18.2.2 Who is a Principal Contractor?
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Relevant Contracts Tax [18.2.2]
[18.2.2] Who is a Principal Contractor?
Principal Contractor is defined in the context of “Relevant Contract” in Section 530
and in Section 531(1) and (2) Taxes Consolidation Act 1997.
1. A principal for RCT purposes is:
a) a person who, in respect of the whole or any part of the relevant operations to
which the contract relates, is the contractor under another relevant contract. An
example would be a person who contracts to carry out activities such as the
plumbing or electrical work on a building but who then in turn subcontracts the
work to another contractor
b) a person:
(i) carrying on a business which includes the erection of buildings or the
development of land (within the meaning of section 639(1)) or the
manufacture, treatment or extraction of materials for use, whether used or
not, in construction operations.
As well as those involved in the erection of buildings, the persons mainly
affected are suppliers of concrete, concrete products, tarmacadam etc. and
operators of sand-pits. Persons engaging contractors to carry out operations
such as site clearance, earth moving and site restoration are also affected.
However, the scope of the provision is narrowed a little by virtue of section
531(2) and section 530A(2). This provides that a builder or land developer is
not to be treated as a principal by reason only of the fact that he or she erects a
building or develops land in relation to such a building where the building is for
his or her own use or occupation or the use or occupation of his or her
employees. This treatment is also extended to cases where a building is erected
for short term letting, i.e. 35 years or less.
(ii) carrying on a business of meat processing operations in an establishment
approved and inspected in accordance with the European Communities
(Fresh Meat) Regulations, 1997 (S.I. No 434 of 1997) or, as the case may
be, the European Communities (Fresh Poultry-meat) Regulations, 1996 (S.I.
No 3 of 1996).
In effect, the reference to S.I. No. 434 of 1997 limits the scope of RCT to the
operators of the larger exporting meat processing plants whose activities
include slaughtering, cutting, boning and cold storage of meat. It does not
include food preparation.
(iii) carrying on a business which includes the processing (including cutting and
preserving) of wood from thinned or felled trees in sawmills or other like
premises or the supply of thinned or felled trees for such processing.
Here, it is important to note that a subcontractor who fells trees for a person is
only subject to RCT if that person is a wood processor or sawmill operator
or a person who carries on a business of supplying timber to wood
processors or sawmill operators.
c) a person connected with a company carrying on a business mentioned in
paragraph (b), This provides that a person connected with a company engaged in
Reviewed April 2015Relevant Contracts Tax [18.2.2]
a construction, land development, meat processing or forestry processing
business must operate RCT on payments made by that person to a subcontractor
in the performance of a relevant contract. However, Section 531(2A) inserted by
the Finance Act 2008 (also section 530A(3)) amended the position mainly in the
case of companies obliged to operate RCT because they were connected with a
company engaged in the business of land development or construction. Those
companies do not have to operate RCT where they engage a subcontractor solely
to carry out work on their own business premises provided they are not
themselves engaged in the land development or construction business. The
amendment also provides that a person, not engaged in the business of land
development or construction, who is connected with a company in the meat or
forestry processing areas, does not have to operate RCT where that person
engages a subcontractor solely to carry out construction operations in relation to
a private dwelling or their own business premises.
A person is regarded as a principal contractor where they are connected with a
company carrying on a business in the construction, forestry or meat processing
industries. However, the connected person rule will not apply where the only
connected parties carrying on such operations are non-resident and are not
carrying on a trade or business in the State through a branch or agency. The RCT
provisions will therefore not apply to a person solely on the basis that it is
connected to a company outside the State which carries on these activities outside
the State.
d) a local authority, a public utility society (within the meaning of section 2 of the
Housing Act, 1966) or a body referred to in subparagraph (i) or (ii) of section
12(2)(a) or section 19 or 45 of that Act,
e) A Minister of the Government.
f) any board or body established by or under statute or any board or body established
by or under royal charter and funded wholly or mainly out of moneys provided by
the Oireachtas,
g) or a person who carries on any gas, water, electricity, hydraulic power, dock,
canal or railway undertaking (a supplier of Liquefied Petroleum Gas is a person
carrying on a gas undertaking), or
h) a person who carries out the installation, alteration or repair in or on any building
or structure of systems of telecommunications.
This definition includes any telecommunication companies, including traditional
telecommunication companies that install, alter or repair systems of
telecommunications. However, as ‘systems of telecommunications’ will continue
to evolve over time, this provision is designed to accommodate this evolution.
Reviewed April 2015Relevant Contracts Tax [18.2.2] 2. Extract from Tax Briefing Issue 66 (July 2007) Background Under Section 531(1)(b)(i) Taxes Consolidation Act [TCA] 1997, a person carrying on a business, which includes the erection of buildings is required to operate Relevant Contracts Tax [RCT] on making payments to subcontractors. On foot of Section 31 of the Finance Act 2007, and in the case of relevant contracts entered into on or after 1 May 2007, this requirement also applies to a person carrying on a business, which includes the development of land as defined in Section 639(1) TCA 1997. Apart from construction-type work, references in this article to land development include the carrying out of any engineering works or other works on land to adapt it for materially altered use and would generally relate to demolition and site-preparation type work. The position, therefore, is that a person carrying on a business, which includes the erection of buildings or the development of land is required to operate RCT on making payments to subcontractors. Under the legislation a person can come within the scope of the RCT system even if he or she does not take an active part in actually erecting buildings or in developing the land. All that is required for RCT to apply and for a person to be a principal contractor for RCT purposes under Section 531(1)(b)(i) is that - the person must be carrying on a business, and the business must include the erection of buildings or the development of land. Property developers carry on a business of developing land. Thus, where a property developer engages a building contractor to erect a building or a contractor is engaged to clear land or a site for development, he or she is a principal contractor by virtue of Section 531(1)(b)(i) TCA 1997 - even though he or she does not take an active part in the actual work involved. This general position is, however, modified by Section 531(2) TCA 1997. The latter provision provides that a person will not be regarded as a principal contractor for RCT purposes by reason only of the fact that, in the course of his or her business, the person erects buildings for the person’s own, or his or her employees’, use or occupation or, (in relation to relevant contracts entered into on or after 1 May 2007) by reason only of the fact that the person develops land in relation to such buildings. Clarification The position outlined above was set out generally, in its pre-Finance Act 2007 form, in an article in the ‘Queries’ Section of Issue 26 of Tax Briefing (April 1997). Arising from a number of enquires received on this matter recently, some further clarification is now provided. It should be noted that the modifying effect of Section 531(2) TCA applies only in the limited circumstances where a person, such as a property developer, would fall to be treated as a principal contractor by reason only of the fact that he or she erects a building or develops land in relation to that building in the course of his or her business, where the building is for his or her own use or occupation, or for the use or occupation of his or her employees. It does not apply where the developer erects a building for sale or develops land in relation to such a building (though it may apply in circumstances where the building is developed with the sole intention of letting it [see below]). Neither does it apply in cases where a property developer, though Reviewed April 2015
Relevant Contracts Tax [18.2.2]
erecting a building for the use of his or her employees or developing land for such a
building is, for instance, a principal contractor for other reasons as, for example,
would be the case where the developer -
is also a building contractor or a land developer and is, therefore, carrying on a
business which includes the erection of buildings or the development of land
and thus a principal contractor anyway under Section 531(1)(b)(i), or
is connected with a building company or a land development company and
therefore a principal contractor under Section 531(1)(c) by virtue of this
connection.
In summary, Section 531(2) applies to exclude from RCT a property developer who
would otherwise fall within its scope by reason only of his or her involvement in the
course of business in the erection of a building or the development of land in relation
to such a building where the building is for use or occupation by the person or his or
her employees. If the person is a principal for RCT purposes for any other reason,
then Section 531(2) does not apply and RCT must be operated.
Developing Property for Letting
Revenue also stated in Issue 26 of Tax Briefing that it generally treats a developer as
carrying on a business which includes the erection of buildings (and thus a principal
contractor) where the developer’s intention is to develop the property for either sale or
letting. However, it went on to say that it would regard the modification provided for
in Section 531(2) TCA 1997 as applying to such a person who arranges to have a
building erected with the sole intention of letting the building. Accordingly, such a
developer or investor was not to be regarded as a principal contractor for the purposes
of RCT. With effect from 1 May 2007 this modification will also apply to a developer
or investor who develops land with the sole intention of letting any buildings
subsequently erected on that land.
It has come to Revenue’s attention that some property developers are developing
property to let under very long leases (99 and 999 year leases). The practice set out in
Issue 26 of Tax Briefing, and outlined above, was never intended to apply in such
cases. Revenue regards such leases as tantamount to a sale. Accordingly, it should be
noted that the practice outlined has application only in the case of a person who
arranges to have a building erected or develops land in relation to such a building with
the sole intention of letting the building under a short lease. For this purpose, a short
lease will be taken to be one that does not exceed 35 years. Only in such cases will a
developer or an investor be treated as not being a principal for RCT purposes. This
change of practice applies in respect of relevant contracts entered into on or after
16 July 2007.
Finally, it should again be noted that the practice just outlined in relation to buildings
for short lease does not apply where the developer or investor would be a principal for
RCT purposes for other reasons. It does not apply, therefore, where the developer or
investor is also a building contractor, or develops land, or is connected with a
construction company or a company engaged in land development. It only applies
where the developer or investor is a principal by reason only of developing a property
in the course of his or her business with the sole intention of letting that building
under a short lease.
Reviewed April 2015Relevant Contracts Tax [18.2.2] 3. Extract from Tax Briefing Issue 71 (April 2009) Clarification on Connected Party Rules (Section 531(1)(c) TCA, 1997) AND Construction operations carried out in a private capacity by a sole trader or partnership Introduction This article sets out to clarify Revenue's position in relation to the operation of RCT by persons who are connected with construction, forestry and meat processing companies and to provide guidance to taxpayers and tax practitioners on this issue. It also provides clarification regarding the obligations of builders operating as sole traders or in partnership in respect of construction operations carried out in a private capacity. RCT and Connected Persons Section 531 (1)(c) TCA 1997 provides that a person connected with a company involved in a construction, land development, meat processing or forestry business must operate RCT on payments made by that person to a subcontractor in the performance of a relevant contract. This connected person rule is an anti-avoidance provision introduced in 1981 to counteract the avoidance of the operation and application of RCT through corporate restructuring. A 'connected person' for this purpose covers both companies within a corporate group where one subsidiary is a principal under Section 531 1(b) and directors/shareholders with a controlling interest in such companies subcontracting as individuals or as part of a partnership. It was recognised that this provision had inadvertently brought certain parties within the scope of RCT, in a way that was never the intention of the legislation. For example, a large Corporate Group with many subsidiaries could have one subsidiary involved in construction operations or the development of land. Under the connected persons rule, this would have been sufficient to require every other company in the Group to operate RCT in respect of any subcontractors engaged by them to carry out minor construction operations, electrical installations, plumbing work etc. Similarly, a person connected with a company involved in meat processing or forestry was, strictly speaking, required to operate RCT in respect of construction operations they carried out in a private capacity. Finance Act 2008 Amendment Section 35 of the Finance Act 2008 introduced a new subsection into Section 531 TCA (subsection (2A)) that was designed to exclude some connected persons from the RCT provisions in respect of construction operations carried out in their own premises. Where the connection was with a meat processing or forestry company, the obligation to operate RCT in respect of construction work carried out in their own premises was removed from all persons connected with the company. Where the connection was with a company involved in construction or land development activities, the obligation was only removed from connected companies. In this context, it is important to note that the obligation to operate RCT was only removed in respect of work carried out in the connected company's own premises. Where such connected companies were involved in letting out property, they were obliged to continue to operate RCT in respect of construction operations carried out in such property. As the 2008 Finance Act only removed the RCT obligation from companies where the connection was with a construction company, directors/shareholders with a controlling interest in construction companies were obliged to continue to operate RCT in respect of construction operations carried out in a private capacity and partnerships Reviewed April 2015
Relevant Contracts Tax [18.2.2]
involving such directors/shareholders were also obliged to operate RCT in respect of all
construction operations carried out on their behalf.
New Treatment
(1) Companies, Shareholders & Directors
Revenue is prepared to regard the 2008 modification of the RCT legislation
(introduced in Section 35 of the Finance Act 2008) as applying in certain limited
circumstances to construction work carried out in premises that have been let out -
a) by persons connected with companies in the meat processing or forestry
businesses, and
b) by companies connected with companies in construction and land
development businesses.
The type of work which will qualify for this treatment (i.e. the obligation to operate
RCT will not apply) is minor repair or improvement work to rented property where
the total value of contracts awarded per property in any tax year in respect of such
repairs or improvements does not exceed €20,000 (incl. VAT). Any contracts awarded
in any tax year which would bring the total value of such contracts over the €20,000
threshold (per property) will continue to be subject to the operation of RCT in the
normal way. A situation could arise where a contract is entered into during a tax year
on the basis that it qualifies for this treatment i.e. the total value of the contract plus
any earlier such contracts awarded does not exceed €20,000 (incl. VAT). However, if
it subsequently becomes clear (at any stage after entering into the contract) that the
value of the contract will/is likely to exceed the original contract price to the point
that the contract will bring the total value of contracts entered into in the relevant tax
year over the threshold of €20,000 per property, normal RCT requirements will apply
to the contract from that point onwards.
[See example in respect of Property D below.]
The new approach outlined above will also apply in respect of minor repairs or
improvements carried out in a private capacity on their own home (including
outhouses and pleasure gardens), or private lettings, or other incidental private work
(e.g. erection of a memorial monument) by a director/shareholder with a controlling
interest in a construction company.
Example
A company connected to a construction company has four rental properties. In 2009,
the company engages subcontractors to carry out repairs and other minor work in each
of the four properties.
Property A
The total value of contracts entered into in 2009 in respect of minor
repair/improvement work is €12,000 - no RCT obligation.
Property B
The total value of contracts entered into in 2009 in respect of minor
repair/improvement work is €18,000 - no RCT obligation.
Reviewed April 2015Relevant Contracts Tax [18.2.2] Property C The total value of contracts entered into in respect of minor repair/improvement work up to 12 September 2009 is €15,000 - no RCT obligation. A contractor is engaged on 3 October 2009 to carry out works estimated to cost €8,000. This will clearly bring the value of the contracts over the €20,000 threshold. As a consequence, the principal should operate RCT on all payments in respect of this latter contract. Any splitting of contracts to avoid RCT will invalidate application of the new approach set out in this article. Property D The total value of contracts entered into in respect of minor repair/improvement work up to 31 July 2009 is €9,000 - no RCT obligation. A contractor is engaged on 1 September 2009 to carry out works estimated to cost €10,000 - no RCT obligation at the time of entering into the contract. During the course of work on the latter contract, it becomes clear that the overall value of the contract will exceed the original estimate of €10,000. At the point where it becomes clear that the total value of contracts entered into in 2009 will exceed the threshold of €20,000, normal RCT requirements will apply from that point onwards. (2) Sole Traders & Partnerships Building contractors operating as sole traders or in partnership are reminded of their obligations regarding the operation of RCT. A builder who is a sole trader or in partnership is a principal under Section 531(1)(b)(i) TCA 1997 as s/he is 'a person carrying on a business which includes the erection of buildings'. S/he must operate RCT in respect of all payments made to subcontractors who carry out construction operations for him/her, including construction operations carried out in a private capacity (i.e. non-business related construction activities). However, the new approach outlined in Paragraph 1 above (i.e. minor repairs or improvements where the total value of contracts in respect of such work does not exceed €20,000 (incl. VAT) per property in a tax year) will also apply in the case of a sole trader or partnership in respect of such work carried out in a private capacity on their own home (including outhouses and pleasure gardens) or private lettings, or in respect of other incidental private work (e.g. erection of a memorial monument). This new approach applies in respect of relevant contracts entered into on or after 20 April 2009. For 2009 'tax year' for the purposes of the application of the new treatment outlined above means the period 20 April to 31 December 2009. General Where the new approach above applies (i.e. where RCT is not operated in respect of certain minor work), records relating to payments in respect of such work should be maintained by the principal and retained for inspection by Revenue. Accordingly, all relevant invoices should be retained for a period of six years and must clearly show the address of the property or properties involved, the date of the relevant contract and the dates of all payments made. This new approach represents a pragmatic approach in relation to the operation of RCT. However, Revenue reserve the right to impose the strict technical treatment set out in the legislation where, in the opinion of Revenue, there is a deliberate attempt to avoid the general operation of RCT, or there is an attempt or intention to avoid or evade tax by any of the parties to a contract. Reviewed April 2015
Relevant Contracts Tax [18.2.2] Where companies or individuals have a doubt as to whether RCT applies in any particular circumstances or to any particular works, they should contact their local Revenue office for advice. Reviewed April 2015
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