Revenue's investigation into RCT fraud and other scams is just the tip of the iceberg for the construction industry.

The construction industry will be the focus of enquiries by the Revenue Commissioners in 2006.

Various bodies have had differing views on the construction Sector. One Revenue official compared the construction sector in Ireland to the "gold rush at Klondike", a SIPTU representative has stated that the Sector is "awash with tax evasion" and "totally deregulated" and the Comptroller and Auditor General's ("C&AG") report in 2005 stated that "certain players in the industry regard tax evasion as a way of gaining competitive advantage". The majority view is that most builders are honest, decent and compliant. Revenue is making no secret of its intention to tackle evasion in the sector, head on.

There are various compulsory schemes in existence which would encompass such benefits as pensions, death in service payments, etc. It would seem, however, that a minority of sub-contractors have sought to use self-employed people and "sub-contractors" (who may, in reality, be employees) to avoid the statutory legal and taxation obligations that they would have towards direct employees.

Three key areas which Revenue intend to focus upon this year are Relevant Contracts Tax (RCT), VAT on property transactions and Tax Avoidance Structures. As a detailed examination of all three areas would be outside the scope of this article, I propose to focus primarily on RCT.

Revenue have stated that they have re-examined the operation of RCT and have devoted additional resources into policing RCT with the ultimate objective of:

• reducing the regulatory burden of the scheme, ensuring that the business fully understands the workings of the system, encouraging them to get the employment status of their workers right, and
  
  
• improving the level of tax compliance.

Apparently, in certain Revenue districts, there has been a practice of giving limited C2 Certificates of Authorisation. The limit operates in terms of a monetary limit (i.e. a typical limit being €75,000). Above that amount, withholding tax has to be applied. It would seem that the application of this practice and the fixing of threshold has, in the past, been left to the discretion of the various Revenue districts, based on risk profiling.

Section 41 of the Finance Bill 2006 proposes certain changes to the C2 regime so that the Revenue practice of applying monetary limits will now be put on a statutory basis. If passed in its current form, the legislation will enable the affected sub-contractor to apply to Revenue for an increased (or reduced) limit, or the removal of a limit, with a right to appeal from the Revenue Commissioners' decision.

According to the C&AG, there are approximately 33,800 principal contractors in the State, 40,000 registered sub-contractors and 56,000 unregistered sub-contractors. In 2004, €612 million was collected by the Revenue in RCT and €90 million was not subsequently repaid or offset. The latter figure might suggest the "tip of the iceberg" of the possible evasion in the sector.

Frank Daly, Chairman of the Revenue, remarked that Revenue's "new organisational structure has put us in a better position to target riskier cases with real time interventions and we have invested heavily in bringing RCT into our mainstream computer system, thus enabling us to capture, analyse and match RCT data and use it to target non-compliance. Our new computerised risk assessment selection tool, known as ESKORT, … enhances our capabilities to detect non-compliers and target resources at them."

Revenue now intends to focus 25% of their audit and compliance activities on the construction sector in 2006. Frank Daly has stated that the Revenue will "continue to tackle suspect principal contractors and sub-contractors; we will continue our programme of site visits to gather research and intelligence to identify persons who are not on our register or who are not tax compliant, we will identify and challenge avoidance schemes and we will continue to focus on the ongoing issue of the proper classification of workers within the industry. Our prosecution programme and our enhanced computer developments will support all of this activity. Strong words indeed.

Special Compliance Districts ("SCD's") have been set up by Revenue in recent years with a view to carrying out audits or investigations/enquiries of those involved in the construction sector (directly and indirectly), on a nationwide basis. It is critically important for a taxpayer and their adviser to appreciate the difference between an audit and an investigation/enquiry.

A detailed examination of the manner in which one might deal with an audit or investigation/enquiry is outside the scope of this article, however, it is crucial that appropriate tax and/or legal advice be obtained the moment Revenue communicate with the taxpayer. If an prompted or unprompted qualifying disclosure of tax arrears can be made by a taxpayer, then the likelihood is that such a taxpayer will not be investigated with a view to prosecution if all arrears of tax are disclosed, agreed and paid. If an investigation is likely to lead to an enquiry or investigation, then considerable caution needs to be taken by the taxpayer. Legal advice from a practitioner specialising in tax investigations/disputes (in addition to tax advice) would be very worthwhile because any information given in the context of an investigation/enquiry could, in certain circumstances, be admissible in any criminal prosecution.

Revenue's very considerable statutory powers to obtain bank accounts and other information both from financial institutions and from taxpayers themselves have been well documented. These powers will be used to full effect. Having seen the manner in which Revenue have approached other projects such as Ansbacher, bogus non-resident accounts and other issues over the years, I have no doubt that Revenue will vigilantly focus on the construction sector for a number of years, many contractors and sub-contractors will be investigated at all levels of the sector and ultimately some will be prosecuted. The fact that custodial sentences are now being handed down for tax evasion on a more regular basis serves as a timely reminder to taxpayers that compliance is the only option.

RCT was introduced in 1970, primarily to counter tax evasion by sub-contractors. The Chairman of the Revenue, Frank Daly, recently said that "the serious compliance problems that RCT was introduced to tackle still exist today and are compounded by the highly competitive nature of the industry where non-payment of tax debt is seen by some as a way to gain a competitive advantage".

Abuse of the RCT system takes many forms:

1. A contractor engages an unregistered sub-contractor for a certain price. The contract money is paid over to the sub-contractor net of the 35% RCT required to be deducted by the main contractor which is remitted to Revenue, however, persons employed by the sub-contractor (if any) are paid in cash and slip under the Revenue's radar. Some commentators have indicated that the Revenue in the past were reasonably happy to go along with this situation, bearing in mind that they were receiving 35% of the monies as opposed to 0%, however, Revenue say abuse of the system will not be tolerated going forward.
   
   
2. Rogue sub-contractors have, through various dishonest or fraudulent means, secured C2 cards with the assistance of principal contractors which entitle them to be paid the contract monies without the deduction of 35%, but ultimately do not pay the relevant VAT or other taxes due to Revenue and promptly disappear. It has been said that some years ago some principal contractors were prepared to assist sub-contractors to obtain C2 cards because they were in a position to secure (then) much needed labour. If, however, a contractor facilitated the fraudulent or illegal acquisition of a C2 card, Revenue may ultimately seek to make that contractor responsible for any tax that the sub-contractor omitted to pay, together with interest and penalties. That contractor's C2 card could be withdrawn, the contractor would also be audited, at the very least, if not investigated with a view to prosecution.
   
   
3. In October 2005, four individuals were prosecuted in the District Court for claiming bogus tax refunds for fictitious jobs. Essentially, they claimed refunds of the 35% which principal contractors deducted, but the jobs were non-existent and when the offenders received the refund cheques, they simply took a small cut for themselves. Fines were levied.
   
   
4. A sub-contractor in Donegal who organised labour gangs received a custodial sentence of 16 months. The sub-contractor pleaded guilty to a number of tax offences relating to the submission of incorrect VAT and income tax returns and failure to comply with company law requirements to keep proper books and records.

This article was published in the March 2006 issue of the "Irish Construction Industry Magazine".

For further information please contact Eoin Cunneen.