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Saturday, 20th April 2024 |
| The next Budget may come sooner than you think! Have you prepared for it? |
Budget 2003
The current Minister for Finance is secure in his position as a great tax reformer but surprisingly, he has added to the complexity of tax administration system in pointless ways. There are also areas of debilitating complexity in the system as he inherited it.
Early start to Budget season
The Budget of 2003 will not be a radical reforming Budget. Early in December the Minister may stand up in the Dail with less than a month to go before he assumes the Presidency of the Council of Ministers for Finance in the EU. Ireland’s accession to the rotating role of Presidency of the EU, on 1 January 2004, will probably mean that the Finance Act of 2004 will have to be slim and uncontroversial.
It also probably implies that the Minister’s decision-taking regarding his Budget will occur much earlier in 2003 than would normally be the case. Those who leave their lobbying for tax changes until October and November may find that by then the Budget has already been set in stone and the priorities for inclusion in the Finance Bill already decided.
Simplify
Given that the Minister will not want to undertake further major changes in his Budget 2003, he might like to look at some modest areas of simplification rather than fundamental reform.
VAT records
The Finance Act 2003 imposed an obligation on an owner of property which is in the VAT net to retain all records relating to expenditure on the premises for up to six years after ceasing to be the owner of the premises.
‘So what?’ You might ask. But consider: A company might own a premises within the tax net for half a century, without it being out of the ordinary. Must the company keep all records of expenditure on that premises for that period? Such an open ended requirement to retain records is simply daft. The function of a Minister is to place a check on well meaning but over zealous advice from officials. He does not seem to have done so in this case.
The provision is all the more surprising in that it is contained in the same Finance Act as limited the power of the Revenue, and of the taxpayer, to re-open tax assessments and tax affairs to a period of broadly four years after the year in which a return is made. The limit of course does not apply to the Revenue where they have grounds to believe there is fraud or neglect on the part of the taxpayer. It contrasts remarkably with the unlimited period of time for which VAT records on property may have to be kept.
The rules relating to VAT records on property are all the more surprising since, where a property does change hands, or where a lease is granted, or ownership rights are otherwise varied, the records relating to that property may be spread over several taxpayers. Under existing law none have any right to the records of the other, so that no taxpayer has a complete view of the full details relating to the VAT status of any particular property.
Some taxpayers may have secured such rights by private contract, but that is not universal. This area is a mess. It imposes vexatious obligations on the private sector with virtually no equivalent advantages to the Revenue.
CAT open-ended liabilities
It is not uncommon for well intentioned people, in making a will, to leave a property such as a house to a member of the family but subject to ‘a right of residence’ or a right ‘to visit’ left to a wide range of their family. Sometimes this is done in the sentimental hope that family members long settled in the USA or Australia may be induced to come home to visit occasionally.
Such a provision in a will does have the effect of reducing the immediate inheritance tax liability. Unfortunately it also means that as each member of the family to whom such visitation or residence rights were granted dies, a further inheritance tax event arises. The original bequest of a house to a family member may have open-ended liabilities that can extend in many cases for up to half a century after the original death.
The fact that Auntie Mary, recently deceased in Florida, was given a sentimental right of residence in a property back in 1975, is most unlikely recalled by anybody in 2003. This long tail on CAT reporting obligations probably yields virtually nothing in taxes to the State. It is part of the complexity of inheritance tax which makes it such an expensive tax to administer.
Its predecessor, estate duty, still had Civil Servants devoted to its administration a quarter of century after it was abolished! Residential property tax continues to the subject matter of Revenue investigation and enforcement, and the reporting rules actually change on almost an annual basis, six years after it was abolished. The spirit of these taxes seems to be alive and well in inheritance tax, which looks forward to a long administratively complex life.
Pay and file dates for companies
A company faces payment of tax on its profits and capital gains on up to six occasions in a year. The first payment must be made one month prior to its year end, at a time when it cannot know what its ultimate liability is going to be. Despite pleas from many quarters, most companies are still unable to make this payment by reference to their prior year liability rather than their current, but still not known, profit.
A further payment may be due 30 days after the year end, if the company made a disposal of a capital asset in the last month of its accounting period. Yet a further payment arises six months after the end of the accounting period and must bring total payments to that date up to 90p.c. of the final liability. The final payment is due nine months after the end of the accounting period.
But that is not all! If the company disposed of development land it must make a payment of capital gains tax (as opposed to corporation tax) on 31 October in every calendar year in respect of such disposals in the first nine months of the year, and on 31 January in every calendar year in respect of disposals in the last quarter of the previous year. You thus may have six payment dates in all.
The Minister could eliminate two of these dates at a stroke by imposing corporation tax rather than capital gains tax on development land disposals by a company. All other capital disposals by companies are subject to corporation tax, including many disposals of land. But if the land is development land, it is instead subjected to capital gains tax, thus giving rise to two additional payment dates. This is a pointless distinction yielding complexity but not taxes.
It is probably too much to hope that the Minister would reconsider the requirement to make a tax payment prior to a year end of a company. But surely he can see the justice of enabling that payment to be made by reference to a prior year’s results, rather than the current year results at a time when they are not known. This could actually increase his cash-flow, given that many companies are experiencing declining profits at present.
While on the topic of tax payment dates, the ludicrous requirement that tax be paid on the exercise of share options within 30 days of their exercise cries out for review. How did the Minister ever agree to this? Admittedly the Finance Act 2003 ran to 246 pages so he might have overlooked that little detail, but now he knows about it!
Self assessment
Most taxpayers don’t have to make annual tax returns. If a person has only income subject to PAYE they usually will not be required to make a return. If a ‘PAYE worker’ has some small amount of self-employed income this can be taxed by restricting tax credits available to him in the PAYE system. However the limit at which the Revenue will permit this to be done is very low - approximately E3,000 per annum.
If a PAYE worker is honest enough to own up to a small amount of self-employed income, why not facilitate him rather than imposing on him the obligation to make a return and separate tax payments which he otherwise would not have to? This limit should be reviewed upwards, perhaps to E15,000 per annum thus saving both the Revenue and the taxpayer a pointless administrative burden.
Oddly enough, it would actually increase the Revenue’s cash-flow since they would be collecting taxes on the self-employed income on a monthly basis under the PAYE system, rather than waiting until after the end of the year to receive payment!
These are a few simple reforms that would make the system work more smoothly, reduce its administrative costs, and in some cases improve the Minister’s cash-flow. They are simple things he could easily get out of the way before assuming the EU Presidency. |
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| Article appeared in the July 2003 issue.
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