# RCT Audit - bad news



## trg (5 Oct 2011)

Hi,

Just heard of a neighbour that got caught with a revenue audit of RCT. His records were not what they should have been, he paid a subbie 100% of his invoice but the subbie had not presented a C2 and there was no payments card in place. 

It seems that Revenue gave the principal every chance to get the subbie to say that the mistake was genuine and that he has a C2 (he hasnt got one) and that all taxes were in order. 

The principal has basically got the run-around from the subbie and Revenue are now demanding payment. They are deeming that the payment made (€55,000) was only 65% and that the 35% (€29,615) must now be paid to Revenue with interest and penalties. 

Does anyone have experience of this?
Will the Revenue now go after the subbie for the underdeclared income tax on the €29,615? 
Can the Principal deem the €29,615 as a cost of sale now and claim an income tax deduction? 

While the fault lies solely with the principal it is still a whopper of a cost which of course is 100% loss as there was no work done 

TRG


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## DB74 (5 Oct 2011)

What's the €538?


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## trg (5 Oct 2011)

Sorry, i initially was going to use an example of payment of €1000 (€538 being 35% if €1000 was deemed 65%) but I reckoned then that when I had approximate figures i may as well use them but i neglected to change some of the figures.


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## trg (5 Oct 2011)

Edited now, thanks for pointing it out


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## DB74 (5 Oct 2011)

This type of problem is common enough and while Revenue recognise that they are not actually out-of-pocket as such, they insist on applying the letter of the law here.

However here is what Revenue themselves recommend you do:

1. Principal pays the tax over the Revenue
2. Principal issues a C45 to the subbie
3. Subbie reclaims the tax from Revenue
4. Subbie reimburses the Principal with the reclaimed tax

However this procedure requires a good relationship between the Principal and the Subbie because it is basically up to the Subbie to ultimately repay the tax back to the Principal which doesn't seem to be the case with your neighbour.

The only other option available to your neighbour is to put his case to Revenue that they will effectively shut him down because of this money and that they are not actually out-of-pocket

As regards your other queries in relation to this issue

1. In theory the Revenue can chase the subbie for the Income Tax on the €29,615 but it is not in their interest to do so because the subbie can then claim back the full €29,615 as RCT paid on a/c

2. The Principal can claim full tax relief on the RCT tax deducted. It may be worth his while redoing his tax return for the year in question to ensure that he gets the full 50% tax relief on the money (I assume that in the year in question, the Principal is a sole trader and has paid tax at the top rate in that year)


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## Gekko (5 Oct 2011)

Try and explore the "no loss to Revenue" argument.

Regrossing seems a little harsh too.


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## mandelbrot (5 Oct 2011)

Gekko said:


> Try and explore the "no loss to Revenue" argument.
> 
> Regrossing seems a little harsh too.


 
The alternative to regrossing is that Revenue demand 35% of the amount paid (so 35% of 55k = 19,250 in this case). Then there would be no credit due to the subbie and the tax would effectively be a penalty.

At least if the amount is regrossed, it gives the principal & subbie an opportunity to straighten the thing out:

1. Subbie raises an invoice (and a subsequent credit note) in the amount of the additional 35%. 
2. Principal issues an RCTDC, based on the "total" invoiced amount.
3. Subbie is entitled to a refund, which by virtue of the credit note, he owes back to the principal.

However, if the subbie is into Revenue and/or the bank for money, then the RCT refund may not be his to give back to the principal.

It's a horrible part of the tax system, RCT.


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## trg (6 Oct 2011)

The principal/subbie relationship is gone, basically the principal pleaded with the subbie (at revenue suggestion) to give him a letter stating that his tax affairs were in order but despite many promises this never materialised. This Revenue suggestion was also vaguely rescinded later. Not sure of the ins and outs of that but it may be that Revenue checked out the subbie themselves and he was not compliant. 

On the basis of the relationship between Principal/Subbie I would say the regrossing idea will not work as they will not co-operate. 

Anyone any technical wizardry ideas? Revenue auditor said that the principal can fight him on this which i found an odd thing to say however, from knowledge I have it seems fairly cut and dry and he's looking at an expensive lesson. 

Found out also that there were many other payments in the same timeframe that were to subbies without payments cards also but where it was proved that the subbie did have a C2 himself then Revenue overlooked those errors.

All in all it looks bleak.


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## T McGibney (6 Oct 2011)

Given the scale of the potential liabilities involved here, its surely worth getting advice from a specialist tax consultant to see if there are any avenues open to the principal. Its probably a bit naive to expect a specialist to reveal any potential strategies here, not least because Revenue people read these pages too.


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## trg (6 Oct 2011)

He is getting specialist advice, no feedback yet as far as i know.


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## mandelbrot (6 Oct 2011)

T McGibney said:


> Given the scale of the potential liabilities involved here, its surely worth getting advice from a specialist tax consultant to see if there are any avenues open to the principal. Its probably a bit naive to expect a specialist to reveal any potential strategies here, not least because Revenue people read these pages too.


 
Big brother is watching! 

But sure, the tax inspector becomes a party to these strategies, particularly when it's being resolved in an audit scenario.

Sounds like the Inspector in the above case is actually trying their best but feels their hands are tied.

If the invoice / cr note / C45 avenue isn't open to the principal, then I think they should at a minimum be asking the Inspector not to regross, because as I said previously, if they do regross, then the subbie should be entitled to the credit... it would be in Revenue's interest not to regross and just apply the 35% to the 55k net...

But certainly, this is one of those situations where good advice may pay for itself.


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## Bronte (7 Oct 2011)

What is an RCT and a C2?


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## mandelbrot (7 Oct 2011)

Bronte said:


> What is an RCT and a C2?


 
RCT is Relevant Contracts Tax. http://www.revenue.ie/en/tax/rct/index.html
It's a system for deduction of withholding tax in certain industries, mainly construction. Essentially, when a main / principal contractor is making payments to a subcontractor then unless they have received clearance from Revenue, they are obliged to deduct 35% relevant contracts tax. They are then obliged to pay over this 35% to Revenue, and give a deduction cert to the subbie, who is then entitled to a credit for the tax deducted.

A C2 is an authorisation (in the form of a Photocard) issued by Revenue, and where a subbie has a C2 then the principal can apply to Revenue for clearance not to operate RCT on payments to the subbie. The clearance issued by Revenue is in the physical form of a Relevant payments card, where the principal records all payments made to the subbie without deduction of tax.

The purpose of RCT is to enforce tax compliance on people operating in construction etc... where previously people, particularly small sole traders, had been operating off the radar. It gives responsibility to the principal (usually a bigger entity) for operation of RCT, and it forces the subbie to engage with Revenue if they want to get any / all of the 35% back.

Lots of guys quite happily operate without C2s, letting the RCT credit build up so that they can pay their VAT / Income tax out of it and get a refund every so often. In some ways it's like a PAYE system for self employed people.

But the rules are very penal where RCT hasn't been operated by the principal, as the OPs case highlights...


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## carrielou (10 Oct 2011)

Would anyone happen to know what to do in the case of a principal refusing to give the sub-contractor the pink part of form.............. over €6000 deducted but no pink forms so the sub cant claim from revenue


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## DB74 (10 Oct 2011)

Contact Revenue

I would tell the principal that you are about to do this first.

You'll have the certs in a week IMO


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## trg (13 Oct 2011)

Not looking good for this bucko, they are being reasonable (in my opinion anyway) on interest and penalties front but not the RCT itself. The argument re: no loss to revenue was bypassed pretty quickly by quoting the relevant legislation.


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## dereko1969 (13 Oct 2011)

From my reading of it, they've been more than fair to him. The fact that he seemed to have no regard for the RCT system means he could well have had the book thrown at him big time.


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## T McGibney (13 Oct 2011)

dereko1969 said:


> he seemed to have no regard for the RCT system



I think its a bit harsh to say this. Okay, the responsibility for RCT compliance rests with the contractor but the OP says that the subbie has given the contractor the runaround and from the OP's comments it seems that the subbie is a nasty piece of work.

An additional tax hit of €30,000 plus interest and penalties, on a single transaction, is very severe in anyone's book, and the days are long gone when contractors could recover from such setbacks by price-gouging on other contracts. If an error like this ends up forcing a contractor to lay off staff or go out of business altogether, one of the biggest losers in the long run will be the Revenue.


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## dereko1969 (13 Oct 2011)

trg said:


> *Found out also that there were many other payments in the same timeframe that were to subbies without payments cards* also but where it was proved that the subbie did have a C2 himself then Revenue overlooked those errors.


 
I'd regard that as having no regard to the RCT process.


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## mandelbrot (13 Oct 2011)

No regard for the RCT system would mean having no payments cards for anyone, and/or not operating RCT deductions on anyone. That suggests to me, albeit without knowing all the facts of the case, that the instances of non-operation were few and far between, a result of genuine error rather than a disregard for the RCT system.

The Inspector must have drawn this conclusion it was the case that there was no regard for the operation of RCT then no doubt the book would've been thrown at him, which it hasn't.


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## mandelbrot (13 Oct 2011)

Trg, given that Revenue are being reasonable about interest and penalties, then they should also be reasonable about the RCT - there's no way your guy should accept the grossing up; he should offer to settle on the basis of the RCT being calculated on the 55k as a gross amount (i.e.e 55k x 35% = 19,250). 

He should point to the fact that if they gross it up then he would be entitled to issue the RCTDC to his subbie, and they would have a valid claim to repayment of the 29k - by doing it the other way, the 19,250, plus interest & penalties on that amount, will be genuine yield to the exchequer... if it were me I would take that settlement rather than spend months going to appeal.


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## trg (15 Oct 2011)

I reckon the guy has regard for the system, it is true that there were many instances where the rules were not being applied correctly but there were many instances (for many years) where the rules WERE correctly applied. 

The eye was taken off the ball but there was no intention to evade or profit. The man has no chance of official appeal, reckon he's going to propose that he pays to Revenue the amount that SHOULD have been deducted but he'll appeal to the goodness of their heart for interest and peno's, he's hoping for time to pay as well.


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## headache (17 Oct 2011)

I've come across this situation before.

Case 1
My client had an RCT audit.  Inspector informed them because they did hold a payments card but had paid the money on a date prior to receiving it (a matter of weeks) technically the Revenue should treat the payment as being 65%.  However, promises were made not to let it happen again and all was well.  No charges or penalties

Case 2
I had a client who was a subbie who received payments from a main contractor prior to receipt of a payments card.  The main contractor was audited and Revenue insisted that any payments made without cards be treated as being 65% due.  They had to pay a lot of money to Revenue and issue RCTDC to the subbies, including my client.  At that time, Revenue still paid out on RCTDCs and issued a refund to my client who repaid it to the main contractor.

Case 3
On a recent audit of a colleagues client, payments were made without a payments card on hand.  Although Revenue admit there is no loss to them, they are insisting that any payments be treated as being 65%.  They are also insisting on interest on penalties on late returns.  ie. if a cheque issued in May but was only paid on June RCT 30 - interest and penalties are due. Having to treat payments as being 65% of the gross will probably put this man out of business.  Resolution has not been reached.

In all of the above cases, subbies were all C2 registered and payments cards were applied for and on-hand but not until after the payments had been made.  In some cases, only by days.

I don't think it is fair to say that this man had no regard for the RCT system.  Sometimes people are just doing their best, or doing the nice subbie a favour by getting payment out to him.  That is why you should listen to your accountant or book-keeper when we say NO to these requests.


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