The Irish Taxation Institute has circulated a copy of Internal Guidelines issued to its staff by Revenue on how to deal with the relevant contracts tax (RCT) penalty regime and the basis for penalty mitigation.
A principal who makes payments to subcontractors within the RCT system is obliged to notify Revenue of the intention to make a payment. Revenue then issues a Deduction Authorisation setting out the rate at which RCT, if any, which must be withheld from the payment. The RCT rates which apply are zero, 20% or 35%, depending on the tax status of the subcontractor. The Guidelines just issued, focus on the penalties which apply in the case of payments made otherwise than in accordance with a Deduction Authorisation.
“Payment Geared” Penalties
A “payment geared” penalty, i.e. a penalty equal to a % of the payment made, is charged where a payment is made otherwise that in accordance with a Deduction Authorisation. This would arise where a Deduction Authorisation has been issued in respect of a payment but when the payment is made RCT is not deducted or is deducted at a rate other than the rate set out in the Deduction Authorisation and also where a payment is made, with or without deduction of RCT, without a Deduction Authorisation having been received.
Revenue determines the rate of RCT which apply to subcontractors depending on the subcontractor’s tax compliance record. The amount of the payment geared penalty which applies to a payment made to a subcontractor depends on the RCT rate which generally applies to the subcontractor as follows:
|Penalty||Tax Status of Subcontractor|
|3%||Zero rate subcontractor|
|10%||20% rate subcontractor|
|20%||35% rate subcontractor|
|35%||Any other subcontractor|
A principal who becomes liable to a penalty because a payment is made otherwise than in accordance with a Deduction Authorisation is required to submit an unreported payment notification to Revenue.
In addition to a payment geared penalty, a fixed penalty of €3,000 (or €4,000 in the case of companies with a separate €1,000 penalty for the company secretary) can apply to the failure to comply with RCT obligations, for example for the failure to notify Revenue of the intention to make a payment or a failure to make an unreported payment notification.
Mitigation of Penalties
Under tax legislation Revenue have the power, at their discretion, to reduce any penalty. A penalty may be reduced by up to 100% unless the penalty has been determined by a court in which case the maximum amount by which a penalty can be reduced is 50%.
In using their discretion to mitigate penalties, the Guidelines state that factors which should be taken into account would be:
• Whether the principal is generally tax compliant not only in respect of RCT but other taxes such as PAYE, VAT, income tax and corporation tax
• Where the default came to light as a result of action taken by Revenue, whether or not the principal fully co-operated should be taken into account.
• Whether the principal self corrected the error
• Whether the principal took reasonable care to comply with his or her tax obligations
In addition, the Guidelines state that mitigation of penalties would be the exception in the following situations:
• Where there is a complete and deliberate failure to operate RCT, mitigation would not be appropriate
• A principal is obliged obtain documentary evidence of identity from subcontractors. In circumstances where the subcontractor is unknown to Revenue and the penalty is 35% of the payment made, mitigation would be the exception unless the principal has complied with their obligation to obtain and keep evidence of the identity of the subcontractor.
• If the principal has a history of making unreported payments.
The revised Guidelines do not make specific reference to “no loss of revenue” cases. Generally where it is accepted that there has been no loss of revenue the tax underpaid is not collected and the penalty due is reduced to 3% of the tax underpaid, subject to a maximum penalty ranging from €5,000 to €40,000 depending on whether this disclosure in question is a first or subsequent disclosure. The Code of Practice for Revenue Audit and other Compliance Interventions sets out the conditions which must be satisfied for no loss of revenue to apply noting that such cases are most likely to apply in the case of VAT and RCT. There is no indication in the revised Guidelines that the position with regard to RCT and no loss of revenue claims has changed. However, we understand that Revenue are resisting “no loss of revenue” claims unless the taxpayer has notified Revenue of the gross payment. Therefore, in practice, it will only apply in very limited circumstances.