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Thursday, 25th April 2024 |
| In November 2003, the government commissioned report on Revenue Powers was published. Since then, few of the recommendations designed to protect the taxpayer from the arbitrary or disproportionate use of Revenue powers, have been legislated for. |
The November 2003 report of the Revenue Powers Group deserved attention, and a prompt reaction. It was a high-powered group, chaired by a former Supreme Court Justice, Mr Justice Francis Murphy.
The Review Group concluded ‘that the existing Revenue Powers are adequate to allow the Revenue to carry out its task with the exception of a limited number of areas’. Most of the recommendations of the Review Group were designed to ensure that Revenue Powers were used subject to proper safeguards to protect the taxpayer, and that the invasiveness of the power used was proportionate to the situation in which it was being used.
The Review Group did not suggest that the Revenue used their powers abusively, nor indeed is that the general perception amongst tax advisors or the public. However, a loose legal framework can only serve to increase the risk of abusive use, which would damage both taxpayers and the Revenue.
Interest charges
The Group recognised that it was proper that the interest charged on overdue taxes should be set at rate which deterred taxpayers from holding back tax payments, as a means of obtaining finance. The Group recognised that not all circumstances in which tax becomes overdue represent the deliberate abuse by the taxpayer of this source of finance. The Group identified two particular situations where the use of a penal interest rate, designed to deter use of overdue tax as a source of finance, were not justified. These two situations were, firstly, innocent error and, secondly, a ‘meritorious appeal case’. A meritorious appeal case was one in which the taxpayer made a genuinely mistaken interpretation of a tax provision and a substantial interest charge was now due as a result of a determination of the Appeal Commissioners. ‘Innocent error’ was taken to arise where the taxpayer had a good track record of tax compliance for the three previous years. In these two circumstances, it was recommended that the interest charge should be related to the time value of money expressed by reference to the consumer price index.
This has not been done. A 10p.c. pa rate is charged on income tax and on corporation tax and an 11.75p.c. rate on VAT and on PAYE. Innocent error continues to be penalised at the same penal rate as applies to abusive non compliance.
Revenue audits
The Review Group recommended that there should be limits on the length of a Revenue audit, and a right of appeal to the Appeal Commissioners against breaches of the limit, so as to ensure that audits do not go on for an unreasonable length of time.
The Review Group also recommended that taxpayers should have a right of appeal to the Appeal Commissioners when they considered that documents or information sought by the Revenue were not relevant or imposed undue burdens on the taxpayer relative to the advantages to the Revenue.
These recommendations matter, and unfortunately have not been acted on. There is truth in the joke that ‘just because I’m paranoid, doesn’t mean that they are not out to get me’! There are occasions when some taxpayers have formed the impression that the only way to get Revenue auditors off their premises, and bring an end to what seems like an unending stream of demands for additional information, more explanations, records redrafted into new forms, et cetera, is to pay over a substantial cheque, even if the taxpayer does not believe that any tax is due. No doubt, in many cases, the taxpayer is being paranoid. However, where there are no statutory protections for the taxpayer, the risk of abuse becomes greater, and the risk of the perception of abuse becomes greater. Revenue powers are intrusive in terms of interference with privacy and property rights. They can be disruptive in terms of absorbing management time. They can be a source of fear even for compliant taxpayers. In such a situation, even the most ethical of Revenue auditors may find that the taxpayer soon begins to speculate as to what it will cost to get rid of him.
Search and seize
The present powers of the Revenue Commissioners to enter private property, and to search and remove records are a confusing hodgepodge. Some sections of the Taxes Acts confer the power to enter premises, and to search and seize, without a warrant. Other sections confer identical powers, exercisable only with a warrant. The Review Group recommended that the power to enter premises and to search them without a warrant should be abolished. Where an application was made for a warrant, they recommended a distinction to be made between the search of a private dwelling, and the search of a business premises; and between the search in relation to a suspected tax liability, and the search in an investigation with a view to prosecution.
The Review Group also recommended specific statutory limits on the period for which seized records could be retained in a non-prosecution case, and time limits for the provision of copies of seized records to the taxpayer in a prosecution case.
Given the availability of scanners, photocopiers, and the ease with which digital records can be copied, there can be no excuse for a copy of all seized documents and computer records not being returned to a taxpayer within a few days of their being taken. At present, the taxpayer has no statutory right to recover either the originals of the records or to obtain access to them in order to continue business, within a reasonable time frame.
Streamlining powers
The Revenue Powers Group recommended that the multiplicity of powers available to the Revenue be categorised into a number of classes, e.g., routine audits; tax investigations; and investigations with a view to prosecution.
The Revenue Powers Group recommended that a taxpayer be always informed as to the nature of the process which was ongoing, in order that the taxpayer could obtain an appropriate level of advice and assistance. They recommended that the nature of the powers available to the Revenue should depend on the nature of the investigation, i.e., only the least intrusive powers being available for a routine Revenue audit, while all of the powers should be available in the case of an investigation with the view to a prosecution.
These recommendations echo the earlier recommendations that the power to enter premises, and search for and seize records should always be available only on foot of a warrant. Such powers would have been seen as suitable only to an investigation with a view to a prosecution. The lesser power, of seeking a Court Order compel the taxpayer to produce books and records, would be available in the case of a tax investigation.
These recommendations have not been acted on.
Problems not dealt with
Not only have most of the recommendations of the Review Group not been implemented, but there are other areas where action is desirable, but which were not focused on by the Review Group.
The cost of taking an appeal against the tax assessment can be huge. That might seem reasonable enough if the taxpayer takes an appeal which he loses. But if the taxpayer wins initially, the Revenue (with unlimited resources) can raise the stakes by appealing through the Superior Courts. Even if the taxpayer wins at the Appeal Commissioner stage, Circuit Court, and High Court stage, a loss at the Supreme Court stage will land the taxpayer with a bill not only for his own costs, but for the Revenue costs throughout the entire process. Tax laws are inherently unclear and there is a real need for the resort to the appeals process to clarify them. That right of appeal becomes unreal if the financial cost of exercising it puts it beyond the reach of a taxpayer.
It should be open to the Courts (it isn’t right now) to refuse to award costs against the taxpayer where, in the opinion of the Court, the case made by the taxpayer was a good arguable case, albeit not correctly founded in the end.
At present, the Revenue are entitled to reopen an assessment for up to four years after the end of the tax year to which it relates. However, where the Revenue consider that there is neglect, no time limit applies to the ability of the Revenue to reopen the matter. ‘Neglet’ means no more than a failure to apply the level of care that the situation demanded. It is a highly subjective concept. The result is that no taxpayer can ever regard his or her tax affairs as finalised.
Taxpayers require a greater protection against the reopening of matters in relation to which they may no longer possess records, or have a good memory.
Financial institutions in particular, are required to retain a large volume of records and in particular, of various forms of declarations by customers. These can be audited for several years after the year to which they relate. Any discrepancy in these records can result in financial loss to the financial institution. It is not unreasonable to expect the Revenue to decide which audits they wish to conduct, and to conduct them within a year of the end of the year at which their declaration relates.
Conclusion
The period of approximately a quarter of a century since the publication of the Reports of the Committee on Taxation have seen our tax system revolutionised and modernised. There has been a huge increase in the powers of the Revenue Commissioners. Many of these powers were added as a result of scandals. In the rush to deal with the scandals, there was not always attention given to the need to protect taxpayers’ rights, and indeed to protect the Revenue Commissioners themselves, from the risk of abuse arising in the exercise of powers. The 2003 report by the Revenue Powers Group was an attempt to make good that deficiency and to bring balance back into the system. It is most unfortunate that its recommendations have been so largely neglected since. |
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| Article appeared in the September 2006 issue.
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