Of all the tax issues I deal with for construction and trades clients in Dundalk, Relevant Contracts Tax — RCT — is the one that generates the most confusion, the most unexpected bills, and the most stress. It is also, once you understand it, one of the more logical systems Revenue operates. The problem is that most people working in construction never got a proper explanation of how it works.
This guide is for builders, subcontractors, plumbers, electricians, and anyone else operating in the construction sector in Ireland who deals with contracts and engages other tradespeople. If you are working on building sites, doing groundworks, doing fit-out, or any other activity that falls under the construction umbrella — RCT applies to you. You will also find related guidance across our business startup guides, particularly for trades businesses getting set up for the first time.
What Is RCT?
Relevant Contracts Tax is a withholding tax that applies to payments made under relevant contracts in the construction, forestry, and meat processing sectors. For our purposes, we’ll focus on construction.
A “relevant contract” is a contract for the execution of operations in the construction sector, including building, demolition, alteration, repair, maintenance, and related work. If you are engaged on a contract of this kind — whether in writing or verbally — RCT applies to payments made under that contract.
The system works as follows: when a principal contractor pays a subcontractor, they are required to notify Revenue of that payment in advance using the Revenue Online Service (ROS). Revenue then instructs the principal on how much tax to deduct — at 0%, 20%, or 35% — and the principal deducts that amount from the gross payment and pays it directly to Revenue. The subcontractor receives the balance.
Who Is a Principal Contractor and Who Is a Subcontractor?
A principal contractor is any business that enters into a relevant contract with a subcontractor. This includes main contractors on large projects, but also any smaller business that engages other tradespeople to help on a job. If you are a plumber who takes on a job and brings in a labourer or another plumber to help, you are a principal contractor in relation to that person.
A subcontractor is any business or individual that carries out work under a relevant contract with a principal. Most tradespeople are subcontractors to somebody — even if they are also principals in relation to others on the same project.
The distinction matters because being a principal creates obligations. You must register with Revenue as a principal contractor. You must notify Revenue of each relevant payment before it is made. You must deduct the correct amount of RCT and remit it to Revenue. You must file periodic RCT returns.
Failing to do any of these things exposes you to penalties, which can be substantial.
The Three RCT Rates
Revenue assigns each subcontractor a RCT deduction rate based on their tax compliance record. There are three rates:
0% — the zero rate. This applies to subcontractors who are fully tax-compliant — returns filed on time, taxes paid up to date, and registered for the relevant taxes. If your tax affairs are in good order, Revenue will instruct your principal to deduct nothing, and you receive 100% of the gross contract payment. The zero rate is not automatically assigned — the subcontractor must have a strong compliance record and be correctly registered.
20% — the standard rate. This is applied to subcontractors who are registered with Revenue but whose compliance record is incomplete or intermittent — perhaps a late return here, a balance outstanding there. Revenue deducts 20% from each payment. This is not a final tax; it is a credit against the subcontractor’s eventual income tax or corporation tax liability. But it means your cash flow takes a significant hit, because 20% of everything you earn is being held by Revenue until you file your return.
35% — the higher rate. This applies to subcontractors who are not registered with Revenue, who have no tax compliance record in Ireland, or who have significant outstanding issues. 35% of every payment is deducted and remitted to Revenue. For a subcontractor earning €150,000 in a year, that’s €52,500 sitting with Revenue until the return is filed — potentially 12 to 18 months later.
The Notification Obligation — How the System Works in Practice
Before paying a subcontractor for work done under a relevant contract, the principal must:
Log in to ROS and access the RCT section. Create a contract notification, identifying the subcontractor (by tax reference number), the type of work, and the contract. Before each payment, submit a payment notification specifying the gross amount to be paid. Revenue responds with a deduction authorisation, specifying the rate to apply.
The principal then deducts the specified amount and pays the subcontractor the balance. The deducted amount must be remitted to Revenue within 23 days of the end of the period.
The subcontractor receives a Deduction Summary from Revenue, showing the amounts deducted. These deductions are credited against their tax liability for the year and can generate a refund if more was deducted than the actual tax due.
What Goes Wrong — The Common Mistakes
Paying without notifying. If a principal pays a subcontractor without first submitting a payment notification to Revenue, they are exposed to a penalty equal to the amount that should have been deducted. On a large payment, this can be a very significant amount. Revenue audits of principal contractors frequently focus on whether all payments have been properly notified.
Using labour hire and misclassifying it as RCT. Not every payment to a tradesperson is an RCT payment. If you engage a person to work under your direct supervision, supplying the tools and materials, they may be an employee rather than a subcontractor. Incorrectly treating employees as subcontractors exposes you to employer PAYE and PRSI liability, as well as penalties. The distinction also has VAT implications for tradespeople that are worth understanding.
Not registering as a principal. Many smaller contractors don’t realise they need to register as a principal when they bring in other tradespeople. The obligation applies regardless of the size of the amounts involved.
Getting the subcontractor’s rate wrong. The rate is determined by Revenue, not by the principal or the subcontractor. You cannot agree with a subcontractor to pay them at 0% if Revenue has assigned them a 20% rate. Using the wrong rate exposes the principal to liability for the difference.
Getting Your Rate to Zero
If you are a subcontractor who is currently on a 20% or 35% rate, getting to zero should be a priority. The cash flow difference is significant, and the rate reflects your compliance standing with Revenue.
The steps to get to zero involve ensuring that all tax returns are filed on time — income tax or corporation tax, VAT if registered, PAYE if you have employees. All outstanding balances should be paid or, if payment in full is not immediately possible, a phased payment arrangement agreed with Revenue. Once you are in a clean position, Revenue will move your rate to zero on the next review.
This is not instantaneous — it takes time and sometimes direct engagement with Revenue. But it is entirely achievable, and the impact on your cash flow from getting to zero rate is often the single most valuable thing a construction business can do in a short timeframe.
What to Do If You’re Behind
If you’ve been operating in construction and you’re not sure whether you’re registered as a principal, whether you’ve been notifying payments correctly, or what your current subcontractor rate is — don’t wait for Revenue to find you. A voluntary disclosure or a proactive review almost always results in a better outcome than a Revenue audit or investigation.
The construction sector is one of Revenue’s priority areas for compliance activity. They have good data - every registered principal is filing payment notifications on ROS, and Revenue can cross-reference subcontractor income against the returns those subcontractors file. Discrepancies are flagged. If Revenue selects your construction business for audit, see our guide on what to expect from a Revenue audit.
If you’re in construction and your tax affairs aren’t structured correctly, talk to an accountant who understands RCT. It costs considerably less than a Revenue penalty. And while you are getting your tax affairs in order, make sure you are also claiming every expense you are entitled to. If you or your subcontractors have worked in Britain, the CIS scheme for Irish tradespeople has its own set of rules and potential refunds worth claiming.
Paddy Malone FCA AITI
Paddy is the principal of Malone & Co. Chartered Accountants in Dundalk. A Fellow of Chartered Accountants Ireland and a Chartered Tax Consultant with the Irish Tax Institute, he has been advising businesses across County Louth and the North-East for over 35 years.