COMMITTEE of PUBLIC ACCOUNTS debate

Chairman

The Committee of Public Accounts is now in public session and we are dealing with the 1998 Annual Report of the Comptroller and Auditor General and Appropriation Accounts, Vote 9 - Office of the Revenue Commissioners. Witnesses are reminded of the provisions of section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act, 1997. I welcome Mr. Dermot Quigley, Chairman and Accounting Officer of the Revenue Commissioners. Perhaps you will introduce the officials accompanying you.

Mr. Quigley

I am accompanied by Mr. Paddy O'Shaughnessy, who is responsible for liaising with the Comptroller and Auditor General's office and the Committee of Public Accounts, Mr. Paul McDonald, the senior press officer in Revenue and our colleague, Mr. Liam Murphy, Principal Officer in the Department of Finance.

Chairman

You are all very welcome. I propose to take business in the following order: paragraphs 6, 7 and 8 together, paragraphs 9, 10 and 11 together, paragraph 12, paragraph 13 and then the value for money audit on VAT and the value for money audit on sheriffs and solicitors. I will ask the Comptroller and Auditor General to introduce paragraphs 6, 7 and 8.

Paragraphs 6, 7 and 8 of the Report of the Comptroller and Auditor General read:

VOTE 9. - OFFICE OF THE REVENUE COMMISSIONERS

6. Revenue Account

Basis for Audit

An account showing all revenue received and paid over to the Exchequer by the Revenue Commissioners is furnished to me annually. I am required under Section 3 of the Comptroller and Auditor General (Amendment) Act, 1993, to carry out such examinations of this account as I consider appropriate in order to satisfy myself as to its completeness and accuracy and to report to Dáil Éireann on the results of my examinations. The results of my examinations have been generally satisfactory.

I am also required under Section 3 of the Comptroller and Auditor General (Amendment) Act, 1993 to carry out such examinations as I consider appropriate in order to ascertain whether systems, procedures and practices have been established that are adequate to secure an effective check on the assessment, collection and proper allocation of the revenue of the State and to satisfy myself that the manner in which they are being employed and applied is adequate. Paragraphs 12 and 13 refer to matters arising from this examination.

Revenue Collected

Revenue collected under its main headings was as follows-


	1998	1997
	£m	£m
Income Tax	5,742	5,208
Value Added Tax	4,267	3,707
Excise	2,825	2,523
Corporation Tax	2,059	1,697
Stamps	541	424
Customs	160	180
Capital Acquisitions Tax	112	89
Capital Gains Tax	193	132
Residential Property Tax	1	3
	15,900	13,963

The amount paid into the Exchequer was £15,899m leaving a balance of £10m prepaid to the Exchequer compared to a balance of £11m prepaid at the end of the previous year.

7. Write-Offs

The Revenue Commissioners have furnished me with details of taxes written off during the year ended 31 December 1998. The total amount written off is made up as follows:


Tax	1998	1997
	£’000	£’000
Value Added Tax	79,128	73,702
PAYE	47,158	61,625
Corporation Tax	15,412	40,801
Income Tax	19,762	47,343
Health/Social Insurance-Self- Employed	109	55,183
Other Taxes	5,342	2,495
PRSI	49,582	-
	216,493	281,149

The distribution according to the grounds of write-off is:


	1998	1997
	£’000	£’000
Liquidation/Receivership/ Bankruptcy	92,522	152,008
Ceased trading - No Assets	52,958	20,855
Deceased and Estate Insolvent	2,864	-
Uneconomic to pursue	54,192	77,806
	1998	1997
	£’000	£’000
Unfounded Liability	85	19,594
Cannot be traced / Outside Jurisdiction	7,099	4,889
Compassionate Grounds	4,030	2,938
Uncollectable due to financial circumstances of taxpayer	2,073	-
Examinership	670	3,059
	216,493	281,149

The large increase in the amounts written off since 1996 (£90.73m in 1996) is due to a revision of the Commissioners' write-off policy with a view to deleting from their records the large amount of debts which are old and regarded as uncollectable and in the case of estimated assessments likely to overstate the actual liabilities. The objective of the programme, which will take a number of years to complete, is that the debt showing on the books will be more realistic and in large measure collectable, and enable resources to be better targeted and more effectively deployed in collecting arrears. The 1998 write-off programme is summarised as follows;

£43.4m was written off on an automated basis comprising £2.9m Capital Gains Tax (Declared Liability), £10m Value Added Tax (Declared Liability), £11.1m Value Added Tax (Estimated Liability), £10.8m PAYE/PRSI (Estimated Liability) and £8.6m PAYE/PRSI (Declared Liability).

Approximately £17m was written off as a result of the 1997 change in policy whereby amounts owing by companies in liquidation are written off at the beginning rather than at the end of liquidation proceedings.

The sum of £49.6m in respect of Pay Related Social Insurance was formally written off in 1998. This was in accordance with new arrangements for write off of PRSI agreed with the Department of Social, Community and Family Affairs and my Office.

Enhanced efforts were also put into the task of reviewing the debt showing in respect of companies in liquidation and arising from this an additional £76m was written off in 1998. An amount of approximately £17m still remains on the books in respect of amounts owing from companies in liquidation which is intended to be written off over a number of years.

Details of taxes automatically written off amounting to £43.4m were retained by Revenue in electronic media. It would be difficult however to determine with accuracy the number of cases involved without extra work being undertaken. For this reason, the number of items making up the amounts written off is not presented in the Report.

I have made a test examination of the cases and I am satisfied with the action taken.

8. Outstanding Taxes and Levies

Table 1 was prepared on the basis of information furnished by the Revenue Commissioners and reflects the activities and transactions in the twelve month period ended 31 May 1999 - the latest date for which data was available at the time of finalising my Report.

Table 1 - Outstanding Taxes and Levies


	Balance at 31 May 1998	Charges/EstimatesRaised a	Paid	Discharged	Balance at 31 May 1999	Estimate of amount likely to be collected
	£m	£m	£m	£m	£m	£m
Income Tax (Excluding PAYE) b	555	1,253	1,289	25	494	250
VAT (Declared liabilities Net of Repayments)	98	3,680	3,691	-	87	59
VAT (Estimates) c	151	16	21	-	146	20
PAYE (Declared Liabilities)	91	4,389	4,401	-	79	50
PAYE (Estimates) c	44	244	261	-	27	7
PRSI (Declared Liabilities)	105	2,059	2,077	-	87	45
PRSI (Estimates) c	33	202	213	-	22	5
Corporation Tax	184	2,103	2,043	82	162	76
Capital Gains Tax	48	190	181	13	44	19
Capital Acquisitions Tax	14	117	117	1	13	7
Abolished Taxes	6	1	1	-	6	2.5
Total	1,329	14,254	14,295	121	1,167	540.5 d

a. Net of write-offs.

b. Includes Deposit Interest Retention Tax, Withholding Tax, PRSI for the Self-employed, Health Contributions and Levies.

c. Net of discharged estimates.

d. The estimate of the amount likely to be collected takes into account factors such as: anticipated reductions of estimated amounts included in balances brought forward from previous years the level of liquidations and business closures historical collection patterns.

Mr. Purcell

Paragraph 6 is an introduction and does not require any comment from me. Paragraph 7 gives a breakdown by tax head and also the reasons for the amounts written off by Revenue in 1998. In line with 1997, the level of write off is high because of the adoption of a more realistic write-off policy in recent years. The main effects have been the clear out of a large volume of cases with arrears under £5,000 and the bringing forward of the writing off of arrears of companies which have gone into liquidation. The Committee will note that the paragraph also reflects the first formal write off of PRSI arrears which had accumulated to £49 million.

Paragraph 8 shows the breakdown of tax arrears at the end of May 1999. To put that in context, ten years ago this column would have shown an amount of £3 billion or so outstanding. We are now down to just over £1 billion which reflects the effect of the more liberal write-off regime to which I just referred. It also mirrors improved collection and more accurate charges being raised by Revenue in the intervening period.

Another way of looking at the figures is that at the end of May 1995, Revenue expected to collect a quarter of the £2 billion on the books at that stage while, at the end of last May, they had £1.6 billion on the books and expected to collect nearly half of that. Gradually, we are reaching a position where the tax outstanding largely represents collectable debts.

Chairman

Mr. Quigley, would you like to make a few opening remarks?

Mr. Quigley

Thank you, Chairman. We have been trying to come to grips with the problem of the old debt which was distorting the figures for which we should be properly held accountable to the public and, of course, this Committee. The old figures had large amounts of what was really artificial debt in the sense that it hailed from the pre-self-assessment era. In that era, Revenue, in the absence of a return by an individual, would have erred on the right side in making an estimate. Those estimates accumulated if the returns did not come and there was this artificial figure in terms of the amounts in the accounts shown. We had this annual controversy which, of course, I understood in that the perception among the public was that there was £4 billion or £3.5 billion in debt uncollected.

As the Comptroller and Auditor General indicated, when companies went out of business, where they were liquidated or there was no liquidation and they ceased trading, Revenue tended to keep all of that on the books which is not in line with any kind of commercial practice which would be understood outside the public service in the sense that it distorted the figures completely.

What we have been doing - I think the Committee of Public Accounts discussed this before - is we have been trying to collect the maximum amount of tax we could collect from that era. We set up arrear project teams and so on to maximise the collection. We were very successful over the period since 1998 and into the 1990s in collecting hundreds of millions of pounds by working through these cases systematically.

In addition, we reached a view that we should be showing a better figure in the accounts. It is not a life or death matter because, of course, if we write-off tax and the circumstances of the individual change, that tax can be written back in again and we would collect it. In terms of accounting for ourselves, here we were with this artificially inflated figure. Having considered the policy implications, we approached the Comptroller and Auditor General in 1996 or 1997 who rightly made it clear that it was the responsibility of the Accounting Officer in Revenue to account for what we did. Nonetheless, he was very helpful in giving broad agreement to the new programme for write-off which we proposed under our own responsibility and in which we set up new procedures for write-off of, say, liquidated cases up front. In other words, when we had the liquidation, we would immediately write it off. If we got money out of the liquidation, so be it - it came into the accounts later. We wrote off those cases up front.

Deputy Bell

Having dealt with the industry longer than I have been in the Dáil, from a trade union point of view, the question of liquidations and receiverships were in my court for many years. I have seen situations where companies in certain industries went into liquidation four or five times and walked away without paying either their share of taxation or any PRSI returns on behalf of the workers. After that, they went to the next town and set up again, doing the same thing. I know of one particular company that did it four times and in one case actually re-purchased the plant from the liquidator and was allowed to get away scot-free. They were laughing at us when we made representations on behalf of the workers.

Would Mr. Quigley like to comment on that from the point of view of the prosecutions referred to in page 9? Maybe I do not read the right newspapers, but I never remember having read about any of these gangsters who rob the State being put in jail. I have seen people being put in jail for robbing a few loaves of bread from a supermarket, but I have never seen people who robbed the State of millions of pounds doing a stretch like Lester Piggot did in England, for defrauding the State. I would like Mr. Quigley to comment on that.

Chairman

We have been making this point for years. Even now the number of prosecutions is very small. What are you doing about prosecutions?

Mr. Quigley

With your agreement, Chairman, may I refer to the question of liquidation, which was raised by Deputy Bell? It is a very important point which I feel strongly about. I will take the question of prosecutions after that, if I may.

We in Revenue feel strongly about the phenomenon the Deputy mentioned, of people walking away from a company, and in our case walking away from the tax debts that may exist in a business. Undoubtedly, that has been a significant part of what has happened. We have adopted a tough policy on this kind of corporate activity. Call it corporate fraud if you like, but it is not corporate fraud in one sense. It is certainly not sound business practice. It has the effect of denying the generality of taxpayers a significant amount of taxes, in some cases taxes which have been taken from PAYE workers on a fiduciary basis by those running the company or, in the case of VAT, collected on a fiduciary basis on behalf of the State. We have toughened up our act in dealing with these companies.

It would be accepted in the business world, amongst creditors generally and groups representing them, that Revenue has toughened up its act and is taking a more proactive role in asserting the rights of taxpayers at creditors' meetings. We are going to court to seek the disqualification of company directors where that is appropriate. We are seeking court-appointed liquidators in far more cases than Revenue did in the past. We need to do more in this area.

The phenomenon Deputy Bell described is referred to by Revenue as the phoenix syndrome. That is because the company is left aside with debts, not only due to Revenue but also to other creditors, parked and then a new entity is set up. We have a tough policy on such cases. We have co-operation between the Collector General's Office and the Chief Inspector's Office. At the point of registration of the new entity we are identifying it as a phoenix case. The Revenue has identified 300 such cases which we are monitoring at present as identified phoenix syndrome cases.

Chairman

Three hundred cases in what period?

Mr. Quigley

These are cases that we have identified over the past couple of years. The policy has been in operation over a few years. There are 300 cases which at present we are monitoring as phoenix syndrome cases. In such cases we are sitting on them. If they step out of line by not paying tax on the due date, or whatever, they will get no consideration from Revenue. They are required to pay on time and we will not give them the same consideration that we would afford to an ordinary company with cash flow difficulties. Where we have a basis for doing so, we are taking action to have those companies wound up and liquidated if they fall behind in paying taxes and, if appropriate, to seek action against the promoters of the companies through the courts. That is our approach and we are following it rigorously. We are also represented on the company law review group. We participate in that. We have had an input into the Companies (Amendment) (No. 2) Act, 1999. We have plenty of proposals and ideas for the resumed work of that group about how this kind of activity should be dealt with.

The prosecution question, which you then raised, Chairman, is one which has been discussed before in the committee. I accept that to date we have not got enough prosecutions for serious tax evasion. We are working very hard on it and I would maintain that we have made good progress over the past couple of years.

We have made many prosecutions for other activities. We have prosecutions, for instance, for failure to file tax returns. Maybe 1,200 people would have been convicted in court and paid over £1 million in fines for failure to file tax returns, which has a very good effect in terms of promoting compliance with the tax system. There were 1,220 cases in fact in 1999 where we actually got convictions for failure to file returns.

I will not disagree with you on that, Chairman, because I hold that view and I have said that this is an important element. It is not the be all and end all because one cannot run a tax system only on prosecution - and it would be wrong to imply that it is prosecution at the expense of settlement. We will never run a tax system efficiently in this country if we do not have audit and settlement and a business like approach in appropriate cases. However, there are cases of serious tax evasion which are appropriate to be picked out and pursued for prosecution if the evidence is available. I will not disagree with you on the desirability of that because we have enshrined that objective in our own corporate plan. I have no problem in accounting for this because the Committee is rightly raising a concern about it. We have tried to put arrangements in place which will produce more prosecutions for serious tax evasion.

I would not like to comment on that without having considered it. I am sure it will be a question when we deal with white collar crime very actively in the various company law review groups and so on. It is a question that could be examined in that context. The penalties by and large are significant and the Deputy will recall that in the amnesty legislation in 1993 the penalties were tightened for serious tax evasion. Over a certain amount an automaticity about the penalty came into it, more than £100,000. The penalties always need to be kept under review. The penalties for failure to file can be significant in monetary terms. There is at least one case where a prison sentence was imposed for failure to file.

We come back then to the criminal prosecution for serious tax evasion. The problem is not with the penalties but with our getting the evidence which is an onerous task and the proof may not always be available depending on the complexity of the scheme or the arrangement. The proof may be even more difficult.

Chairman

The problem is the British authorities do not seem to have that difficulty. They have had high profile jailings which had a salutary effect. We have never had one and that is what is troubling this Committee. Two years ago under pressure from this Committee the Department of Finance agreed to the appointment of a prosecuting solicitor to assist Revenue. We were told that there was a bottleneck and that such an appointment would begin to resolve the problem. Why has that not improved the situation?

Mr. Quigley

I appreciate the assistance from the Committee in that. That was helpful to us and, indeed, I have gone back to the Department of Finance. You may remember that when we got the additional powers in the Finance Act, 1999, I went back for a package of 37 additional specialised staff which included two more legal officers. I am not finished yet because my conviction is that to streamline this process I may need to have more legal officers working with the case workers. That is the line I am pursuing.

I must take issue with you, Chairman, in terms of the number of cases. I have discussed this with the chairman of the Inland Revenue in the United Kingdom. If we get our definitions right - and I may not have them fully right - and we are talking about serious tax evasion, the UK has approximately 100 cases per year. I am talking about serious tax evasion, not the failure to file. That can be serious but it is not what I am talking about. I am talking about criminal prosecution for serious tax evasion. On the basis of proportionality I would have thought that our six or ten cases were not out of line, although it is not enough. There will never be a huge number of cases because the investment in this is very heavy but the number of cases should increase.

Chairman

Deputy Bell has raised an interesting point about a possible Revenue court. Let us note that suggestion as something that we might want to pursue.

Deputy Bell

Yes, we have special courts in many areas but the collection of taxes is a serious question because taxes are used to fund the State and, for example, to pay social welfare recipients and people who are sick or waiting for operations. People who evade tax commit the most serious crime as far as the State is concerned. There should be a Revenue court which would deal not alone with criminals but also non-filers. There is a great number of non-filers, even in the PAYE sector. I live in Drogheda and if I work in a factory there I must take a day off work and travel to Pearse Street or O'Connell Street in order to speak to a tax inspector about my tax affairs. There is no decentralisation in the tax system. There is a tax office in Dundalk, for example, which does not cover County Louth. No service is provided by the Revenue for small businesses and PAYE workers locally. Will Mr. Quigley comment on those two points?

Mr. Quigley

Will Mr. Quigley tell me something about the heading regarding write-offs and "uneconomic to pursue"? What type of considerations are brought to bear under that heading?

Mr. Quigley

There are two broad categories within that. One would be the cost of pursuing cases using solicitors or the sheriff where the normal routine efforts to obtain the money would have failed. There is a comment in the report with which we have tried to deal that, on some occasions, we have allowed cases to continue for a lengthy period where they should have been dealt with more quickly.

Deputy Rabbitte

Who makes the call? Does the sheriff make the call or does Mr. Quigley? I presume the sheriff is at the coal-face, so does he draw the conclusion that it is not worth the candle?

Mr. Quigley

Under the new system, the case worker will decide in the first instance if it is appropriate to refer it to the sheriff. He or she will have tried to persuade the taxpayer to pay. Reminders will have been sent, interest will have been charged or the taxpayer will have been told that interest is clocking up and that, if they do not pay immediately, they will pay interest. There used to be a long delay because we were relying on the mainframe computer. Under the new system, after a relatively quick period, the taxpayer could be referred to the sheriff. Partly as a result of questions asked at a meeting of the committee about the remuneration arrangements for sheriffs, where they had access to the interest on the money collected, we have now put new arrangements with the sheriffs in place. Under those, we err on the side that once the item goes to the sheriff he or she will have most of the say. It cannot be completely ruled out that the case worker might want to recall the case because money might be received or circumstances would be explained which would affect the matter.

We are trying to err on the side of the sheriff pursuing it once it goes to him or her, and the taxpayer who defaults will certainly have to pay the higher costs which will arise. This is a punishment for forcing us to go the route of using the sheriff. To an increasing extent, once the case goes to the sheriff or the solicitor, they call the shots.

I am happy to be able to tell the committee that we have put in place the solicitor arrangements on which it pressed us. Rather than using two firms appointed a long time ago to do solicitor work, which was the case under the old system, we put the work out to tender and we now have six firms of solicitors with expertise in debt management working on our behalf throughout the country. We signed up with those firms late last year in December, so it is early days, but when cases go to these people, it is increasingly the case that they will call the shots because they have more expertise than us in some respects.

I agree that that phenomenon is there and part of what we are doing, which I talked about earlier, the phoenix syndrome cases, can arise in that sector as well. The shadow economy activity, as we refer to it now, is a major issue still, there is no question about that, though as tax rates come down you would expect it to improve. While there are no firm figures on it, I think there has to be a shadow or black economy activity which is significant. We are trying to improve our information there. We have the black economy monitoring group, where we have the trade unions and employers along with the Department of Social, Community and Family Affairs participating with us in trying to identify areas which should be looked at. Our special inquiry branch would try to get the information on those cases and then we would include them in our audit. Increasingly I feel that we have to sectoralise the approach to audit investigation and get into the sectors and we are considering this at present in Revenue. We have a partnership committee which is looking at this business of the shadow economy and how we might improve our performance.

Chairman

Is there a document retention policy in the Revenue?

Mr. Quigley

There is a document retention policy but it is subject to management decisions about periodic culling of documents for reasons of efficiency and because there are storage problems. In the particular instance here, there was a culling in 1996 involving a significant number of files for storage reasons. The tax system and districts had been reorganised for self assessment. Files had changed and were being stored in various warehouses. We were still running out of space and there was a decision to cull certain files out of the system. The management decision tried to limit the downside by stipulating that the files, which involved old cases, should not have a tax liability of more than £2,000. There were other parameters to manage the exposure or risk of those documents being culled out of the system. However, there was such a management decision for efficiency reasons.

I feel reasonably confident that we can address the issues that are arising out of the tribunals and inquiries. They are very painstaking investigations for Revenue which require the amassing of very significant amounts of information. Getting lists is one thing, and we were delighted to get lists. We got a number of lists from the Tánaiste but that is only the start of a very extensive investigation which will be required by Revenue.

We have had to introduce new technology software because we are getting information, not only from authorised officers reports, which are properly sent to us and so on, but also using our powers under the Finance Act, 1999, to get voluminous information from financial institutions. We also have other information from other third parties and so on. The task in these investigations, at least in the one which the Deputy primarily has in mind, is to collate that information and facilitate the inspectors in matching disparate pieces of information. The appropriate action to be taken in the case will then arise and there will, of course, have to be discussions with the taxpayer. Documentation will have to be requested, either from the taxpayer or, if the taxpayer does not co-operate, Revenue will go to court to secure that documentation. We will have to assess that. We will have a good deal of information.

While it is a hypothetical situation, to directly address the Deputy's point, there could be circumstances in those inquiries where a file, which seemed innocuous in the past on the basis of the parameters decided, might suddenly become more interesting and is no longer in existence. I would not like to mislead the Deputy on that. I cannot mislead him and I do not intend to by saying that in a certain situation one might regret that a file was no longer in existence, even though at the time the management decision was made to cull in this area it appeared that file could be put aside.

In that situation all would not be lost for the Revenue. Apart from the law on electronic records mentioned by the Chairman, existing law allows us to regard computer records as suitable for swearing affidavits and so on. Even in the situation the Deputy has in mind, Revenue would pursue the investigation. There is a downside to such a management decision made in good faith on the basis of parameters decided conscientiously, in that later one could find it would be useful if that had not been done and the files concerned were available. That situation could arise.

Deputy Ardagh

I apologise to the Chairman and the members of the Revenue Commission for my delay in getting to the meeting. I had a diary maintenance problem, but it will not lead to a legal prosecution.

The Deputy's question is interesting and difficult. I will be honest and say there are many pressures on Revenue at presentwith the multiplicity of inquires and investigations and the phenomenal growth in the taxpayer base as a result of economic growth. The increase in the number of employers between 1995-96 and 1998-99 was 16%. The increase in the number of employments in the same period was 26%. The increase in the registrations for taxes between 1989 and 1999 was 52%. Vehicle registration has increased by 54%. Registration per head of staff was 595 in 1989 and has increased to 943 per head of staff at present.

The change in the nature of employment where people can and are switching jobs puts pressure on tax offices. There were significant changes in last year's budget to introduce the next phase of the credit system, which was complex for taxpayers to understand until we get to the level of the full credit. The tax offices were swamped with queries and questions about that system. I was conscious that the standard of our telephone and other services we provide for taxpayers was deteriorating. We are under pressure. We have had to divert experienced tax inspectors - there was no question but that we would do that - to deal with the various inquiries and investigations and priority has been given to work in relation to Ansbacher and the tribunal work. It is a priority requirement for Revenue to deal with that work and to produce proper results in those areas. That puts pressure on the audit. The audit figures will be down for the year the committee will consider next because of that priority. A problem does exist.

We must maintain our priority on the current debt or an Accounting Officer will have to attend this committee again to explain why there are billions in debt. That should not happen. We have a good chance, because of the write-off arrangements and others which have been put in place, to have an accountable level of debt which is largely collectable. That is what I want to achieve. We are under pressure to produce the interventions by contact with the taxpayer, charging interest and referral to sheriff or solicitor very speedily. This is being done within six weeks to two months. We must undertake this in a strict manner to keep compliance at its present level.

On tax returns for the self-employed, before self-assessment only 50% of those returns would have come in on time. We now get between 75% and 76% returns on time. Over the following year or two, through pursuit, we will get between 96% and 98% returns for the self-employed. We have not lost a lot. I would like to have less to do with the very old past. I have to account for the collection of taxes. It is a salutary figure. If one looks at the debt now on a time basis, there is still some 24% of the outstanding debt for the pre-1991 period, after the 1988 and 1993 amnesties. My colleagues in management in Revenue and I are asking ourselves hard questions about the time to be devoted to do that, the appropriate way to deal with it in future, the appropriate write-off arrangement and so on to deal with the very old debt where no incentive was taken to pay it, and where numerous visits to the solicitor or the sheriff have not produced results.

We have not slackened off. There is pressure in dealing with the current business, maintaining the compliance by customer service and following up the audit investigation. It was on that basis I approached the Minister for Finance for additional staff. He has agreed to substantial additional staffing for Revenue and it is being put in place through discussion with the trade unions involved. That will be of significant help to Revenue in dealing with the two aspects referred to by the Deputy.

Deputy Ardagh

A staff of 6,000 was mentioned. What do you expect the maximum numbers will be in the next couple of years? What increase in staff are you hoping to have and that you think will be needed to fully carry out the work by the Oireachtas?

Mr. Quigley

We are still in discussion on this matter but there will be hundreds of additional staff in Revenue.

Deputy Ardagh

There are various tribunals on DIRT, etc., which take up a great deal of time and, in practice, the audits are not being completed and the new audits are not commencing and so on. Do you think a time will come when there will be no more Ansbacher accounts and tribunals to take up as much time by Revenue staff as it is at present?

Mr. Quigley

It is difficult to see beyond the significant amount of inquiry investigations in which we are engaged at present. Much of it is complex and a significant part of it seems to involve offshore activity. No taxation administration has been able to deal effectively with offshore activity in a world of free movement of capital in the absence of exchange controls. Added to that, tax havens are not under any obligation of double taxation treaty or otherwise to exchange information, although, as the Deputy has probably gathered from the media, there are moves afoot in OECD on discussions in the area of banking secrecy, etc., in which we are participating with our colleagues from the Department of Finance.

It would be a little heroic of me at the present stage of inquiry, and the use of our significant new powers, to suggest that we would be able to deal with everything. We are determined to deal with the fall-out from the investigations in which we are currently engaged. We are determined, even though it will take time, to deal effectively and in the appropriate manner, whether it is in the collection of tax or in the prosecution of cases amenable to prosecution, to turn in a good performance. I would not like to prophesise on the future because Revenue, those in the business world, tax practitioners and the Oireachtas will learn a great deal from this about what needs to be done for the future.

Deputy Ardagh

To return to the cases of criminal prosecution for serious tax evasion - there is a small number of them there - without criticising the Judiciary in any way, was there an expectation by senior staff in Revenue that jail sentences may have been imposed when taxpayers were found guilty?

Mr. Quigley

I will be slightly evasive on the Deputy's question because I am conscious of my position in that I should not be critical of the Judiciary.

Deputy Ardagh

That is correct and nor should we.

Mr. Quigley

Given the evidence in the cases of criminal prosecution, Revenue took the view that jail sentences could be imposed. At the end of the day, the DPP must be satisfied. One case went out of court on a technicality. Prison sentences were imposed, but suspended in others and fines were imposed rather than prison sentences on the remainder. It is a difficult question to answer and I would not like to comment on the Judiciary. Revenue has done its job which it needs to do better - it needs to have more cases. If Revenue is given the evidence and the DPP sanctions criminal prosecution, it is accountable for that.

Deputy Ardagh

Do you agree that improving the work you are doing and having more evidence will determine and dictate if jail sentences will be imposed?

Mr. Quigley

If we increase——

Chairman

I will bring in the Comptroller and Auditor General at this point because the next three paragraphs deal with prosecutions - they should have been introduced earlier. Thereafter, we will resume where we left off.

Paragraphs 9, 10 and 11 of the Report of the Comptroller and Auditor General read:

9. Prosecution of Non-Filers

A summary of prosecution action in 1998 for failure to file Income Tax and Corporation Tax returns is as follows:


	Income Tax	Corporation Tax	Total
Cases awaiting court hearing 1 January 1998*	1,117	448	1,565
Legal proceedings instituted	1,968	327	2,295
	---	---	---
	3,085	775	3,860
Cases heard	659	198	857
	---	---	---
Cases awaiting court hearing 31 December 1998	2,426	577	3,003

Fines were imposed in all cases heard to a total value of £709,090 in 1998.

*Note

The Revenue Solicitor's Office carried out a review of the status of all cases outstanding with each State Solicitor in 1999 which has resulted in a revised set of statistics for 1997. The opening balance for 1998 has therefore been adjusted accordingly.

10. Revenue Audit Programme

An effective tax system must incorporate procedures for verifying the validity of the returns submitted by taxpayers. This involves the desk checking of returns for completeness, accuracy and reasonableness and on-the-spot inspection of documents and records.

The majority of audits carried out by the Revenue Commissioners are specific to taxheads, like VAT and PAYE, but a significant number of comprehensive audits are also carried out which may focus on all or any taxes payable but in practice are primarily aimed at Income Tax, Corporation Tax and Capital Gains Tax. There is also a body of work which comes under the general category of Revenue audit arising out of the activities of the investigation and anti-avoidance branches. In addition a special programme of field visits was undertaken in 1998 to check whether persons registered as self employed sub-contractors were correctly registered or whether they should pay tax and PRSI through the PAYE/PRSI system. A total of 6,040 visits were carried out under that programme during the year. The audit programme will involve continued monitoring of such taxpayers in future years. The outcome of the Revenue audit programme is summarised in Table 2.

Table 2 - Revenue Audit Programme

( i) Audits Completed


Audit Type	1998		1997
	No of Audits Completed	Yield £m	No of Audits Completed	Yield £m
Comprehensive Audits	3,283	61.62	3,635	60.10
Value Added Tax	9,162	45.28	7,764	38.93
PAYE Employers	4,423	14.03	5,095	14.10
Capital Acquisitions Tax	293	3.32	315	3.30
Relevant Contracts Tax	996	3.72	1,856	8.10
Investigation Branch	22	1.33	77	3.71
Anti - Avoidance	16	2.90	20	2.40
Total	18,195	132.20	18,762	130.64

(ii) Comprehensive Audit Results

As part of the self assessment system comprehensive audits are carried out following review of returns made for Income Tax and Corporation Tax purposes. The result of this audit activity is as follows:


Audit Activity	Total	Income Tax Returns	Corporation Tax Returns
Audits in progress at 1/1/98	1,808	1,072	736
Audits initiated in 1998	3,430	2,462	968
Total	5,238	3,534	1,704
Returns accepted	824	528	296
Cases closed with additional liability	2,459	1,827	632
Total	3,283	2,355	928
Audits in progress at 31/12/1998	1,955	1,179	776

(iii) Yield from Comprehensive Audits


Income Tax Returns		No.	As % of Total	Yield £’000	As % ofYield
Returns Accepted - No additional tax payable		528	23	-	-
Agreed settlements
£1 - £5,000	763		32	1,261	4
£5,001 - £50,000	902		38	14,278	45
£50,001 - £100,000	70		3	5,992	19
Over £100,000	35	1,770	1	9,145	29
	---
Referred to Collector General for enforcement action (a)		24	1	450	1
Settled by restriction of losses carried forward to future years (b)		33	2	410	1
Totals		2,355	100	31,536	100


Corporation Tax Returns		No.	As % of Total	Yield £’000	As % of Yield
Returns Accepted - No additional tax payable		296	32	-	-
Agreed settlements
£1 - £5,000	245		27	902	3
£5,001 - £50,000	290		31	10,556	35
£50,001 - £100,000	36		4	3,008	10
Over £100,000	38	609	4	13,537	45
	---
Referred to Collector General for enforcement action (a)		2	-	280	1
Settled by restriction of losses carried forward to future years (b)		21	2	1,800	0
Totals		928	100	30,083	100

a. Where the Inspector is unsuccessful in collecting the additional tax and interest arising on audit adjustments, the amounts are referred to the Collector General. It is likely that the amounts eventually collected by the Collector General will be significantly less than the full amounts shown.

b. A number of audit settlements involve the restriction of losses available for carry forward against future years profits, thereby providing higher tax yield in those years. The yield shown assumes that taxable profits in future years will fully absorb the losses. This may not always be the position and hence the yield figure may be less than the figure shown.

c. The amounts of the highest individual settlements in 1998 were £6,623,677 and £3,184,290 for Income Tax and Corporation Tax respectively.

d. Interest charges of £7.94m and penalties of £3.11m are included in the yield from agreed

(iv) Random Audits

Random audits were carried out as part of the comprehensive audit programme up to 1997. For 1998 random audits were extended to the VAT and PAYE/PRSI audit programmes also. The objective is that 2% of all audits undertaken in the year will be selected randomly.

Cases selected randomly for audit were sent to districts late in 1998 and as a result not all audits were completed. A total of 89 comprehensive, 84 VAT and 70 PAYE/PRSI audits were however completed as part of the 1998 programme. Additional liabilities of £172,544 including £33,154 in penalty and interest charges were assessed in 61 cases while the returns of the remaining taxpayers were accepted as originally submitted.

(v) Arrears of Tax collected by Auditors

In addition to the yield collected by auditors on adjustments made to tax returns, they also collect any arrears of tax already on record with interest. This amounted to £27.6m in 1998(£22.2m in 1997).

11. Investigation Branch Settlements and Prosecutions

Audits carried out by Revenue staff on taxpayers may reveal underpayments of tax due to inaccurate records, incorrect application of taxation rules and regulations and other factors. A settlement in relation to the taxes underpaid and interest and penalty charges arising is generally reached on audit between the taxpayer and Revenue staff. However, where evidence of systematic or widespread evasion of tax comes to the attention of Revenue, either through audit or from other sources, the cases are referred to their Investigation Branch. Where such investigation reveals that a taxpayer has failed to disclose relevant information, resulting in an underpayment of tax, legal proceedings may be instituted against the taxpayer. Alternatively, the Revenue Commissioners may agree to accept from the taxpayer a sum in settlement of the tax outstanding with the addition of interest and penalty charges.

Early in 1997 the Revenue Commissioners completed a reorganisation of the Investigation Branch, concentrating the preponderance of the staffing resource in pursuing a prosecution strategy in contrast to the previously prevailing policy of accepting monetary settlements in virtually all cases. The continuing reduction in both the number of investigations completed and the yield therefrom is a direct consequence of this change in emphasis.

During 1998, investigations were completed in 22 cases, 11 of which resulted in back-duty settlements amounting to £1,337,382 (77 cases in 1997 of which 24 yielded £3,712,897) becoming collectable inclusive of £553,553 (£1,462,818 in 1997) in penalty and interest charges.

The Accounting Officer supplied me with the following information in relation to prosecutions in 1998:


Cases in hands at 1 January 1998	25*
Cases referred for consideration for prosecution in 1998	8
Cases dropped due to lack of evidence	(1)
Cases brought to Court in 1998	(6)
	-
Cases in hands at 31 December 1998	26
	--

Of the 26 cases on hands at the year end, 20 were still under investigation and decisions to prosecute had been made in 6 cases.

Of the cases brought to Court in 1998 six resulted in successful convictions. Fines were imposed in 5 cases. In the sixth case, a director received a 6 month prison sentence (suspended), and disqualification from acting as a director was re-affirmed. Details of the fines imposed are shown in the following table:


Category	No. ofCases	Total Fines £
Company	1	2,250
Company/Director	2	22,500
Individual	1	1,000
Director	1	8,000
Total		33,750

Note*

The Office of the Chief Inspector of Taxes carried out a review of the status of all cases outstanding at 1 January 1998, which resulted in a revised set of statistics for 1998. The opening balance for 1998 has therefore been adjusted accordingly.

Mr. Purcell

The subject matter of paragraphs 9, 10 and 11 have been more or less touched on by the Deputies in their questioning and, indeed, by the Accounting Officer in his response. I will make one or two comments on the matters which have arisen. On the prosecution of non-filers, a problem may arise on the backlog in the courts. As the Accounting Officer indicated, the level of prosecution for non-filing of returns has increased significantly over the past few years. I am looking at a figure for the end of 1998 that more than 3,000 cases were awaiting hearing. I know they do not require the same type of resources as the prosecution of serious tax offences but, as Mr. Quigley indicated, they are important in their own right. There may be a case for the suggestion that I think was made by Deputy Bell, and about which the committee spoke, of the need and desirability of having a court dedicated to handling tax cases. This might give sustenance to that argument.

On paragraph 10, there was a reference to the compliance examination carried out in 1998 of contractors, particularly building sub-contractors. This examination was long overdue. That is an implied criticism, it is not an explicit criticism of Revenue. There was a situation where Revenue were satisfied if they got their 35% tax from the sub-contractors. When talking about sub-contractors, we are talking about individuals being taken on as labourers. I can speak from personal experience of labourers being taken on for a few weeks in the summer not being put on PAYE when it was appropriate to do so. Revenue took the view, maybe not officially, that if they were getting 35% sub-contractor's tax in respect of individuals at least they had some kind of handle on what otherwise might drift into the black economy while the Department of Social, Community and Family Affairs and the trade unions were concerned that people were not being properly covered in what was an employer/employee relationship. This examination was long overdue and I am pleased it was so successful.

On paragraph 11, there has been sufficient discussion about the prosecution of serious tax offences. I note what the Accounting Officer said and there is nothing further I can add. However, there is a downside in that investigation branch activities have been totally scaled down. That reflects the fact that there were only 22 back-duty settlements in 1998. It is an inevitable consequence of what had to happen.

Deputy Rabbitte referred to the communication from a Revenue official sent to the Committee and which was referred to me for examination. I think I reported informally to the Committee at the time. I think Revenue's destruction policy was reasonable. We sampled cases, particularly high value cases, to establish if the underlying documents were available and in practically all cases we found they were there. Sometimes it took some searching to find them but eventually they were found. While the document destruction policy was there, there were problems in shifting tens of thousands of files. There were a number of shifts because there was no dedicated premises available which was suitable for retaining these files. Sometimes, with that number of shifts, some things slip through the cracks in the floorboards. There is no doubt that is what happened in some cases. So far it has not caused a real problem as far as I could establish but I am not quite sure in the case of a prosecution for serious tax offences that computer records would stand up in court. That would have to be checked. I am not a legal expert but I think that was the view even in the Revenue solicitor's office when we tried to establish what the position was. There is a potential problem there but not on a serious scale.

Chairman

On this sub-contractor phenomenon, are the 6,000 mentioned solely in the construction industry or is this more widespread?

Mr. Quigley

It was essentially in the construction industry. May I read a paragraph because I got my figures wrong and I wish to correct them.

Chairman

Yes.

Mr. Quigley

Mr. Quigley

That has to be done. That was done before we did the visit, but on the visit we saw that the system was not operating as well as it should have been.

We will not stop collecting taxes. The programme is that we are starting with the more simple returns so from September 2000, the VAT3 or the P30, the employers' PAYE, will be fileable on the Revenue On-line Service. We will have an education and promotion campaign. We have already started on that. The following year, around April 2001 on the current plans, we will open up the system to the CT1, the corporation tax return, and the Schedule D, the form 11 and form 12. We are setting an objective that we will have 50% of business returns filed on-line within five years.

This means that for the taxpayer and the agents, there will be a very efficient service. Part of that service will be that they will have access to the taxpayer's details on the Revenue system. They will have access outside office hours. They will get a better service than we can give them at present using static service. There is a big plus in it - I make no secret of it - for Revenue. If Revenue can reduce the paper mountain and the processing that is needed for compliant taxpayers, we will shift our resource into the audit and investigation area and anti-evasion activity.

Deputy Ardagh

Is it the 2000-01 tax year for the personal tax return?

Mr. Quigley

Yes, starting in April 2001.

It could go on for years if there is an appeal. If there is an appeal, it depends on the complexity of the case regarding how quickly one will get to the Appeals Commissioners and so on. I cannot give the information off hand, but I will provide it on an average basis.

Deputy Dennehy

I compliment Mr. Quigley and his Department in relation to the on-line system. The public awareness programme over the past couple of years has been excellent and there is a good match between advising the public and threatening employers and others who are responsible for making payments on behalf of employees. The Department should keep up that good work.

Regarding the 12,000 individuals who are not really sub-contractors, when there was a problem in the States with illegals, the employers rather than the illegals were targeted. On a second strike, a mandatory jail sentence was imposed. Is Mr. Quigley satisfied that enough action has been taken against employers or companies?

Mr. Quigley

I thank the Deputy for his comments about our overall approach. I am satisfied that we have done sufficient on the basis of the visits programme which was there, but we need to go back and monitor it. One disturbing thing about audit investigation is that one can find cases repeating. We are taking a particular look at that at present where we do a reaudit five years down the line and we find that the same problem has arisen. I am concerned about that and seeing how we can tighten up that area. All we can do is monitor the cases that we have visited and then take tougher action in whatever form, whether it involves settlements with interest and penalties or other action. We will look at that again when we go back and see how the system is working. We cannot assume that it will be all right.

Deputy Dennehy

Deputy Rabbitte, the Chairman and others drew attention to the fact that it always appears to be the little person who gets hammered. Attention should be given to companies because larger companies began this practice. Deputy Ardagh mentioned the financial returns from Revenue audits. It is important to point out that social welfare was also involved in almost all cases. There had been cross-fertilisation, so to speak. Other public money is involved aside from tax returns. It is essential to continue the work being done. Forestry, security and transport were also mentioned.

I will come back to that and to the prosecution issue and the courts. I will make a proposal to the Committee about what we should do next on that issue.

Paragraphs 12 and 13 of the Report of the Comptroller and Auditor General read:

12. Judgment Mortgages

Enforcement measures used by the Revenue Commissioners in pursuing arrears from defaulting taxpayers include the referral of cases to their own Revenue Solicitor and to two firms of external solicitors. Cases are referred to Solicitors after failure by the sheriff to effect collection or are deemed unsuitable for sheriff enforcement. Solicitors may pursue the recovery of tax debts through the courts. When a court judgment has been obtained against the debt Revenue may request the Solicitors to identify any property assets to which the debt may be attached. Having identified unencumbered property assets owned by the defaulting taxpayer the Solicitor may then seek to have a judgment mortgage registered against that property. When the judgment mortgage is registered the owner cannot make an unencumbered sale of the property. The judgment mortgage remains in place until the debt has been satisfied or discharged. The Revenue appointed solicitor, with the permission of the court, may proceed with the forced sale of the property and offset the proceeds against the debt. Ultimately the Solicitor can initiate liquidation or bankruptcy proceedings or pursue a prosecution against the defaulting taxpayer.

Information provided by the Revenue appointed solicitors showed that 1,249 judgment mortgages were registered between 1990 and 1997 to a total value of £58,089,587 and the judgment mortgage was satisfied in approximately 10% of cases. Publication of a notice of satisfaction or discharge of the judgment mortgage in Iris Oifigiúil ends the enforcement process and the case is then settled.

In the course of an audit of the procedures for enforcing tax collection through the use of judgment mortgages the following points were noted:

(a) The profile of many tax defaulters was of individuals with their own business or classified as professionals who had been assessed for Income Tax mainly. These individuals had accumulated unpaid arrears for considerably long periods (up to 10 - 20 years). Some, in fact, have never paid tax or made an annual return. Despite the incentives provided by the tax amnesties of 1988 and 1993 to all tax defaulters to clear their arrears without penalty or interest charges on late payments none of these cases availed of the amnesties. In some cases Revenue had advised individuals directly to avail of the tax amnesties but received no response. These individuals also failed to respond at any stage of the enforcement process. Some defaulters continue in their businesses or professions up to the present.

The enforcement process did not commence in many cases until many years of unpaid arrears had built up. Several cases were noted where the elapse of time was so long that Revenue were ultimately constrained from proceeding to applying to the courts for a judgment mortgage because the taxpayer, by that stage, was deemed too old and no longer had any visible means of income.

There were also delays of between one and four years from the time Revenue obtained a court judgment to registering the judgment mortgage.

I sought an explanation for the long delays in proceeding to and applying the various enforcement stages.

(b) When a judgment has been obtained against tax arrears Revenue request their Solicitors to conduct a search for property assets to which the debt may be attached. Such searches invariably identified the family home but only in very few cases were other property assets traced. In some cases other properties were identified as owned by somebody of the same name as the tax defaulter but no other checks were conducted to establish if he/she was the owner. Revenue currently operate a policy of not forcing the sale of the family home and since 1994 did not proceed with judgment mortgages in some cases because searches failed to reveal property other than the family home. Revenue have, in fact, never proceeded to a forced sale of any property, even in the occasional instance where a judgment mortgage was registered to property other than the family home.

I inquired as to the adequacy of the process and its value as a means of recovering tax arrears in the absence of any further action by Revenue.

(c) Judgment mortgages were satisfied or discharged on foot of:

settlements offered by defaulting taxpayers and accepted by Revenue for amounts which were substantially less than the amount of the judgment mortgage registered.

a reduction of the tax liabilities by Revenue to agree with the total already paid. There were cases where there was no payment and the tax assessments for all years in arrears were reduced to nil.

tax returns submitted for the taxpayer some time after the registration of the judgment mortgage - such returns were outside the statutory deadline and were up to 20 years late in some cases. These returns were accepted without change and the tax charge was invariably reduced to an insignificant amount as a consequence.

discovery that the 'charged' property was, in fact, owned by somebody other than the taxpayer, usually somebody by the same name or a close relation.

discovery that other financial institutions had a prior charge or security on the property.

An analysis of the total tax paid for cases where the judgment mortgage was satisfied showed that the yield amounted to 30% of the registered debt at £1.25m.

In view of the non-compliance record of these tax defaulters I inquired as to why Revenue compromised on legally enforceable debts and failed to properly identify ownership and charges on property for the purpose of registering judgment mortgages.

In relation to (a) the Accounting Officer stated that:

The longest gap between the original tax charge and referral to solicitor which could be located was 17 years in one case, while in a minority of other cases the gap was up to 10 years. In all of these cases there was activity in the intervening period, including appeals, amnesties and sheriff enforcement. Most defaulters sought to avoid imposition of the mortgage by negotiating with Inspectors or other areas of Revenue, but the responses were not satisfactory.

Enforcement policy in Revenue has undergone a process of development since the mid 1980's. The treatment of each case depended on the date of the liability and the date at which crucial decisions concerning enforcement were taken.

Revenue has always recognised that there were problems and difficulties in their enforcement of collection. Prior to 1986, enforcement was normally through solicitor action. There was scope also for the Collector General to refer warrants directly to the County Registrars for collection, but this was not a favoured option.

Enforcement generally was hampered by the scope for taxpayers to appeal assessments, delaying the finalisation of a tax charge for years. In addition, the length of time taken to progress a case through the Courts rendered solicitor action ineffective, and the quality of information and information-handling systems available to Revenue often undermined attempts to focus on the most serious cases and take prompt action against them. Thus, the very resource-intensive process of instructing solicitors and managing cases through the courts made it difficult to work on recent liability and yet was not fully effective in collecting tax arrears.

The result of such enforcement was the accrual of arrears and estimated arrears to a level of over half of total annual collection by the mid-1980s. The appointment of Revenue sheriffs in 1986 and 1987 had an immediate and marked effect on the collection of recent liabilities, but the amount of liability (especially estimated liability) which had accrued was too large for any rapid inroads to be made.

The move to self-assessment and the Arrears Review Project were all attempts in the late 1980s to make some progress with the accumulated arrear, and considerable progress was made. At the same time, attachment was introduced, the registering of judgment mortgages against taxpayers property was adopted as a normal practice. All of these initiatives were directed in varying degrees at more effective quantification of older liabilities and more effective enforcement of collection.

Notwithstanding the beneficial effects of the measures taken, some of the older liability was based on unreliable estimates. Much of this type of liability has been written off in recent years. There still remains some soundly based liability, accrued before 1990, where attempts at collection have proved ineffective, but write-off is clearly inappropriate. Some of this liability is in cases where judgment mortgages have been registered.

During the period (up to the early 1990s) when Revenue systems and the available enforcement options were both less than fully effective, it was not possible to provide a streamlined enforcement system. This is the principal reason why there were sometimes very long delays in initiating action, and in progressing from one stage of legal action to the next. During the amnesties of 1988 and 1993, new referrals for enforcement could not be made and this contributed to the delay in many cases. By 1997 only a negligible number and value of cases referred for solicitor action were more than five years old. Most of the judgment mortgage cases are being enforced following an examination, under the Arrears Review Project or by a caseworker, which quantified the liability and rendered it suitable for enforcement. These cases are continuously progressed, but the length of time taken to reach the point of deciding whether to impose a judgment mortgage depends on the circumstances of each case.

In regard to the tax amnesties, no case where solicitor action was under way or where a judgment had been registered was eligible for the 1993 amnesties, and these taxpayers were not advised by Revenue to avail of them. In relation to the 1988 amnesty, a thorough check of all of the cases would be required to establish whether any cases being proceeded against were advised to avail of the amnesty.

In relation to (b) the Accounting Officer stated that:

the search for property assets by solicitors is not the only search carried out. In every case where the possibility of judgment mortgage is being explored, local Revenue officials are consulted in order to avail of local knowledge. In addition, since 1995 it has been a standard part of collection case-working to establish in communication with the taxpayer whether assets exist which may later be called on as security for tax debt. In many cases, there were, in fact, no property assets other than the family home.

It would be possible to conduct more extensive formal searches than at present. However, the cost of such a procedure would be excessive except in the most serious case, and in any event, it has been found that enquiries by the caseworkers managing the case are themselves very effective. He stated that he was satisfied that the current search procedures are generally adequate and that the new solicitor arrangements will add further to the progress being made.

A forced sale of the family home would not normally be proceeded with except where the value of the property is sufficient to allow the taxpayer to obtain a substitute dwelling from the proceeds of sale. While there has never been a forced sale of a family home, the possibility of such a sale and the encumbrance of the mortgage have been effective in forcing payment in a number of cases. Since the introduction of collection case-working (where larger cases are individually managed) in 1995, forced sale has been threatened in several instances, resulting in sale of the property by the taxpayer, and payment of the tax from the proceeds of sale. It has not yet been necessary to proceed to actual sale by Revenue.

In certain circumstances, it may be justifiable to register a mortgage as a means of securing the debt even where no other form of enforcement is available but as a general rule it is current policy that a mortgage should be used only as part of a definite scheme to obtain payment of all outstanding taxes. Most payments received on judgment mortgage cases result from further action taken by Revenue in the course of case-working.

There is little benefit in mortgaging a fully encumbered property as a general practice. However, the actual debt owed and secured by mortgages may be much less than the nominal value of the mortgage where, for example, a debt is largely repaid or the tax debt is estimated. The sale value of a property may not be readily available and may be understated by the taxpayer in certain circumstances. For these reasons, it is sometimes prudent to register a further mortgage where there is a lack of information about the actual debts of the taxpayer or the value of the property.

At present, Revenue are well advanced in the process of selecting new external solicitors for debt collection activity. New working arrangements will apply to the new solicitors. They will be expected to take responsibility for the effectiveness of their actions, and will be paid accordingly. They will be given considerable freedom of action within agreed parameters to pursue the enforcement option most likely to succeed in each case. In the event of failure to collect, they will report back to Revenue with a reasoned recommendation for further action to finalise the case. Revenue expect that this new arrangement will considerably improve the speed and effectiveness of solicitor action particularly when combined with the increasing proportion of solicitor referrals which originate with caseworkers who are fully familiar with each case.

In relation to (c) the Accounting Officer stated that:

The great majority of judgment mortgages are now more than five years old, and much of the tax debt involved is older than ten years. In these cases, there is usually no other route which might reasonably be followed for the recovery of the tax. In the majority of cases, the mortgage is on the family home and the taxpayer no longer has the means to pay the full amount for which the mortgage was registered.

Mortgages are released after an approach by the taxpayer concerned, and the full amount of tax owing (including amounts not covered by the mortgage) is always demanded. In most cases, the mortgage was registered in the first place in the absence of any response from the taxpayer so that when release of the mortgage is being discussed it is normal for the taxpayer to substitute declarations (returns) for the estimated tax liability on record. It is not surprising that these declarations are for smaller amounts than have been estimated in the past, because the practice up to early 1990s was often to overestimate liability in order to elicit a response. In some cases it has emerged that trade ceased earlier than our records show, so that the liability for some tax periods is actually nil.

Once the actual liability is established, it is necessary to obtain payment. Thorough and extensive checks, including consultation with Revenue officials in the taxpayers locality, extensive interviews with the taxpayer, and examination of any relevant documentary evidence are carried out to establish the actual financial capacity of the taxpayer, and the full amount is required to be paid where Revenue are not satisfied that there is an inability to pay. It is often the case, however, that the taxpayer has no means except a retirement pension, and simply wishes to have his or her home unencumbered in their late years. Even in these cases, the largest possible payment is insisted on, and the mortgagee must also pay the legal costs of release. In many cases, other family members come together to raise a reasonable payment towards the tax debt. At a certain point, however, it must be recognised that the taxpayer cannot improve on his/her offer. At that point, Revenue must judge whether there is a practical alternative to acceptance of the offer. Only where there is no alternative the mortgage is released on payment of less than the full amount of tax due with any remaining uncollectable balance written off.

Every reasonable effort is being made to identify property owned by the taxpayer. The most stringent measures are taken to ensure that property which is identified as being associated with a taxpayer is actually his/her legal property. It is sometimes the case, however, that the name of the taxpayer is shared by several people in the locality and it is only by carrying out a variety of checks that the legally registered owner is confirmed to be the taxpayer with whom Revenue are concerned. Despite thorough checking there have been only two cases identified where the property on which the mortgage was registered belonged to another individual with the same name (and in one case the same address) as the taxpayer. With the current approach to judgment mortgages the possibility of this happening is extremely remote.

There is no specific link between the decision to proceed to register a mortgage and the decision to audit a case. At the present time, where judgment mortgages are used in conjunction with case-working, it sometimes occurs that a caseworker, in the absence of co-operation from a taxpayer, would request that an audit be carried out to establish actual tax liability. The decision to register a mortgage would, however, come later in the collection process.

Many judgment mortgage cases contain old liabilities and are therefore likely to have been reviewed as part of the Arrears Review Project between 1989 and 1993. This project entailed examination of older cases by inspectors, who attempted to establish the actual level of tax liability, and submitted a report which included some information on assets held by the taxpayer. Due to resource constraints in the early 1990s and because of the disruption caused by the 1993 amnesties, however, some of these reports were not acted on for some time and the information lost currency. In addition, the cases concerned continued to accrue liability after the inspectors examination, and in some instances, absence of books and records (or lack of co-operation) forced the auditors to estimate liability. For these reasons, even where a visit took place it was not always possible to be sure that the extent of debt and the capacity to pay were fully established.

In general, the Accounting Officer stated that most of the shortcomings identified in the use of judgment mortgages are historical in nature and have been corrected by Revenue as part of the ongoing development of the collection and enforcement processes.

He stated that he was satisfied that judgment mortgages will continue to be an important part of the range of enforcement options available to Revenue, but he was also of the view that the appropriate enforcement option must be chosen on the basis of good knowledge of the taxpayer concerned. At present and for the foreseeable future, the appropriate form of enforcement is selected on a case-by-case basis. Revenue are currently in the course of identifying suitable cases where it is intended to execute mortgages in default of payment. The process will be reviewed in the context of the proposed new arrangements with external solicitors.

13. Tax Implications of Companies Struck-off

Companies are obliged to make annual returns to the Companies Registration Office (CRO). Failure to do so can result in the company being struck-off the Company Register. Revenue became aware in early 1998 of proposals by the CRO to strike-off about 50,000 non-filers from the register commencing from November 1998. The main implication from a Revenue standpoint was that companies with tax liabilities could be struck-off and the collection and enforcement process against them would cease. Once the company is struck-off it is no longer a legal entity with the result that Revenue are unable to pursue tax liabilities from the dissolved company.

A survey carried out by Revenue of cases struck-off in an earlier period indicated that approximately 3% of cases could be 'live' Revenue cases. Other than the company taking steps to be restored to the register Revenues only option is to apply to the High Court for reinstatement. This option would only be pursued if there was a realistic prospect that the tax recovery would exceed the costs of reinstatement.

In response to my inquiries as to the steps being taken to protect Revenue interest the Accounting Officer informed me that:

Since becoming aware in early 1998 of the proposed huge increase in company strike-offs Revenue had been working in consultation with the CRO to find a solution and to issue operating instructions.

Revenue can identify, on a case by case basis, struck-off companies that are on the Revenue register by selecting the company CRO number from the lists published in Iris Oifigiúil. However, in order to bulk process those cases at District level a number of technical problems had to be overcome. These problems are currently being addressed and it is hoped to provide access shortly in each District to an extract of the CRO file to enable it to check, among other things, the status of a company. When this facility becomes available, together with a linking programme to the Revenue serial number of each case, work on struck-off cases will be prioritised starting firstly with those posing the greatest revenue risk, and written instructions will issue to staff.

In relation to the reinstatement of cases through the High Court, while it is generally the position that such action is largely governed by recoverability and the costs involved, decisions are made on the facts of each case which would also take on board other relevant information relating to associated companies, directors etc.

A new initiative to achieve better enforcement of company laws in response to the Report of the Working Group on Company Law Compliance and Enforcement on which Revenue was represented and to which Revenue made a submission has been announced by the Tánaiste. It recommends an amendment to the Companies Acts to allow a Court, if it thinks it proper to do so, to declare that any director or secretary of a company which has continued to trade while it had been struck-off shall, upon restoration, be personally liable without any limitation of liability for all or any part of the debts or other liabilities of the company during the period when it was struck-off. This will add considerably to the ability of Revenue as a notice party to effectively pursue the relevant liabilities if and when enacted.

It is anticipated that the return filing compliance rates in the CRO will be significantly improved as a result of other recommendations of the Working Group thereby reducing the need to strike-off companies.

Revenue have also discussed with the Company Registrar the possibility of further amendments to the Companies Acts to address some of the problems of struck-off companies continuing to trade. Briefly, if enacted, these would provide for reinstatement only from the date of the reinstatement decision by the Registrar or order of the Court. This would allow Revenue to compulsorily register and assess a continuing business as a sole trade and pursue the individuals concerned for the tax liabilities arising in the interim period before reinstatement. Alternatively, new legislation could provide for pursuit against the restored entity.

The Companies (Amendment) (No.2) Bill, 1999, proposes to recognise Revenue as a notice party to any reinstatement via the High Court. This provision, if enacted, would enable Revenue to seek to have conditions, such as payment of taxes outstanding before strike-off, applied to all applications for Court reinstatement.

Revenue are also examining the potential of the State Property Act, 1954, in relation to struck-off companies, with a view to the assets of these companies becoming the property of the State.

When the computer programmes to support bulk processing of cases become available, administrative measures will be implemented including:

cancelling of all enforcement procedures

determining if the case currently has live status and continues in business

contacting the taxpayer with a view to having the company voluntarily reinstated

initiating reinstatement proceedings where there is a realistic prospect of tax recovery and the amount involved is material.

Mr. Purcell

Paragraph 12 opens with a summary of Revenue's powers of enforcement against tax defaulters which appear to be more than adequate to ensure that it does not pay tax defaulters to fail to comply with their tax obligations. However, a reading of the material in this paragraph shows that the reality could be different. For some in the past it appeared to be the case that if they ignored the Revenue Commissioners for long enough they would eventually go away. They would not be prosecuted, bankruptcy proceedings were rare and even if a judgment mortgage was registered against their property, there was no effort made to enforce it.

Paragraph 12 concentrates on the use of judgment mortgages where Revenue has the power to dispose of the defaulter's assets and utilise the proceeds to satisfy tax liabilities. My staff established that this power was not used to the ultimate point of forcing a sale of property, although 1,249 such mortgages were registered between 1990 and 1997. The failure to use this sanction stems from the situation that generally the only property asset identified to which the judgment mortgage could be registered is the family home. Revenue is not prepared to force a sale in those circumstances. While more intensive searches for other assets could be costly, nevertheless, even in the rare cases where such assets are identified, no forced sale was effected. I note from what the Accounting Officer said earlier that that is no longer the case and the Committee should note that. He is talking about 15 cases which may result in a forced sale.

I am not saying, even throughout the years, that the judgment mortgage did not have a value as an instrument of enforcement. Some defaulters have complied when the enforcement stage has been reached but, in many cases, the final settlements have been only for a fraction of the court registered debt and, in some cases, the tax unpaid has been just written off. The Accounting Officer informed me that this could arise due to the current circumstances of the person or where there were doubts about the accuracy of the assessments made. The situation could also arise because of the lack of substantiating records in Revenue due to the passage of time, and this is something Deputy Rabbitte referred to earlier. That happens from time to time.

All this is a consequence of an enforcement regime which was process driven and unwieldy to a point where it resulted in some cases falling into a limbo from which they never moved. An associated tardiness, which I accept was due to the prioritisation of other matters, in pursuing difficult cases to their logical conclusion also contributed to the problem. The Accounting Officer is of the view that the new arrangements, for sheriffs and solicitors in particular, which the Committee will consider later will improve the efficiency of the enforcement system and minimise the incidence of this type of case arising in future.

Paragraph 13 to which the Chairman referred concerns companies which have been struck off. It draws attention to the potential repercussions for the collection of outstanding income tax and corporation tax of the decision by the Companies Office in late 1998 to strike off companies which failed to make their annual returns to that office. While the initiative on the part of the Companies Office to finally get to grips with the non-filing problem is commendable, it causes difficulties for the Revenue Commissioners in the sense that, once a company is struck off, it is no longer a legal entity. As a result, collection and enforcement action for the recovery of outstanding taxes cannot be operated. According to figures supplied to me, more than 42,000 companies have been struck off under the programme in the period from November 1998 to 6 April 2000. Some 2,375 of these cases were still marked as live in Revenue's records with a total outstanding tax liability of £5.5 million. The total tax liability for all 42,000 companies struck off under the programme amounts to £13.5 million. This tax is not necessarily lost because an application may be made to the High Court for reinstatement of the company whereupon collection action can be resumed. Recent legislation provides that Revenue is a notice party to any such application and also gives it an option to apply to have officers of the company made personally liable for the tax debts during the period of the dissolution.

It will be seen in the paragraph that the Accounting Officer referred to technical problems which had to be overcome to bulk process the struck off cases at district level. I understand that these technical issues have been largely resolved and it is expected that, in the near future, struck off and reinstated cases will be capable of being accessed in the districts to facilitate prioritisation and the efficient organisation of work. My information is that the Companies Office is now taking an even tougher line with non-filers and intends to commence, if it has not already done so, a programme of striking off in bulk companies which have one or more returns outstanding. Prior to this, companies which failed to make returns in two consecutive years were liable for this treatment. This latest move could have serious implications for the collection of outstanding company tax, but perhaps the Accounting Officer would be in a better position than me to comment on this latest development.

Mr. Quigley

I wish to refer to the previous paragraph about the judgment mortgage. The Comptroller and Auditor General has described the position fairly regarding the previous regime and what we in Revenue are now trying to do. We had a bulk processing system using the mainframe computer. It was not a very efficient system in some respects because it did not give us the flexibility to enforce tax in the way we would have liked. Our staff have put in a great deal of time and effort in past years to streamline both the technology and the systems. We are now well on the way to having a very good system. As indicated previously, we have also engaged new external solicitors and have refined the relationship with the sheriffs, not only in terms of remuneration but also in terms of a consultation forum with Revenue to discuss the state of the business, what needs to be done and problems which might arise.

We are now in a better position to pursue enforcement to the nth degree. It is our objective to engage more actively in post-judgment enforcement where we were not very active in the past. We will use the expertise not only of our own staff and legal people but also of the expert debt managers in the external solicitors to do that. I have already indicated that we have initiated 15 cases seeking to dispose forcibly of property. These would not be residences but property which would be available to pay tax. We also intend to set more ambitious targets than we have had in the past for expertise intensive enforcement, such as bankruptcy. We should have a number of bankruptcy cases every year. We already have two in train under this new procedure. We should conduct examination of means before the court. All the available means of enforcement will be used to pursue cases under the new streamlined system.

I expect we will have to account for our performance but we are reporting progress on the streamlining, which we have told the Committee about on previous occasions, and we hope to show by our actions, especially in the post-judgment enforcement stage, that there will be a tough penalty for people who can pay but have not paid tax and that this will have an important confidence building effect on other taxpayers. We are already getting the reputation for being tough in the case of insolvency and so on. We are now moving into a different phase and we will set specific targets for that.

On the paragraph concerning the striking off of companies, I have no problem with what has been said. This is a commendable objective for the Companies Office. It must be efficient in the same way as Revenue must be. It is seeking to do something which badly needs to be done to enforce company law regarding returns and to exact a penalty of striking off if returns are not made. That is something we must all support because the effect will be a more focused company register which will help us all in dealing with corporate governance and taxation. I support it.

We were made aware at the start of 1998 that 40,000 companies would be struck off. I have seen the public advertisements for the next phase which, as the Comptroller and Auditor General indicated, will apply where only one return is outstanding as against two. A significant number of companies will be struck off because of that. Revenue will have to cope with the fallout of that. It is a price worth paying to correct the position. In our dealings with taxpayers, we do not want dormant or inactive companies clogging up our register and diverting our resources. We want our resources to be focused on the cases that are validly active and should be paying tax, but we are going to have a problem managing that.

They will have difficulty down the line, so there is a very important sanction. Our computer system - a few years ago the Comptroller and Auditor General commented on this - needed to be developed to produce proper audit trails, checks, etc., and we have a new system which is currently being acceptance tested and which will tighten the structure and provide a better service.

Okay. I think we should note the paragraph and the accounts, but with the following proviso: that a special meeting of the Committee take place in two months time - I do not want to overload the work of the Accounting Officer - to examine prosecutions by Revenue, including legislation, procedures and administrative or legislative deficiencies which might exist and how they might be corrected. We will ask the Office of the Director of Public Prosecutions, the Department of Finance and the Revenue Commissioners to comment on the suggestion for a special Revenue court and whether there should be a directory of Revenue offences in the DPP's office because of the special nature of these problems. We will fix that meeting for not earlier than two months time. A separate issue has arisen today. The Committee will invite the Construction Industry Federation and ICTU to appear before it to discuss the question of employing sub-contractors rather than employees and the abuse involved. The accounts are noted

Reports on Value for Money Examinations.

1. Value-Added Tax Collection and Control.

2. Use of Sheriffs and Solicitors in the Collection of Taxes.

Mr. Quigley (Accounting Officer) further examined.

It might be as well to do so because we have touched on some of the aspects referred to in the report. The report examines the use of sheriffs and solicitors as a means of collecting taxes where the conventional methods used by the collector general have been unsuccessful. In particular, it examines how Revenue processes cases for referral to sheriffs or solicitors and arrangements for monitoring their subsequent performance.

Since 1995, as the Accounting Officer said earlier, there has been a gradual move away from the production line approach of referring tax debts to enforcement to an individual case working approach which facilitates the identification of the most appropriate means of pursuing the debt. At one level the report is in the nature of a snapshot of the status of the changes implemented three years into the evolving new system. The building blocks are firmly in place. Revenue's computer systems have been developed to a point where consolidated data on taxpayers is now on line and this permits a more efficient approach to debt collection.

Since November 1998, a more business-like arrangement has been entered into with sheriffs which, among other things, provides for a new fee structure and the setting of performance targets. On the solicitors' side, the putting out to tender of enforcement services, which had long been advocated by this committee, was implemented in December 1998. Subsequently, six firms were selected for this purpose under arrangements which clarify and modernise their role in the collection system.

There are indications that the new systems are more effective than what went before. For example, the level of repeat referrals to enforcement agents, which was almost 50% at the time of the examination, has dramatically fallen. I was particularly concerned about this aspect because it seemed that there was a substantial body of tax defaulters who are habitually availing of the traditional Revenue approach to defer paying their liabilities until left with no other option but to do so. Therefore, there has been real improvement in that area.

Other findings in the report refer to the absence of regular reviews of the validity of so-called "stops" which serve to suspend enforcement action, the need to carry out work to establish the real status of cases which are designated as "no size" and the need for prompt renewal of sheriffs' certificates where their validity has expired. I am happy to report that progress is being made on all of these fronts and that the current system has the potential to be a powerful tool in collecting debts from recalcitrant taxpayers.

Unfortunately, it is this small rump which causes many problems. We have heard how 93% of VAT returns are made within two months and there are similar statistics for other taxes. However, at this stage of the process we are discussing tax that is expensive to collect but it is important from an equity point of view, that, despite the difficulties, no effort is spared and, if possible, to impose as much of the additional costs involved on those who cause the difficulties in the first instance. This is where interest, penalties and severe censure come into play.

Chairman

Are the arrangements reasonable in this case?

Mr. Purcell

In the past - I am not revealing any State secrets here - the systems of sheriff enforcement and, particularly, solicitor enforcement were totally inadequate and did not really meet the needs of tax collection at that stage. We are discussing tax at the edge - perhaps a few hundred millions of pounds within the £20 billion to which the accounting officer referred earlier. However, it is a substantial amount of money. Even if there are lower figures in the future it is important, pour encourager les autres, that the Revenue is seen to take this to its logical conclusion as quickly as possible, bearing in mind the difficulties to which the cases involved give rise. If possible, Revenue should ensure that there is a real penalty for those who try to hold out on paying their taxes.

I must withdraw what I said earlier because, procedurally, my comments were not correct. We cannot note the accounts properly but we will note all the paragraphs, with the exception of the prosecution paragraphs - Nos. 9 and 11. We will note the remainder of the accounts.

It is intended to write to Revenue, the DPP and the Department of Finance setting out what we would like to do. We will then ask the DPP to appear before us, which is an unusual request for us to make, to discuss the general administration in his office of Revenue prosecutions in addition to the other matters I raised, namely, the desirability or feasibility of a special Revenue court, the establishment of a special prosecution service for Revenue offences within the office of the DPP or otherwise and any other administrative, legal or procedural deficiencies the system contains. We will resume our deliberations in that regard in the first week in July.

We will ask the CIF and ICTU to come before us to discuss the question of sub-contractors versus employers and the point made by the Chairman of the Revenue Commissioners that of 12,000 out of 63,000 sub-contractors should have been treated as employees. That is the decision of the committee. Is that agreed? Agreed.

The committee will now adjourn until Thursday, 11 May when we will deal with Vote 8 - Office of the Comptroller and Auditor General - the Comptroller and Auditor General's Report on Impact of Value for Money Examinations from 1994 to 1996 and Vote 43 - National Gallery, 1998 Appropriation Accounts.

The witness withdrew.

COMMITTEE of PUBLIC ACCOUNTS debate - Thursday, 4 May 2000

1998 Annual Report of the Comptroller and Auditor General and Appropriation Accounts.

Vote 9 - Office of the Revenue Commissioners.

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COMMITTEE of PUBLIC ACCOUNTS debate -
Thursday, 4 May 2000