In the trenches

In this article we take a look at the Annual Revenue report, 2008 and outline some current Revenue initiatives in the audit and enquiry area.

Annual Revenue Commissioners Report, 2008

The Revenue Commissioners (Revenue) recently issued their Annual Report for the tax year 2008.  The net receipts amounted to €41.1 billion which is €8 billion below the budget estimate and €6.43 billion, (13.5%), below the corresponding figure in the previous year. Both the collapse in the construction sector, which resulted in a decrease in property values, together with the decline in share values contributed significantly to the €6.43 billion decrease in net revenues. The net VAT receipts in the year alone were down over €1 billion, whereas the net revenue from stamp duties and capital gains tax decreased by 45% and 54% respectively.

Other tax heads also recorded a decrease in yield in 2008 with the net receipts for corporation tax down 20.7% and PAYE down 0.08%, which is the lowest decline under any tax head in the year. This is interesting as PAYE is the second largest tax head in net revenue terms though it remains to be seen if such a low decrease will continue in 2009 given the unfortunate increase in unemployment levels towards the end of 2008 and in this year.  However, undoubtedly the recent tax increases (income levy and health contributions) in the PAYE area will go somewhat to offset any future decrease under this tax head.

In 2008 the Revenue completed 13,414 audits which yielded €569.2 million. While this was down 17.2% on the 2007 yield this is not to be taken that the Revenue are decreasing their activity in either audit and / or assurance checks. Rather, the Revenue in the annual report has attributed the decrease in the net receipts to a fall in the number of special investigations undertaken in 2008 together with fewer cases with unusually large yields, which was encountered in 2007.

Indeed, Revenue audit activity is actually set to increase in the current climate, as the Revenue has a fear that tax evasion will increase due to the recession. In order to deal with this expectation the Revenue has increased its budget allocation to deal with tax evasion and the examination of legal tax avoidance schemes to almost 31% of its total budget spend. It was stated at the publication of the annual report that the current focus of the Revenue officials is on targeting cash businesses such as shops, pubs, etc, to ensure that all tax obligations are being met by the individuals / companies concerned.

Risk Evaluation Analysis and Profiling (REAP)

Previous Tax Watch articles discussed the use by the Revenue of the REAP system.  The Revenue introduced the REAP system into all tax districts in 2006 to assist with its Audit program and 2008 was the first full year of using REAP as the main source for audit selection. The system basically identifies the risk attached to each taxpayer by assigning scores based on the presence of a number of risk indicators set by Revenue.  

The Revenue advised that in 2008 most cases would be selected for audit using REAP and that at least 60% of the cases selected for review would be in the top 20% risk category. The annual report states that ‘53% of audit cases settled had a risk ranking in the top 20% of REAP identified risk’, which would suggest that REAP is an effective tool for Revenue in identifying perceived risky cases.

Special Investigations

The Revenue has extended its investigation of Single Premium Insurance Policies (SPIP) to premiums between €20,000 and €50,000. Readers may recall previous articles in Tax Watch regarding the Revenue’s special investigation of this area. The focus of the investigation is on untaxed monies invested in life assurance products, not on any gains received from such policies. Taxpayers have until 30 November 2009 to pay the tax, interest and penalties on any undeclared monies as a means of avoiding criminal investigation and if this is done the Revenue will accept the settlement as a full and final settlement.

In 2008 the contribution of the special investigation into Life Assurance Products was €18.7million with a total yield from the investigation currently at €464.2 million. It is anticipated that the current investigation will also yield further funds.

As previously reported in Tax Watch the Revenue was engaged in a national capital gains tax project over the last two years.  The focus of this review centred on large capital gains tax payments, the issue of capital losses forward, multiple disposals, etc. Though it is understood that over 2,000 CGT returns were examined, we understand the yield has been relatively low to date.

The Revenue recently announced the commencement of an investigation into the use of trusts and offshore structures. This arises due to a perception in Revenue that trusts might be used to hide untaxed income / capital. Any persons with tax issues in this area have until 1 September 2009 to notify their intent to make a qualifying disclosure and must make the settlement, (tax interest and penalties), by 31 October 2009. The focus of the investigation is on the tax treatment of property, assets and funds settled by persons on both foreign and Irish trusts.

In what is seen by many as a PR exercise the Revenue has recently issued letters to senior executives in the financial institutions. While the letters issued are not standard audit notification letters, the individuals are being given the opportunity to bring any issues relating to their tax affairs to the Revenue’s attention in advance of the review. This review seems to be more of a trawling exercise as it does not appear to be based on any specific risk criteria. As part of this review the Revenue is to focus on contributions made to pension schemes. This area is topical at the moment as we understand the Commission on Taxation is to recommend that the current tax relief on pension contributions at the marginal tax rate be reduced to the standard tax rate. This proposed measure will effectively halve the tax relief for pension contributions made. At the same time we understand the Department of Finance has decided to investigate the costs to the taxpayer of providing tax relief at the marginal rate to individuals who have make pension contributions, which is of particular interest in the current climate in the context of those that have made the maximum legal contributions to their pension schemes, while availing of tax relief at 41%.

And finally, on 15 April 2009 the Criminal Justice (Surveillance) Bill 2009 was published, proposing to give the Revenue, among a number of other parties, new covert surveillance powers to assist with the prevention and detection of serious crime. This may have far reaching consequences and it remains to be seen how this will operate in practice.