I am aware that the Revenue Commissioners have tightened their fiscal control of the construction industry in recent years. Starting in late 2005, Revenue conducted a national campaign of audit and site visits in the industry to establish the levels of tax compliance and to tackle abuse.
One of the key problems identified was the fairly common failure to operate the construction industry withholding tax, known as RCT (Relevant Contract Tax).
RCT is a withholding tax operated by a principal contractor on payments to subcontractors. A subcontractor can avoid the withholding tax by applying to Revenue for a so-called C2 certificate. This allows the sub-contractor to be paid without tax deduction provided that the principal contractor applies to Revenue for a payments card for the sub-contractor. This card is issued where Revenue is satisfied that there is a contract between the principal and sub-contractor and the subcontractor has a satisfactory tax record. The card provides an auditable link between the two parties and is an essential part of Revenue control.
It became clear in 2006 that in many cases, payments were being made without tax deduction where these terms of the RCT scheme were not met. There was worrying evidence of organised fraud involving criminal gangs who used the system to extract fraudulent refunds.
Revenue undertook widespread publicity campaigns to explain the proper operation of the tax. They issued briefing papers to accountants, and to contractors through trade magazines. Revenue spoke at forums held by the Irish Taxation Institute to over 1,000 tax accountants.
Finally, for cases where the tax had not been properly operated, Revenue created a mechanism for end year collection to help principal contractors regularise their RCT and avoid being hit with a charge to tax, interest and penalties for failures to operate RCT properly.
Despite this, many cases have turned up in audit where RCT has not been properly operated; in particular, there has been a failure to use the key control document, the relevant payments card. Legally, this failure places the tax liability on the principal contractor. Some principal contractors faced with Revenue audits have argued that failure to withhold the RCT has not resulted in tax loss as the sub-contractors in the case were fully compliant with tax law. However, Revenue cannot establish this in any cost-effective way. I am advised by Revenue that in these circumstances they have proposed a mechanism that would allow the principal and sub-contractor to retrospectively adjust the tax liability between them so as to eliminate any double taxation. Unfortunately, some contractors have been unable or unwilling to make these adjustments. The majority of taxpayers in the construction industry are not affected by the problem as they operate RCT correctly.