Relevant contracts tax for the renewable energy sector

17 December, 2020

Renewable energy companies involved in the production of electricity are within the scope of Relevant Contracts Tax (RCT). Given the broad scope of RCT, and the severe penalties that can arise for non-compliance, it is important that companies operating in this sector are aware of their RCT obligations and have adequate controls and processes in place to manage compliance.

A photo of the Ha'penny bridge over the river liffey in Dublin city centre.

What is RCT?

Relevant Contracts Tax is a withholding tax that applies on payments made to subcontractors for certain works, and includes water, electrical or hydraulic power undertakings and related activities. There are three deduction rates, 0%, 20% and 35%, with the rate dependent on the tax compliance position of the contractor engaged.

When does RCT apply?

Companies involved in the production of electricity have an obligation to operate RCT on payments to subcontractors for certain works, known as 'relevant operations'. The range of works within the scope of RCT is very broad and includes the construction of wind farms, solar farms and other renewable energy plants, contracts for the repair and maintenance of such farms and plants, as well as works which are preparatory to or for rendering complete such construction or repair works.

This brings in a wide range of onshore and offshore works including site preparation works, supply and install contracts, erection of scaffolding, site clearance works, waste management, drilling works, haulage of materials for use in construction operations.

As such, it is necessary to review all contracts with third parties to ascertain the contracts within the scope of RCT.

What are the common pitfalls for renewable energy companies?

Failure to operate RCT can result in costly tax settlements. In our experience, most penalties for RCT non-compliance for companies operating within the renewable energy sector have stemmed from a lack of knowledge of RCT and when it should apply, such as:

  • Mistaken belief that RCT doesn't apply: renewable energy companies not recognising that RCT applies to their sector and the extent of the works caught for RCT
  • Companies unaware of the territorial scope of RCT and that it includes Irish territorial waters
  • Procurement not being aware of RCT rules: Failure to recognise that a contract is within the scope of RCT at the time that a contract is entered into
  • Non-operation of RCT on payments for the supply of labour (e.g. inter-company payments, payments to employment agencies)

Revenue focus

RCT continues to be an area of focus by Revenue and companies who do not comply with the RCT procedures can face costly RCT settlements. Given the costly consequences of getting things wrong, it is important that the relevant stakeholders within the organisation have the knowledge of RCT and that there are appropriate system controls in place to manage RCT.

If you are a subcontractor operating in the renewable energy sector, what should you consider?

  • Application to Revenue to obtain a 0% RCT rate: Securing a 0% RCT rate means that you can receive payments gross, without deduction of RCT
  • Offset RCT withheld against other tax liabilities: Subcontractors can offset any RCT withheld on payments to them against other tax liabilities
  • Obligation to operate RCT: to the extent that you are engaging other contractors, you may have an obligation to register as a Principal Contractor and operate RCT on payments to subcontractors

We are here to help you

Our RCT team has extensive knowledge of the issues facing both principal contractors and subcontractors operating in the renewable sector. We can provide a wide range of RCT support including managing Revenue Audits, carrying out health checks, making 0% rate RCT applications and operation of Revenue's eRCT system. We also have significant experience in delivering RCT training sessions to clients, so that you have the skills you need to address RCT issues and reduce the risk of future errors. If you would like to ensure that your business is RCT compliant, contact us today.

Contact us

John O'Loughlin

Partner, PwC Ireland (Republic of)

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