Dublin. The purpose of the seminars, presented by Tax Partner Siobhán O’Hea, is to raise awareness of common VAT pitfalls on property transactions.

VAT on property can be a complicated area but it is vital to thoroughly investigate the potential VAT impact before embarking on any property transaction, Siobhán advises.

“We are seeing problems crop up in many different situations. For example, more people have got involved in letting property in recent years and this is an area where VAT issues can often arise. While lettings are exempt from VAT, landlords can opt to tax the letting and charge 23% VAT on the rent. This can be advantageous if the landlord wants to claim repayment of VAT incurred on the acquisition or development of the property, however it is important to be aware that there are restrictions. For example, you cannot opt to tax the letting if the property is occupied for residential purposes or occupied by the landlord or a person connected with the landlord.

“On sales of commercial property, liability to VAT depends on whether the property is considered ‘new’. There are Revenue rules governing the definition of ‘new’ for property VAT purposes. Generally, the supply of older properties is exempt from VAT however, in some circumstances, the vendor and purchaser may jointly opt to have the transaction subject to VAT.

“Where property is supplied in connection with an agreement to develop the property, these transactions are always taxable.

“In our experience, there are VAT pitfalls in many every day property transactions and these can prove very costly for clients. This is why Crowleys DFK are running these seminars for solicitors. It’s an opportunity to raise awareness and to help ensure common mistakes are avoided,” Siobhán concluded.

For further information on Crowleys DFK VAT briefings, please get in touch.

Talk to us

Siobhán O’Hea
Partner, Tax Services
siobhán.ohea@crowleysdfk.ie

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Understanding how EU VAT Rules impact Electronically Supplied Services

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Businesses based in Ireland who provide electronically supplied services (e-services) to customers need to understand how to apply VAT correctly, explains Siobhán O’Hea, Partner of Tax Services.

Value Added Tax can be a complicated area for businesses who provide electronically supplied services to customers in the EU or elsewhere.

While the rules may appear daunting, it is important to familiarise yourself with the basics as getting it wrong can be costly.

What are e-services?

The first step in getting to grips with VAT is understanding what is considered an ‘electronically supplied service’ for VAT purposes.

Electronically supplied services, sometimes called ‘e-services’, cover a broad range of services delivered over the Internet or an electronic network. Examples include electronically supplied software and software updates, web hosting, online publications and e-books, the provision of online advertising on websites, music downloads, online games, distance learning programmes which are delivered wholly online without human intervention, and so on.

What these services have in common is that they could not be provided in the absence of information technology.

Tangible products, such CDs and DVDs or printed matter such as books, newspapers and journals, are not e-services even though they may be purchased online.

It is beyond the scope of this article to list everything that is, or is not, considered an e-service, however detailed listings can be found on Revenue website.

If you are in any doubt, it is advisable to seek advice from an experienced tax practitioner familiar with VAT as there is a risk that if you make an error on a sale, you will repeat it on subsequent sales. Errors that go unnoticed for a period of time can be very expensive in the long run.

Place of supply and your customer

Once you have determined whether or not your services are ‘e-services’ for the purposes of VAT, the next step is to look at the ‘place of supply’. This is because ‘place of supply’ rules determine whether a supply is subject to VAT.

If your customer is a business, the place of supply is the place where the business receiving the services is established. Businesses based in Ireland do not normally charge Irish VAT on services to a business established in other EU member states. Instead, the business customer must self-account for VAT in their own country.

If your customer is non-business (a consumer) based in the EU, the place of supply for e-services is the place where the consumer resides. This means that businesses based in Ireland who provide electronically supplied services to consumers in other EU member states are liable to register and account for VAT in each EU member state where they have customers. Revenue provides an optional mini one-stop-shop (MOSS) scheme which aims to reduce the administrative burden and cost of complying with this requirement.

Countries outside the EU

If your business is based in Ireland and you provide e-services to a business or consumer based outside the EU, no EU VAT is charged. However, if the service supplied is effectively used and enjoyed in an EU country, that country can decide to levy VAT.

E-services, provided by suppliers established in a non-EU country to consumers in the EU, must also be taxed at the place where the customer resides or has a permanent address unless the supplier has opted to use the mini one-stop-shop (MOSS) scheme. The non-Union MOSS scheme enables these suppliers to register for VAT in one EU country only.

Complying with EU VAT law

VAT is a complicated tax at the best of times and this article touches on just some of the aspects that create confusion for businesses providing e-services.

For further information and to find out how Crowleys DFK can help you comply with EU VAT law, please get in touch.

TALK TO US

Siobhán O’Hea
Partner of Tax Services
siobhán.ohea@crowleysdfk.ie

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VAT and Payment Services

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The Revenue Commissioners have issued guidance which sets out the VAT treatment of transactions concerning the transfer of money.

Guiding Principles

Transactions are defined according to the purpose and nature of the service provided and not according to the person supplying or receiving the service.

The principles that need to be considered when determining if a service qualifies for exemption are as follows:

  1. Exemption can only relate to transactions which form a distinct whole, fulfilling in effect the specific, essential functions of such transfers.
  1. An exempted service must be distinguished from the supply of a mere physical or technical service.
  1. A transfer is a transaction consisting in the execution of an order for the transfer of a sum of money from one bank account to another.
  1. A transfer is characterised by the fact that it involves a change in the legal and financial relationship existing, on the one hand, between the person giving the order and the recipient and, on the other, between those parties and their respective banks; and in some cases, between those banks.
  1. The transaction which produces the change is solely the transfer of funds between accounts, irrespective of its cause.
  1. The mere fact that a service is essential for completing an exempt transaction does not warrant the conclusion that the service is exempt

Status of the Supplier

When considering whether a service qualifies for exemption, the nature of the person supplying the service is not relevant (i.e. the supplier does not have to be a regulated financial institution). It is the nature of the service being supplied that needs to be considered.

Means by which the service is supplied

The means by which the service is supplied e.g. electronically or manually is not a decisive factor when considering the application of the exemption. Again it is the precise nature of the service being supplied that will determine the VAT treatment.

Physical or Technical Services

Where a supplier provides the infrastructure that facilitates the transfer of funds, those supplies cannot qualify for VAT exemption unless they themselves fulfill the specific and essential function of a transfer, in particular creating the change in the financial and legal relationship between the parties.

Charges for Using Certain Payment Methods

Where a supplier supplies goods or services to a customer and charges an additional fee to accept payment via a specified method, e.g. credit card, this charge is not independent from the supply of goods or services and cannot qualify for VAT exemption.

The receipt of a payment and the handling of that payment are intrinsically linked to any supply of goods or services provided for consideration. It is inherent in such a supply that the provider should seek payment and make appropriate efforts to ensure that the customer can make effective payment in consideration for the goods or services supplied.

Please contact us if you require assistance with the above.

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Budget 2018 – VAT Compensation Scheme for Charities

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Budget 2018 introduced a Charities VAT Compensation Scheme. This will take effect from 1 January 2018 but will be paid one year in arrears i.e. in 2019 charities will be able to reclaim some element of the VAT costs arising in 2018.

Charities will be entitled to a refund of a proportion of their VAT costs based on the level of non-public funding they receive.

For example, where a charity’s gross income for 2018 involves 30% funding from State/EU/international organisations and 70% privately sourced income including fundraising, subscriptions and donations, they may claim 70% of their VAT input costs for the year.

Not eligible for relief under the scheme will be VAT incurred on private non-charity-related expenses; VAT incurred that is subject to an existing VAT refund order and VAT incurred that is otherwise deductible.

From 2018 onwards, charities will need to ensure that their accounting systems are designed to enable them quantify the total VAT cost and the proportion that is eligible for refund.

We would be happy to assist charities with implementing/upgrading their accounting systems to identify VAT costs so they can easily be reclaimed and on how best to structure their activities to ensure they maximise the amount of VAT they can reclaim.

You can view the Department of Finance’s document in full here.

If you would like further information, please contact us.

 

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VAT Treatment of Education and Vocational Training

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Finance Act 2015 amended the VAT treatment of education and vocational training. The amendment was to ensure that Irish VAT legislation reflects judgements of the Court of Justice of the European Union.

The wording of the amended legislation caused uncertainty for many training providers in the private sector as it stated that only training or retraining services provided by a “recognised body” could continue to be exempt from VAT. The definition of “recognised body” made it difficult for many private sector training providers to qualify.

If a supply if not exempt, VAT is chargeable on that supply.

Revenue did comment at the time of Finance Act 2015 that it did not believe that the changes would lead to divergence from existing practices but there was no written guidance from Revenue on the subject to give training providers comfort.

Thankfully, this uncertainty has now been resolved with Revenue’s recent e-Brief on the subject.

Revenue confirm that vocational training and retraining services continue to be exempt from VAT where certain conditions are met. They confirm that where each of the conditions (listed below) are met, there is no requirement that the provider must be a “recognised body”.

They list these conditions as:

  • The training must be vocational in nature; that is, it must be directed towards an occupation and its associated skills.
  • It must be provided to improve the vocational rather than the personal skills of the trainee.
  • The vocational skills that the trainee acquires can be transferable from one employment to another, or to self-employment.
  • The training will generally be provided by means of a structured programme, have concise aims, objectives and clear anticipated outcomes.
  • There should be a clear trainee/trainer relationship between the student and the teacher or instructor.

Where any of the above conditions are not met or the course is primarily directed towards personal development or undertaken for recreational purposes, the course will be subject to VAT at the appropriate rate.

This is a very welcome clarification for training providers in the private sector who now have written guidance from Revenue to assist in deciding if their supplies are subject to VAT or exempt.

It is also useful for Irish businesses and public bodies who receive education and training services from abroad. The responsibility for correctly self-accounting for VAT on the receipt of these services falls on the Irish recipient and there is now written guidance from Revenue to assist in deciding whether to self-account for VAT at the appropriate rate or whether the receipt of the service is exempt from VAT.

Please contact us if you require assistance with the above.

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