Time to Scrap Tax Clearance Certs?

Revenue have this morning confirmed that from next Monday, 1 July, Tax Clearance Certs will not issue to taxpayers who have failed to pay the 2012 Household Charge.

From next Monday, all unpaid Household Charge bills become Local Property Tax (LPT) liabilities and are then collectable by Revenue.

While we can’t blame Revenue for doing all they can to collect outstanding Household Charge and LPT bills, its unfortunate that the conditions for obtaining a Tax Clearance Cert are becoming more and more onerous and bureaucratic – so much so that their original function has been almost forgotten.

Tax Clearance Certs were introduced in the 1980s as a measure to combat blatant and widespread tax evasion. In those days, it was common practice for individuals and firms to dodge tax on State contracts and income.

The requirement to produce a Tax Clearance Cert quickly forced these cowboy operators to clean up their act. It was very successful in doing so and helped greatly in cleaning up tax evasion in that era.

However we have since learned that having a certificate is no guarantee of tax compliance and probity.

Successive high-profile scandals exposed countless politicians and business people who had blatantly evaded tax while holding tax clearance certs.

Indeed ex-TD Michael Collins was prosecuted and found guilty of obtaining a tax clearance certificate under false pretences, by falsely claiming to be tax compliant.

Mr Collins had in the meantime admitted to owning a bogus non-resident account, and later made a substantial tax arrears settlement with Revenue.

The Collins case demonstrates the futility of using tax clearance certs as a tool to combat wilful evasion. In fact they have become little more than a bureaucratic box-ticking exercise.

If your tax record is clear on a specific day, your certificate will issue. On the other hand, a tiny residual tax balance, an unpaid Household Charge bill, or a mislaid tax return will block its granting.

There is no allowance for materiality or overall compliance. And no sanction for persistent late filing of VAT, PAYE/PRSI or Income Tax returns, once the wrongdoer can contrive to regularise their tax position in the nick of time to ensure their certificate is renewed.

Worse still, those remaining cowboys who nowadays abuse the tax system, in a far more sophisticated and elaborate manner than their 1980s counterparts, still find the tax clearance cert system only a minor obstacle to their crimes.

I believe that the time has come to rethink the whole logic behind tax clearance certs, and devise a better system to police and reward tax compliance.

Todays’s Revenue eBrief is here.