Tax Audits: New Code of Practice – Same Old Story

November 27, 2015

Revenue have recently updated their Code of Practice for Revenue Audits.

The new update applies from 20 November 2015 and replaces the previous Code issued in August 2014.

The most striking change (in paragraph 1.10.5)  is the new Revenue policy of reporting an accountant or tax agent to their professional regulatory body where they consider that their work during a Revenue Audit “does not meet the standards of a professional body“.

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Needless to say, there is no corresponding measure to shop a dodgy tax inspector to a third party regulator.

If you encounter an incompetent, unpleasant or aggressive inspector, you can only complain directly to Revenue.

When it comes to tax audits, sauce for the goose is rarely sauce for the gander.

 

 


Revenue Warn Builders: “We’re Back!”

August 31, 2015

The Revenue Commissioners have warned builders and tradesmen to be on their guard in relation to tax compliance, as the construction sector slowly recovers from its long recessionary slump.

The collapse of the building sector following the 2008/09 crash was a catastrophe, not only for those working in and earning a crust from construction, but also for Revenue, who had enjoyed booming tax receipts from the sector in the Celtic Tiger bubble years.

In its eBrief last week, the tax authority announced that it is beefing up its “compliance interventions” programme for the industry, in order to ensure that the State benefits fully from the recovery.

This centres mainly on the online Relevant Contracts Tax (eRCT) system, in addition to VAT and Employers’ PAYE/PRSI.

Revenue to Builders - We're Back!

Revenue have now flagged the following key issues:

  • Operation of the eRCT system, including full reporting of payments to sub-contractors, and notification of “Unknown” sub-contractors;
  • Reconciliations of Home Renovation Incentive (HRI) applications with VAT returns;
  • Cross-checking of eRCT, PAYE/PRSI and VAT returns with reported profit margins;
  • Reviews of VAT Reverse Charge and PAYE/PRSI procedures;
  • More attention on the vexed question of classifying employees vs. subcontractors; and
  • A fresh focus on the treatment of non-Irish resident principal contractors & sub-contractors.

Once underway, the Revenue  “compliance interventions” programme will entail more:

  • aspect queries – requests for documentation and other specific questions
  • profile interviews – interviews focusing on the key tax “compliance risk areas” identified by Revenue based on the taxpayer’s profile.
  • revenue audits – full examinations of tax returns and claims.
  • unannounced visits to construction sites.

Revenue are strongly encouraging builders and tradesmen to review their tax compliance, and regularise any shortcomings before they take action.

In many cases this will entail making an “unprompted voluntary disclosure” and settling tax, penalties and interest liabilities.

If you are going down this road, I strongly recommend that you first arm yourself with appropriate professional assistance and ensure that your proposal complies with the Revenue Audit Code of Practice.


Are Revenue Really Using PAYE Audits to Fish for Third-Party Data?

August 18, 2015

“Revenue are doing audits of PAYE taxpayers who got one-off single-house planning permission and demanding details of all payments to tradespeople.”

…according to Aidan Clifford in the Sunday Independent at the weekend.

I haven’t yet heard of this happening. If if it is, I’d be very, very alarmed.

Revenue Audit

The purpose of a Revenue Audit is to audit a tax return. It should never be merely a general trawl through a private individual’s personal expenditure.

And if Revenue are auditing PAYE taxpayer returns with the sole intention of fishing for information on non-business spending, there’s a good chance they’re violating both their own Code of Practice and their wider data protection obligations.

If you’ve a grievance over the conduct of a Revenue Audit, you can use their complaints procedure.


Revenue, Techies & The Bart Simpson Paradox

January 31, 2013

Tech contractors are this week anxiously reviewing their contract and tax arrangements following last Friday’s news of a looming Revenue crackdown on the sector.

They and their advisors will be grappling with a range of complex issues, some of which contradict each other.

Revenue & Tech Contractors

An interesting contradiction lies at the heart of a major issue flagged by Revenue last week, as follows:

“For the moment, our concern is that in many cases too small a proportion of the gross contract payment is reported as liable to tax in the hands of the contractor. Into the future, this will continue to be the subject of frequent checking, and will be a factor in risk-based selection for audit.”

Essentially Revenue are stating here that, if your contracting business has significant overheads, they will suspect you of evading tax.

This seems to directly contradict Revenue’s own Code of Practice for Determining Employment or Self-Employment, which lists the various factors that indicate whether a worker is an employee or a contractor running their own business.

Among the criteria that suggest that they are self-employed, are that the worker:

  • “Provides the materials for the job.
  • Provides equipment and machinery necessary for the job, other than the small tools of the trade or equipment which in an overall context would not be an indicator of a person in business on their own account.
  • Has a fixed place of business where materials, equipment etc. can be stored.
  • Provides his or her own insurance cover e.g. public liability cover, etc.”

Now, if a contractor provides all these component functions in the course of their contract work, these will all cost money, ie overhead costs. These costs represent the difference between the contractor’s gross turnover and their net profits.

For a contractor who provides their own materials, equipment and insurance, and runs their own business premises, these overhead costs may be significant. Yet Revenue’s letter now tells contractors that if their companies have such large overheads,  they will be treated as suspected tax dodgers!

It looks like Revenue are presenting contractors with a classic Catch-22: Unless you incur overheads, you’re not a contractor at all. And if you incur overheads, you’re a suspected tax dodger.

As Bart Simpson once said:

Life is a paradox, You’re damned if ya’ do, and you’re damned if ya’ don’t.

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Contractor Companies Face Revenue Probe

January 25, 2013

Revenue are now reviewing the tax affairs of limited companies and directors who provide contracted services to a larger company or group.

They have this week written to the Irish Tax Institute, confirming that that their review has already commenced in the South West region (counties Cork, Limerick, Kerry and Clare) and is “likely” in due course to extend to other parts of the country.

Revenue

Revenue state that they have already found “a significant understatement of tax liability” in many cases, which they attribute to “deficiencies in accounting for input costs and expenses”.

They are now inviting contractors to make voluntary disclosures of their tax underpayments, including interest, and the following penalties as set out for “deliberate default” in the Code of Practice for Revenue Audit:

  • unprompted disclosure (i.e. where no audit or investigation notice has issued) –  penalty of 10% of the tax underpayment.
  • prompted disclosure (made after receipt of a audit notice) – 50% penalty;
  • failure to make a complete disclosure,  75% – 100% penalty.

In the coming weeks, contractors, and their tax advisors, will need to carefully review the implications of this news.

The Institute of Tax website includes a pdf copy of the Revenue letter while you can also find a full transcript here.


Revenue’s Letter on Contractor Companies -In Full

January 25, 2013

The following is a full transcript of Revenue’s letter to the Irish Tax Institute confirming that they are “reviewing the tax affairs of companies and their directors” in the South West Region.

The Irish Tax Institute have separately published a pdf copy of the letter here.

Revenue

“Mr Mark Barrett Chairperson
South West Representatives
Irish Tax Institute                                                     22 January 2013

Dear Mark

I am writing in response to queries from yourself and other tax practitioners about the current project in the South West Region concerning various contractors. I would be grateful if you would inform the relevant ITI members of the contents of this letter, which sets out our position as clearly as I can. If I have overlooked any issues, please let me know.

Revenue in the South West Region (Cork, Limerick, Kerry and Clare) are currently reviewing the tax affairs of companies and their directors, where the main source of income is a contract or contracts “for service” with a larger company or companies (directly or through intermediaries), the company in question does not appear to have a substantial business separate from these contracts, and in most cases the director(s) are the only employees of the company and pay tax through PAYE. To date, we have established that in many cases there are deficiencies in accounting for input costs and expenses, with the result that there has been a significant understatement of tax liability to the benefit of the director(s). As a result of these findings, this area will continue to be a significant focus of Regional inquiries through 2013, and it is likely that similar explorations will be initiated in other Regions.

Because of the nature of the underdeclaration, we take the view that the provisions of the Code of Practice for Revenue Audit require us to regard the underdeclaration as stemming from deliberate behaviour. This has the consequence that an unprompted disclosure (i.e. where no notice of audit or investigation has been received) attracts a penalty of 10%; a prompted disclosure made after receipt of a notice of audit is penalised at 50%; and failure to make a disclosure, or to make a complete disclosure, moves the penalty to between 75% and 100% of the tax underpayment. Of course, all underpayments also attract interest from the date of default.

A full disclosure, whether prompted or unprompted, avoids publication. If however the disclosure is incomplete, is not accompanied by full payment, or otherwise fails to meet the requirements described in the Code of Practice for Revenue Audit, then all benefits of disclosure are lost.

In order to facilitate and encourage disclosure, and to ensure a consistent approach to all cases, we have decided not to carry out in-depth checking of disclosures where the disclosure matches existing Revenue information and the general profile for the industry sector concerned. We have also decided that the penalty rates set out in the preceding paragraph will apply subject to exceptional circumstances. Where exceptional circumstances are claimed, a special case will need to be formally made to the Revenue caseworker, who will make a recommendation for decision at Assistant Secretary level.

The definition of “qualifying disclosure” is contained in Section 2.7 of the Code of Practice for Revenue Audit. Naturally, we will take a reasonable approach to the level of detail required, but all significant matters must be included, and payment or an acceptable proposal for payment is also required. If we accept a disclosure and the accompanying payment, we will also accept that the taxes and periods covered are those relevant, and will not look at earlier periods. If however, there are firm reasons to believe that the disclosure is significantly deficient, we retain the right to audit any and all relevant years and taxes.

In the normal course, where an audit is required, it will cover the four complete years preceding the date of issue of the notice of audit. Extension to other years will, as in all audits, depend on the circumstances of the case, but will be unusual. Likewise, there is a possibility of prosecution where audit shows a blatant breach of legal provisions but this will, we hope, be rare.

Changing taxpayer behaviour is a very important consideration in all compliance initiatives, and this is no exception. At the moment, we are not expressing an opinion on whether the arrangements we encounter are valid, that is, whether the company directors should more properly be regarded as direct employees of the entity awarding the contract. This question is being reviewed and may be adressed in the future. For the moment, our concern is that in many cases too small a proportion of the gross contract payment is reported as liable to tax in the hands of the contractor. Into the future, this will continue to be the subject of frequent checking, and will be a factor in risk-based selection for audit.

I hope the foregoing makes our position clear, and I look forward to the co-operation of your members in assuring correct and tax-compliant behaviour in this large and growing area.

Yours Sincerely

Anthony Buckley

Assistant Secretary South West Region”


Tax Audits and Late Payments Keeping Revenue Busy

January 18, 2013

9,000 audits, 499,000 enquiries and 1 in 5 late payments & returns in a busy 2012 for Revenue

Revenue recently published their Headline Results for 2012, which includes some very interesting statistics.

Tax Receipts

In 2012, Revenue collected €36.7 billion in taxes. Income Tax raised €15.2 billion, just ahead of the combined total from VAT & Excise duties, which amounted to  €14.9 billion. This reflects the increasing role of indirect taxes in supporting the public finances in the current recession.

Revenue Audit Tax Inspector smallLate Payments & Returns

Last year, more than one in five tax payments and returns were filed late – in fact only 80% of normal tax returns and payments were made within 1 month of the due date.

However there was much higher compliance amongst larger taxpayers. A 95% on-time rate was recorded for “medium case” taxpayers with annual combined tax liabilities (including Income Tax/Corporation Tax, VAT, PAYE/PRSI etc)  over €75 ,000. The compliance level was higher again (at 98% rate) for “large case” individuals and businesses who pay over €500,000 each year.

This reflects the fact that larger businesses have much more to lose by failing to pay tax or file returns on time, as their % surcharges and interest bills will be much higher.

I wouldn’t be surprised if the comparatively low rate for “small case” taxpayers prompts Revenue to target this sector in 2013. That said, Revenue mustn’t forget many small businesses are struggling badly at the moment and any over-zealous approach on their part could prove both damaging for these businesses and counter-productive for Revenue.

Revenue Audits

Revenue completed a total of 9,065 audits in 2012.  These audits raised a total of €359.1 million, less than 0.1% (or one-thousandth) of the entire tax take. However, each audit raised on average a sum of €39,613, which includes liability for tax arrears, interest and penalties.

This is a substantial sum, especially when it is noted that most audits raise little or no liability for the taxpayer. If “zero settlement” audits are excluded from the figures, I would expect that the average liability sum would rise sharply.

Obviously hardcore tax evasion is still rife in Ireland, but once detected, evaders face severe financial consequences. On the other hand, court prosecutions for serious tax evasion remain relatively rare, with only 25 convictions secured in 2012, while another 156 prosecutions for alleged serious evasion were before the Courts at the end of 2012.

The vast majority of Revenue activity was in the form of Risk Management Interventions (ie querying apparent anomalies) and Assurance Checks (eg verifying claims for credits etc against supporting documentation). Revenue completed almost 499,000 such exercises in 2012, raising over €110 million.

In addition, Revenue last year implemented their new PAYE Compliance risk system, designed to identify and pursue tax underpayments by PAYE workers. This system enabled almost 30,000 tax return checks. These yielded €22m in extra tax, an average of €750 per case. I expect that these checks will become much more commonplace in 2013 and future years.

Tax Collection

In 2012, Revenue used special collection enforcement measures in almost 32,000 cases, to collect €210 million in taxes.  Over 22,700 such cases involved Revenue Sheriffs, who collected €149 million, with the remainder collected through a further 5,000 cases via solicitors and 4,000 cases involving attachment orders.

The full Headline Results document is available online.