COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 20 Oct 2005

2004 Annual Report of the Comptroller and Auditor General and Appropriation Accounts.

Vote 9 - Office of the Revenue Commissioners.

Vice Chairman (Deputy McGuinness)

We turn to the Annual Report of the Comptroller and Auditor General and Appropriation Accounts, Vote 9 - Office of the Revenue Commissioners, Chapter 2.1, Revenue account, Chapter 2.2, tax written off, Chapter 2.3, outstanding taxes and PRSI, Chapter 2.4, Revenue audit programme, Chapter 2.5, prosecutions, Chapter 2.6, special investigations, and Chapter 2.7, the special savings incentive account scheme.

Correspondence relevant to today's meeting dated 5 October 2005 from Mr. Chris Walsh of J. C. Walshe & Co. Chartered Accountants and Registered Auditors has been received from the Chairman's office.

Witnesses should be aware that they do not enjoy absolute privilege and should be apprised as follows: the attention of members and witnesses is drawn to the fact that as and from 2 August 1988, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act 1997 grants certain rights to persons who are identified in the course of the committee's proceedings. These rights include: the right to give evidence; the right to provide or send documents to the committee; the right to appear before the committee, either in person or through a representative; the right to make a written and oral submission; the right to request a committee to direct the attendance of witnesses and the production of documents; and the right to cross-examine witnesses. For the most part, these rights may only be exercised with the consent of the committee. Persons being invited before the committee are made aware of these rights. Any persons identified in the course of proceedings who are not present may have to be made aware of these rights and provided with a transcript of the relevant part of the committee's proceedings - if the committee considers it appropriate in the interests of justice.

Notwithstanding this provision in the legislation, I remind members of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against any person outside the Houses of the Oireachtas or an official either by name or in such a way as to make him or her identifiable. Members are also reminded of the provisions within Standing Order 156 that the committee shall also refrain from inquiring into the merits of a policy or policies of the Government or Minister of the Government, or the merits of the objectives of such policies.

I now ask Mr. Daly, Chairman of the Revenue Commissioners, to introduce his officials.

Mr. Frank Daly

I am accompanied by: Mr. Paddy Molloy, principal officer, head of statistics and forecasting branch, Mr. Tom Dowling, assistant principal officer, the administrative budget manager and liaison officer with the Comptroller and Auditor General; and Mr. Joe Lynch, principal officer in the strategic planning division.

Mr. Paddy Barry

My name is Paddy Barry. I am a principal officer in the economic division of the Department of Finance. I am accompanied by Mr. David Denny, who is a principal officer in the Department's personnel relations division.

Vice Chairman

We are dealing with Vote No. 9 and chapters 2.1 to 2.9, inclusive.

Paragraphs 2.1 to 2.9, inclusive, of the report of the Comptroller and Auditor General read:

2.1 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. Sections 2.2 to 2.9 refer to matters arising from this examination.

Revenue Collected

Revenue collected under its main headings in 2004 is shown in Table 1.

Table 1 Revenue Collecteda

	Gross Receipts	Repayments	Net Receipts	2003 Net Receipts
	€m	€m	€m	€m
Income Tax	13,189	2,494	10,695	9,156
Value Added Tax	13,635	2,918	10,717	9,716
Excise	5,242	176	5,066	4,736
Corporation Tax	5,707	372	5,335	5,155
Stamps	2,106	36	2,070	1,664
Customs	178	4	174	137
Capital Acquisitions Tax	200	10	190	213
Capital Gains Tax	1,548	20	1,528	1,436
Residential Property Tax	-	-	-	1
Total	41,805	6,030	35,775	32,214

a Total gross collection amounted to €48.7 billion as levies and fees such as PRSI (€6.7 billion), Health Levy (€129m) and Environmental Levy (€14m) are collected for other Departments.

Of the net receipts of €35,775m, a total of €168m was paid during 2004 under Section 3 of the Appropriation Act, 1999 from the proceeds of tobacco excise to the Vote for Health and Children. €35,572m was paid into the Exchequer which represented a prepayment of €333m. The amount prepaid at the end of 2003 was €368m. Most of the prepayment is due to the transfer into the Exchequer of moneys received from taxpayers as deposits and payments on account pending final settlement of tax liability. Such amounts are rarely repaid to the taxpayer and will subsequently be included in the relevant tax receipts figures as and when liability is finalised. An enhancement to Revenue's systems during 2004, introduced procedures which will allow most payments on account to be allocated and processed as tax receipts.

2.2 Tax Written Off

The Revenue Commissioners have furnished me with details of the €173m of taxes written off during the year ended 31 December 2004. Details of the total amount written off and the distribution according to the grounds of write-off are shown in Table 2 and Table 3.

Table 2 Taxes Written Off

	2004	2003
Tax	€000	€000
Value Added Tax	72,369	41,792
PAYE	36,862	17,505
Corporation Tax	8,326	5,895
Income Tax	16,385	34,683
Capital Gains Tax	868	977
Other Taxes	1,120	1,986
PRSI	36,618	16,607
Total	172,548	119,445

Table 3 Grounds of Write Off

Grounds of write-off	2004 No. of Cases	2004 €000	2003 No. of cases	2003 €000
Liquidation/Receivership/Bankruptcy	2,097	88,519	337	29,442
Ceased trading - no assets	2,760	40,447	2,277	32,390
Deceased and Estate Insolvent	176	1,350	200	2,022
Uneconomic to pursue	19,359	23,162	38,844	39,322
Unfounded Liability	209	1,983	151	1,688
Cannot be traced / Outside Jurisdiction	586	9,615	331	5,978
Compassionate Grounds	248	2,322	81	926
Uncollectable due to financial circumstances of taxpayer	706	5,150	520	7,677
Totals	26,141	172,548	42,741	119,445

The increase of €53m in the amount written off is mainly due to a review and write off of old insolvency debt on record (this category of write off increased by almost €60m over 2003). In 2004, €3.3m was written off on an automated basis consisting of cases with small balances (less than €500) which were uneconomic to pursue. Cases under general investigation, potential Ansbacher cases, and cases under the control of the Criminal Assets Bureau are excluded from all write off procedures.

The Internal Audit Branch in Revenue undertakes an annual examination of tax write offs. The 2004 audit examined a sample of 171 cases representing 22% (€37m) of the value of non-automated write offs (€169m). The results of the ten automated write off runs were also examined and the application of the authorised selection criteria was confirmed. Commonality checks are designed to establish, prior to tax being written off, whether related entities have outstanding tax liabilities. Write off procedures provide that where a commonality check identifies related entities with tax liabilities greater than €250,000, the case should be referred to the Collector General's Dedicated Pursuit Unit for review prior to any write off. Of the cases sampled by Internal Audit, 92 met the criteria for commonality checks but the check was not recorded as being carried out in 29 of those cases. Internal Audit carried out a commonality check on the 92 cases and identified 7 that should have been referred to the Dedicated Pursuit Unit but were not. It was also considered that one of the 171 cases sampled should not have been written off (as there was an overpayment on record that equalled the amount of the outstanding tax but had not been offset) and that another was written off prematurely (before all appropriate avenues of collection had been exhausted). The total amount involved in these two cases was some €76,000 (€25,000 and €51,000 respectively). In the first case the overpayment has been offset against the amount owing and the write off has been reversed. In the second case, the original debt has been reduced by €23,000 following adjustment of estimates incorrectly raised and a further attempt to collect the debt is being made.

2.3 Outstanding Taxes and PRSI

Table 4reflects the activities and transactions in the twelve-month period ended 31 March 2005. Table 5 sets out an aged analysis of the balance outstanding at 31 March 2005. The tables were prepared on the basis of information furnished by the Revenue Commissioners.

Table 4 Outstanding Taxes and PRSI

Analysis of Balance at 31 March 2005
Balance at 31 March 2004	Tax or Levy	Net Charges Raised	Paid	Written Off	Balance at 31 March 2005	Under Appeal	Available for Collection
€m		€m	€m	€m	€m	€m	€m
346	VAT	9,984	9,985	56	289	64	225
186	PAYE	9,513	9,510	28	161	4	157
198	PRSI	6,579	6,573	28	176	2	174
306	Income Tax (Excluding PAYE)	2,488	2,485	17	292	64	228
-	DIRT	163	163	-	-	-	-
157	Corporation Tax	4,448	4,387	78	140	56	84
150	Capital Gains Tax	1,542	1,544	-	148	88	60
12	Capital Acquisitions Tax	1	10	-	3	-	3
8	Abolished Taxes	-	-	-	8	-	8
1,363	Total	34,718	34,657	207	1,217	278	939
3.1%	Debt as a % of gross collectiona				2.5%	0.6%	1.9%

a Gross collection in 2003 was €43,968m and in 2004 was €48,705m.

Table 5 Aged Analysis of Debt at 31 March 2005

Tax	Total tax outstanding at 31 March 2005	Amounts outstanding for 2004	Amounts outstanding for 2003	Due for periods 1990/91 to 2002	Due for earlier periods
	€m	€m	€m	€m	€m
VAT	289	49	83	157	-
PAYE	161	88	21	51	1
PRSI	176	99	27	49	1
Income Tax	292	2	69	212	9
Corporation Tax	140	27	25	84	4
Capital Gains Tax	148	3	32	112	1
Capital Acquisitions Tax	3	-	-	3	-
Abolished Taxes	8	-	-	8	-
Total	1,217	268	257	676	16

2.4 Revenue Audit Programme

Overall Audit Programme

In a self-assessment system returns filed by compliant taxpayers are accepted as the basis for calculating tax liabilities. The validity of returns is established by the auditing of a selection of cases either through reviewing and seeking further verification of particular details or by the examination of documents and records at a taxpayer's premises. The outcome of the 2004 programme of Revenue audits is summarised in Table 6.

Table 6 Revenue Audit Programme

	2004		2003
Audit Type	No. of audits completed	Yield €m	No. of audits completed	Yield €m
Comprehensive	4,058	382.3	4,359	226.3
Value Added Tax	2,776	50.0	3,951	76.4
PAYE Employers	517	5.1	874	18.1
Relevant Contracts Tax (RCT)	439	7.0	231	1.6
Combined Fiduciary (VAT, PAYE and RCT)	848	18.4	544	13.2
Capital Acquisitions Tax	677	6.3	112	5.6
Verification Audits and Desk Reviews	6,750	76.4	5,695	86.8
Customs Auditsa	162	2.4	214	0.5
Excise Auditsa	25	-	45	-
Environmental Levy Auditsa	59	0.1	13	-
Powers of Inspection Auditsa	10	1.6	-	-
Investigation Branch	-	-	1	0.4
Anti-Avoidance	-	-	3	0.3
DIRT	-	-	8	0.8
Total	16,321	549.6	16,050	430.0

a Details of these audit types are included for the first time, 2003 details have been restated.

Comprehensive Audits

The selection of cases for comprehensive audit is made on the basis of such factors as screening of annual returns, re-audit of cases with previous undercharges, other information available to Revenue and random selection. For 2003 and 2004, selection was also based on information relating to bogus non-resident accounts obtained from financial institutions under High Court orders - 1,690 comprehensive audits were completed in bogus non-resident account cases in 2004 (2,460 in 2003). Generally, a settlement is agreed following completion of the audit and any outstanding amount is paid. A number of settlements involve the restriction of losses which may be carried forward against future years' profits. Where an Inspector is unsuccessful in collecting the additional amount of tax and interest arising on audit adjustments, the amounts are referred to the Collector General for collection.

The outcome of the 4,058 comprehensive audits completed in 2004 is detailed in Table 7. The overall yield of €382.3m includes interest charges of €110.5m and penalties of €39.3m.

Table 7 Yield from Comprehensive Audits

	Income Tax		Corporation Tax
	Number	Yield	Number	Yield
Agreed Settlements:
€1 to €12,700	1,792	€3.5m	65	€0.8m
€12,701 to €100,000	992	€39.2m	110	€4.8m
€100,001 to €500,000	347	€73.1m	49	€12m
€500,001 to €1m	63	€44.7m	11	€8m
Over €1m	27	€145.5m	10	€31.5m
Other Settlement Activity:
Returns accepted - no additional tax payable	264	-	308	-
Settled by restriction of losses carried forward to future years	6	€0.2m	3	€18.5m
Referred to Collector General for enforcement action	11	€0.5m	-	-
Totals	3,502	€306.7m	556	€75.6m

Random Audits

The traditional random audit programme was not carried out for 2004 due to a change in Revenue strategy as a result of a review of the programme. However, 25 cases selected under the programme for previous years were completed in 2004, 13 of which yielded €155,153 in tax, interest and penalties.

For 2005, Revenue introduced a Taxpayer Compliance Testing Programme. The programme has two primary functions

·	To measure and track compliance with all tax legislation, and
·	To ensure that all tax payers run the risk of being selected for audit.

The programme selected 400 cases on which full comprehensive audits are being carried out. The cases were selected from those that had a live registration for any of the following taxes - Income Tax, Corporation Tax, VAT, Employer's PAYE/PRSI and Relevant Contracts Tax. Selection was pro rata for each of the regions and the Large Cases Division. The target date for completion of the programme is September 2005 and evaluation of the programme is planned for December 2005.

2.5 Prosecutions

Under Revenue prosecution strategy, Regions and Divisions forward cases to Investigation and Prosecutions Division for investigation with a view to criminal prosecution where there is prima facie evidence of serious revenue offences having been committed. These cases are further evaluated within the Division before commencement of the resource intensive criminal investigation work which can take several years before reaching the Courts. In 2004, 57 cases were referred to the Division for consideration and 31 were accepted for investigation with a view to prosecution. In the one case decided in Court in 2004, an individual was convicted of submitting incorrect Capital Gains Tax returns and a three month sentence was imposed but was suspended on condition that 180 hours community service was served. The individual was also fined €5,000.

The status at July 2005 of the 66 tax cases on hands at the end of 2004 is

·	34 are still under investigation
·	13 have been submitted to the DPP
·	The DPP has issued directions to prosecute in 4 cases
·	Bench warrants have been issued in 2 cases
·	5 cases are before the court
·	Convictions have been obtained in 6 cases and a guilty plea has been entered in 1 further case
·	1 case has been closed.

In addition to prosecutions for serious tax offences, there were 91 convictions for Customs and Excise and Vehicle Registration Tax offences including tobacco smuggling and customs frauds involving counterfeit spirits. Custodial sentences were imposed in 7 of these cases. There were also 180 convictions for unlicensed trading and 149 for marked oil offences.

2.6 Special Investigations

Table 8 sets out the payments made to the end of July 2005 in relation to cases being examined as part of the Revenue Special Investigations. A short summary of progress to date in the investigations follows.

Table 8 Payments arising from Special Investigations

Investigation	Cases Involved	Payments to Date
DIRT - Look Back Audits (financial institutions)	37	€225m
DIRT - Underlying Tax
Voluntary Disclosure Scheme	3,675	€227m
Post Voluntary Disclosure Investigations	c. 8,300	€362m
NIB	465	€55m
Ansbacher	289	€51m
Pick Me Up Schemes	71	€0.7m
Mahon Tribunal	27	€28m
Moriarty Tribunal	18	€8m
Offshore Assets	c.13,200	€754m
Undisclosed Funds - Life Assurance Products	c.4,600	€329m
Total		€2,039.7m

Underlying Tax on Bogus Non-Resident Accounts

A total of 3,675 taxpayers paid €227m1 under the Voluntary Disclose and Pay Scheme whereby the underlying tax relating to funds deposited in bogus non-resident accounts was required to be paid by 15 November 2001. I referred in my 2003 Report to Revenue's liability reviews of a sample of cases. 37 of the 268 liability reviews have still to be completed. The total yield from the 231 liability reviews completed is €4.3m. 17 cases have been deemed ineligible and 8 of these have paid additional amounts of €0.8m. The remaining ineligible cases are at various stages of investigation.

Revenue obtained information on taxpayers who held bogus non-resident accounts but who did not avail of the Voluntary Disclose and Pay Scheme from financial institutions on foot of High Court orders under Section 908 of the Taxes Consolidation Act, 1997. At July 2005, payments of €362m had been received from such taxpayers.

Offshore Investments via National Irish Bank

In 2005, investigations began into an additional 13 cases that invested in an offshore investment scheme operated by National Irish Bank to bring the total number of cases involved to 465. Investigations have concluded in 416 of the cases. 299 cases have settled with total liabilities of €48.2m and 117 cases had no liability. Investigations are continuing in the remaining 49 cases and payments on account of €4.2m have been received from 16 of these. NIB has paid €2.4m in respect of Capital Gains Tax on compensation it paid to certain investors.

Ansbacher Investigation

Cases directly involving Ansbacher type arrangements as well as other cases involving offshore funds and deposits are being investigated. There are 289 cases comprising 179 cases on the High Court Inspectors' Report and 110 similar cases discovered by Revenue or listed in the Authorised Officer's Report.

High Court orders have been used to gain access to books, records and other documentation relevant to the investigation. The High Court granted access to documents and information obtained by the Inspectors in relation to Ansbacher clients and persons who failed to co-operate with the Inspectors and Revenue has applied for such access in a number of cases.

136 cases have been settled to date, 71 of which had total liabilities of €42.3m, including a settlement of €7.5m with a Cayman Islands based bank. The other 65 cases settled had no liability and include 43 non-resident cases covered by the provisions of Double Taxation Agreements as well as 4 cases covered by the 1993 Amnesty provisions. In addition, payments on account of €8.7m have been received in 29 of the 153 on-going cases.

Pick-Me-Up Schemes

Pick-Me-Up Schemes involved expenses for goods or services incurred by a political party being invoiced by the supplier to another trader who paid the supplier as a means of supporting the party. Such payments were not deductible for tax purposes, the VAT was not reclaimable and the invoices issued were not in accordance with legal requirements. The investigation found a total of 71 cases that apparently avoided tax by engaging in 'picking up' expenses which were proper to political parties. 42 cases have been settled for a total of €470,724 including interest and penalties. Revenue has decided not to settle 15 cases that have been mentioned at the Mahon and Moriarty Tribunals until those bodies have reported. €158,157 has been received on account from 6 of those cases. 14 cases are still under investigation some of which relate to payments in the 1980s or early 1990s and for which records are no longer available. As a result it is proving difficult to confirm liability. Payments on account of €90,340 have been received in 5 of these cases. These figures have not changed in the last two years.

Tribunals

Matters disclosed at the Moriarty and Mahon Tribunals that suggest that tax evasion may have occurred are being investigated as they come to notice. Currently, 18 cases are being investigated as a result of the Moriarty Tribunal and two have been settled for a total of €6.3m. Payments on account of €1.4m have also been received. 27 cases are being investigated as a result of the Mahon Tribunal. None of these cases have been settled but payments on account of €28.5m have been received in 14 cases.

Offshore Assets

In 2001 Revenue established an Offshore Assets Group to examine the tax status of assets held offshore by Irish residents. Following inquiries into taxpayers who invested funds in offshore subsidiaries of two Irish financial institutions, Revenue announced in February 2004 the commencement of an investigation into unpaid tax on funds in offshore accounts and investments. Account holders were encouraged to give Revenue notice of their intention to make a qualifying disclosure by 29 March 2004. They were then required to submit a statement of disclosure and any payment due by 28 May 2004 (subsequently extended to 10 June). The benefits to account holders of meeting these deadlines were mitigation of penalties, settlement details would not be published and there would be no investigation with a view to prosecution. Revenue intend to seek High Court orders to identify those who have not made a voluntary disclosure and one order has been obtained. A total of €754m has been received to the end of July from some 13,200 cases as a result of the work of the Offshore Assets Group.

Undisclosed Funds - Life Assurance Products

Investigations began in 2004 into the use of single premium life assurance products to hide income or gains not previously disclosed for tax purposes. The first stage of the investigation involved a deadline of 23 May 2005 for taxpayers who invested undeclared funds in life assurance products to give notice to Revenue of their intention to make a voluntary disclosure. The disclosure scheme does not apply to anyone currently under investigation and the benefits to taxpayers of availing of the scheme are that

·	the disclosure will be treated as a voluntary disclosure and therefore, settlement details will not be published
·	Revenue will not initiate a prosecution
·	penalties will be mitigated in accordance with the Code of Practice for Revenue Auditors

Some 10,000 such notifications were received and these had until 22 July 2005 to pay their outstanding liabilities. Payments of €329m had been received by the end of July 2005 from some 4,600 cases. The second stage of the investigation will identify taxpayers who have not availed of this voluntary disclosure scheme and Revenue will use the powers obtained in the Finance Act, 2005 (section 140) to inspect information held by life assurance companies to assist in making an application for a High Court order.

2.7 Special Savings Incentive Account Scheme

Introduction

The Special Savings Incentive Accounts (SSIA) Scheme was introduced by the Finance Act, 2001, to encourage individuals to provide for the future by saving regularly. The essence of the scheme was that the Exchequer would effectively pay a tax-free bonus of 25% on amounts saved monthly by individuals over a five-year period. The estimated annual full year Exchequer cost of £100m (€127m) indicated a tentative estimate for annual subscriptions of £400m (€508m). It was considered that the scheme would also help reduce inflation by taking money out of the economy but the gross amount (€635m p.a. - subscriptions and Exchequer contribution) was considered too small to have any measurable effect.

Administration of the Scheme

The administration of the SSIA Scheme was provided for under the Special Savings Incentive Accounts Regulations, 2001 (S.I. No. 176 of 2001). In essence, the Regulations required the financial institutions to operate and ensure compliance with all of the terms of the Scheme. Revenue were given a policing role that included the power to audit financial institutions' compliance with the Scheme. The main features of the Scheme are

·	The Scheme commenced on 1 May 2001 with the first subscription to an account to be made before 30 April 2002. The Exchequer contributes a tax credit equal to 25% of the amounts saved each month for 60 months. The maximum savings permitted in a month are €254 per account and a minimum of €12.50 was required to be saved in each of the first 12 months.
·	Only individuals over 18 years of age and resident for tax purposes could open an account. An account holder must remain resident or ordinarily resident throughout the period the account is held. Each individual is allowed only one account and is required to produce evidence of their PPS number to the account manager and complete a declaration when opening the account.
·	Each account must be funded from the account holder’s own resources (except in the case of married couples) and sums cannot be borrowed or repayments of borrowings deferred in order to fund savings to the account.
·	SSIA accounts are managed by Qualifying Savings Managers (financial institutions) which are required to register with Revenue. There are 330 financial institutions registered consisting of banks (9), building societies (3), credit unions (302), insurance companies (15) and the Post Office Savings Bank. Funds in SSIA accounts can be invested by financial institutions in deposits, shares, government securities or life assurance products. Individuals can transfer accounts from one financial institution to another. On maturity, tax at the rate of 23% is deducted from the income or gain arising from the investment of the funds in the account i.e. tax is applied to the difference between the total value of the account on maturity less the total subscriptions and tax credits that were lodged to the account. However, if there is a withdrawal at any time before the account matures, tax at 23% is deducted from the full amount of the withdrawal i.e. the subscriptions and tax credits as well as any income or gain.
·	Revenue makes monthly payments to financial institutions based on claims from them for the net amount due i.e. the tax credit due less tax on gains. Financial institutions must make annual returns by 28 February giving details of all SSIAs.

Outturn of the Scheme to date

Total subscriptions to 31 March 2005 amounted to €7.26 billion and the net amount claimed from Revenue to that date was €1.776 billion. Details are shown in Table 9.

Table 9 Accounts, Subscriptions and Tax Credits

	No. of Accounts	Total Subscriptions	Net Amount Claimed from Revenuea
2001	398,214	€356,565,983	€88,790,617
2002	1,143,418	€1,859,321,585	€459,664,728
2003	1,113,880	€2,187,421,507	€532,623,415
2004	1,094,294	€2,264,832,004	€550,244,518
2005 (to March)	b	€591,814,025	€144,605,547
Total		€7,259,955,104	€1,775,928,825

a The financial institutions receive the tax credit one month in arrears.

b Not available until 2005 Annual Return submitted.

c Total tax credits claimed were €1,815,533,212 less total tax on gains of €39,604,387.

Statistical data compiled by Revenue (Table 10) shows the distribution of income levels for SSIA holders for the years 2002 to 2004. That distribution closely reflects the overall distribution of taxpayers' incomes as reported by Revenue.

Table 10 Distribution of Income Levels for SSIA Holders 2002 to 2004

Income Category	Income Range (2002 levels)	% of account holders 2004	% of account holders 2003	% of account holders 2002
Low	<€20,000	27.7%	28.1%	28.8%
Medium	€20,000-€50,000	49.1%	49.0%	48.8%
High	>€50,000	23.2%	22.9%	22.4%

Scheme Issues

In light of the unexpected extent of the uptake of the Scheme, I sought the views of the Accounting Officer of the Department of Finance on

·	the original estimate of the cost to the Exchequer
·	the factors supporting the setting of the Exchequer inducement of 25%
·	the extent to which existing savings were switched into SSIAs
·	the impact of the Scheme on inflation.

Given the benefit conferred on the financial institutions by the scale of the response to the Scheme, I also asked if any consideration had been given to seeking contributions towards the cost of the Scheme from them.

The Accounting Officer of the Department of Finance pointed out that the Government, on the recommendation of the Minister for Finance, decided to introduce the Special Savings Incentive Scheme to encourage individuals to provide for the future by a regular pattern of savings and as a means of taking demand out of the economy. The Minister provided a tentative estimate to the Dáil and Seanad of an Exchequer cost of €127m per annum indicating a level of savings of over €500m per annum. The Accounting Officer stated that these figures were not targets for the amount of savings the Scheme might attract and that the Minister made it clear during the Dáil and Seanad debates that he would be happy to see the Scheme maximised resulting in significantly more savings and therefore a greater cost. He also informed me that there is no target level for retention of savings as such.

The Accounting Officer explained that the Scheme arose out of consideration by the Minister and the Department early in 2001 of various suggestions for tax relief to encourage consumers to save rather than spend. The basis of the 25% Exchequer contribution to amounts saved was simply the 20% standard rate income tax relief expressed in terms of the net cost of the contribution i.e. tax relief at the standard rate on the grossed up amount of the contribution. The contribution was conceived in this way, as a bonus via the financial institutions, largely to keep administration costs down.

In relation to switching of savings, the Accounting Officer said that the Scheme was designed in as much as possible to reduce switching but it was clearly understood when the decision was being made that such switching could not be ruled out. However, the evidence from the annual returns to Revenue from the SSIA providers indicates that the scheme was successful in attracting a significant number of younger savers and people on lower incomes.

As regards the effect of the scheme on inflation, he said that the position is that in general terms, goods price inflation in Ireland is determined by international prices and exchange rate changes while services sector inflation is largely determined by the strength of domestic demand, the amount of slack in the labour market (i.e. wage pressures) and the level of competition across the different services sectors. Therefore, it is reasonable to expect that reducing domestic demand has a favourable impact on services sector inflation and therefore on the overall level of consumer price inflation. It is extremely difficult to isolate the impact of this factor from other factors driving inflation at the time. The gap between Irish and Euro area inflation has by now been effectively eliminated but clearly there were many other factors at work here. It is important to note however that economic theory strongly suggests that relationships in this area are not stable over time.

As for the likely impact of the scheme on inflation when funds are released, this will depend on a series of factors including the level of retention of savings, the amount of the remainder spent or invested, whether spending will be on domestic output (e.g. services) and assets or on imports, (e.g. cars, foreign holidays or foreign assets), the amount of slack in the economy when the money is spent and the extent to which the savings habit fostered by the scheme is persisted with. Estimates vary widely as to the influence of these factors. Information on intentions to spend or save is of necessity based on surveys and the output from these are very difficult to assess. What the money will be spent on is difficult to gauge. There is little or no previous experience in the economic literature to go on and in any event decisions are likely to be strongly influenced by the economic environment at that time. He said that the Department of Finance approach is to develop a range of scenarios and factor these into their current economic forecasts and accompanying variability analysis.

The Accounting Officer stated that the decision to introduce the scheme was a policy decision, taken for the stated reasons and that no contribution was ever envisaged from financial institutions. He noted that interest rate competition between institutions seeking to attract investors to the SSIA scheme provided some very competitive rates of interest (in addition to the 25% bonus) for those who shopped around between institutions.

Control of the Scheme by Revenue

Revenue operate direct control over the Scheme through processing and approval of claims for monthly payments from financial institutions as well as validation and reconciliation of annual returns. Responsibility for ensuring individual savers comply with the terms of the Scheme has to a large extent been entrusted to the financial institutions. Revenue carry out inspection visits to financial institutions to monitor their operation of controls in this regard and to ensure that the financial institutions themselves are in accord with the terms of the Scheme. My staff reviewed Revenue's checks on the Scheme with generally satisfactory results. In response, the Accounting Officer of Revenue informed me that

·	there were no instances of invalid monthly claims from financial institutions
·	discrepancies mainly relating to PPS numbers and dates of birth arising from the validation of annual returns were followed up and have either been resolved or will be before the end of 2005
·	a programme of inspections in the financial institutions shows that they have fulfilled their administrative responsibilities adequately
·	some 700 cases were reported for non-compliance and 450 cases have been disqualified since the Scheme commenced.

In response to my query as to whether Revenue has established the number of instances where payments are being made by Revenue under the SSIA Scheme in respect of individuals who owe money to Revenue, have had outstanding taxes written off or have not submitted tax returns due, the Accounting Officer for Revenue stated that while tax compliance as such is not one of the conditions attaching to the SSIA Scheme, Revenue's approach to non compliance is to identify the non compliant at an early stage and casework the case as appropriate. This may include enforcement or indeed attachment. It is Revenue policy that where appropriate, all suitable creditors will be examined for the purposes of attachment, including SSIA accounts. This approach has been successfully used in the recent past. He pointed out that SSIA account holders must be individuals, the majority of whom are PAYE employees and as such would not generally feature on the Revenue non-compliant listings.

2.8 Relevant Contracts Tax

Background

The Relevant Contracts Tax (RCT) tax deduction system was introduced in 1970 to counter tax avoidance in sub contracting in the construction industry and was subsequently extended to forestry and meat processing operations. The number of contractors and sub contractors engaged in these industries is set out in Table 11.

Table 11 Contractors and Sub Contractors in Construction, Forestry and Meat Processing Industries

	2000	2005
Principal Contractors	22,000	33,801
Registered Sub Contractors (C2 Holders)	27,000	40,329
Unregistered Sub Contractors	36,000	56,580

For 2005, 18,640 contractors act as principals and registered sub-contractors and are included in both categories (11,000 in 2000).

RCT only applies where the principal contractor and the sub contractor operate in the same industry. A principal contractor must establish, for each job, whether a worker is a sub contractor or an employee. It is not always obvious whether an individual is employed or self employed and there is no absolute definition covering all cases. The category a person falls into depends on what they actually do, the way they do it and the terms and conditions under which they are engaged.

Under the RCT system, a principal contractor must deduct tax at 35% from payments to sub contractors unless the principal has a relevant payments card issued by Revenue for that sub contractor. Where a principal has a relevant payments card for a sub contractor, payments are made without deduction of RCT and recorded on the payments card. Relevant payments cards are only issued by Revenue in respect of sub contractors who hold certificates of authorisation (C2s). C2s are issued by Revenue to sub contractors on application provided their tax affairs are in order and the applicant is deemed to be a bona fide sub contractor. Where RCT is deducted from a payment, the principal gives the sub contractor a deduction certificate showing the gross amount of the payment and the tax deducted. After the end of the month in which the payment is made, the sub contractor can submit the deduction certificate to Revenue and claim repayment or offset of the RCT deducted.

Principal contractors must maintain a record of payments to all sub contractors and submit monthly returns (RCT30) together with remittance of the tax deducted. An annual return (RCT35) must also be made showing the total payments to each sub contractor (paid with and without deduction of RCT) and the total RCT deducted (if any) from each. The amount of RCT collected and repaid for the years 2001 to 2004 is shown in Table 12.

Table 12 RCT Collected and Repaid or Offset 2001 to 2004

	2001	2002	2003	2004	Total
	€m	€m	€m	€m	€m
Collected	422	394	477	612	1,905
Repaid/Offset	365	365	403	522	1,655
Not Allocated	57	29	74	90	250

Changes Introduced Since 2000

Since my 2000 Report on the systems and procedures for administration of RCT several operational changes have been introduced.

·	RCT has been incorporated into Revenue’s Integrated Taxation Services (ITS) system.
·	RCT was introduced into Revenue’s Active Intervention Management (AIM) caseworking collection system in a limited way in 2002 thus allowing monitoring of the larger principal contractors. RCT has recently been fully integrated into the AIM caseworking system.
·	Monetary limits can now be applied to payments cards issued. For payments over that amount, RCT must be deducted or a new payments card applied for.
·	The Finance Act 2004 empowers Revenue to maintain a register of principal contractors.
·	A risk evaluation of RCT has recently been carried out by Revenue.

I sought the observations of the Accounting Officer on the extent to which the changes introduced have addressed the issues identified in my 2000 Report and in particular

·	the progress made in pursuing the €38m - €44m arrears of RCT highlighted in my 2000 Report
·	when electronic processing of the annual return data is likely to be implemented and the benefits it will give to the administration of the tax
·	when the recommendations of the risk report will be available for consideration and implementation
·	whether it is intended to seek a legislative basis for the payment card monetary limit.

The Accounting Officer stated that in recognition of the potential risk associated with RCT, Revenue had committed a large proportion of its information technology resources to incorporating the tax into the ITS system. This necessitated assigning a higher priority to RCT than the development of the PAYE system for employees. He said that this decision was taken on the basis that it was necessary to move RCT into ITS before the administrative problems identified could be properly addressed. Its inclusion in ITS means that a full audit trail of all RCT processing activity is now available. Further benefits are system checking

·	of the tax compliance of sub contractors prior to C2 issue
·	that contracts limits are not exceeded prior to Payments Card issue
·	of deduction certificates and tax compliance status of sub contractors claiming refunds or offsets. ITS automatically offsets refund claims against outstanding taxes.
·	for principals who are not up to date with returns and payments when sub contractors claim refunds or offsets
·	of cumulative monthly payments by a principal against total deductions from sub contractors per annual return and issue of estimate as necessary.

Revenue's recent restructuring has included the establishment of Special Compliance Districts in each of the Revenue Regions. These Districts have commenced a number of projects and initiatives with a particular focus on the construction industry and major infrastructural projects which have produced information and intelligence that has increased Revenue's understanding of the RCT sector as well as identifying and profiling cases that present risks. The intelligence from such projects provides a base from which Revenue can evaluate the effectiveness of its current programmes and develop new strategies on how to tackle fraud and evasion. These developments coupled with the introduction of a new computerised risk assessment system will facilitate the development of new policies and compliance programmes to actively pursue appropriate cases. He regards these measures as a significant step towards ensuring the efficient administration of RCT, the identification of compliance risks and addressing any weaknesses in RCT administration.

In relation to the cases with arrears of €38m to €44m, the Accounting Officer stated that when RCT was introduced into ITS in November 2002, all balances for the years 2000/2001 and later were included in ITS. Balances for prior years were not automatically transferred to ITS due to the uncertainty of the charges under the old system. Where the older charges were confirmed as valid, they were manually input to ITS for full collection case working. The majority of cases have been examined at this stage and where necessary, the liabilities have been included in ITS. Some of the cases have to be rechecked to confirm the status of the charges. This requires access to files stored "off site" and it is taking some time to retrieve the files and confirm the position. Examination of all cases is expected to be completed by the autumn.

The Accounting Officer also informed me that the facility to capture the data on the annual returns is currently being developed and is scheduled for completion in December 2005. Annual returns for 2004 and subsequent years will be processed. He stated that the capture of this data will allow Revenue to

·	Match data already being captured from refund/offset claims with the principal’s returns.
·	Check the validity of payment card numbers quoted.
·	Identify subcontractors who are not reclaiming RCT deducted.
·	Identify patterns where principal contractors engage uncertified subcontractors only (increased cash flow), C2 holders only (less administration) and subcontractors who do not provide a tax reference number (possible shadow economy issues).
·	Identify principal contractors where compliance with RCT legislation and regulations may be an issue (payments card numbers not quoted and no tax deducted, payments card number quoted not issued to that principal).
·	Use the annual return data in the risk assessment system to profile cases where tax might be at risk across all taxheads.

The Accounting Officer also stated that Revenue was in discussions with the Department of Social and Family Affairs as to the extent of information they would require from the annual returns to assist in identifying instances of sub contractors working while claiming social welfare benefits.

The Accounting Officer said that Revenue management have not yet considered the report of the risk evaluation of RCT which has just recently been completed. Some of its proposals and developments could be introduced quickly while others will require information technology developments.

The Accounting Officer informed me that the monetary limit on payments cards was introduced on an administrative basis in 2004 under the care and management provisions of the Taxes Consolidation Act, 1997. It was introduced to reduce some of the risks associated with the tax including cases where sub contractors who held C2s on the basis of a small contract were being used to channel significant payments to large operators in the shadow economy who would not have met the criteria to obtain a C2. The limit also provides a degree of protection to Revenue against the possibility of small, labour only contractors building up significant tax debts. Revenue consider that the monetary limit is a pragmatic response to these risks and is appropriate and desirable in the long term and is therefore best placed on a statutory footing. Revenue are considering this and other changes required to the RCT legislation with a view to putting forward proposals to the Department of Finance for consideration for inclusion in the Finance Bill, 2006.

Current Audit Issues

In the light of the findings of my previous audit and the changes introduced since, I examined the operation of RCT in the Fingal District, the Cavan/Monaghan District and the Construction Business Unit of the Large Cases Division. The system operated in each of these was examined. Sample checks were made of principal contractors and their annual returns, the validity of payments cards and tax reference numbers supplied on annual returns and the compliance record of sub contractors listed on the annual returns. In addition, a sample of Revenue audits in the construction sector was examined and internal audit activity in the RCT area was reviewed. The findings of my audit together with the responses of the Accounting Officer are set out below.

Submission of Annual Returns by Principal Contractors

32 of 65 annual returns examined were submitted from 1 to 10 months after the due date. A penalty for late submission was not imposed in any case.

The Accounting Officer stated that based on the experience of the use of penalty proceedings in relation to other taxheads, Revenue are of the view that the automatic taking of penalty proceedings alone for late submission of returns will not be effective in changing the compliance behaviour in RCT cases. Since Revenue restructuring, a more whole case approach to tackling non-compliers is being followed. This means that instead of dealing with individual instances of non compliance (such as the failure to file a particular tax return) in isolation, account is taken of the total risks across all taxheads. Decisions on the type of action to be taken are made based on what is considered to be the most appropriate intervention to change the behaviour of the taxpayer. The introduction of the computerised risk assessment system will greatly facilitate this new approach. It may be that in some cases, penalty proceedings will be the most appropriate action to take. However, this new approach is at an early stage.

Completion of Annual Returns

·	8 of the 65 annual returns included entries for 38 sub contractors without a payments card number but no RCT was recorded as deducted.
·	Entries on annual returns for 3 sub contractors showed negative amounts.
·	There were some 6,533 sub contractors on the annual returns examined. Tax reference numbers were not supplied for 457 of these.
·	Addresses were not provided in all cases.

The Accounting Officer informed me that it is Revenue policy that annual returns are examined to check for deficiencies but due to pressure of other work programmes some were not fully examined. Where problems are identified, cases are considered for audit as part of a District's annual audit programme and the decision to initiate an audit will take into account factors such as the degree of the deficiency (the tax at risk), the tax history of the case and resources. Where a decision is made not to proceed with a formal audit other options and contacts need to be considered. To ensure that there is consistency in RCT administration across all Regions, Revenue proposes to issue comprehensive instructions on the best practice to be applied in working annual returns. The instructions will also address other issues such as the quality of information provided on RCT return forms.

In relation to cases where no payments card number was quoted but no tax was deducted he said it may be the case that the principal omitted the number from the annual return in error. Where this is not the case, the matter is generally referred for audit. Where the audit shows that tax should have been deducted payment is required unless, in exceptional circumstances, where there is no neglect, all parties are fully compliant and nothing would be gained by processing a payment through the system. Also, payment is not required in group cases, as provided by the Code of Practice for Revenue Audit, where the group is compliant.

Enquiries into the cases where there were negative amounts on the annual return show that the principals' own internal systems led to these amounts being recorded on the RCT 35s. Any tax implications arising are being followed up.

In relation to the absence of tax reference numbers on the annual return, he said that as the return may be submitted a year or more after the subcontractor was engaged, possibly on a short term contract, a difficulty arises in that the principal contractor may not have the means of getting this information. The subcontractor must however provide their date of birth in all cases. The address should also be supplied in all cases, but in practice it is often omitted where the subcontractor has provided a tax reference number or has a C2 certificate. In any event the subcontractor's address is available on Revenue's computer records.

He stated that the electronic capture of annual return data will automate the detection of discrepancies but that until that process is complete, processing of forms would be extremely costly in terms of resources and has to be assessed in terms of the benefit to be gained and the opportunity costs involved. Revenue has other strategies in place to detect non-compliance and tax at risk with new dedicated teams in its restructured organisation. The work of the Special Compliance Districts means that those who are not in the tax system are now being detected on a current basis and not after the fact when an annual return form has been submitted and the subcontractor cannot be traced.

Sub Contractors' Tax Reference/Registration Status

The validity of the reference details and the tax registration status of a sample of sub contractors recorded on the principals' annual returns were checked as part of my audit. In most cases the outcome was satisfactory but there were difficulties with some cases which I raised with the Accounting Officer.

The Accounting Officer stated that in light of the large amount of information relating to subcontractors on annual returns, coupled with the practical difficulty of interrogating this data outside of a management information system, no specific check has been carried out to date on the validity of tax reference numbers. However, this difficulty will be addressed by the electronic data capture of information on annual returns. The approach to using this development to ensure that taxpayers who supply inaccurate data can be detected is being examined.

Comprehensive instructions issued in October 2004 to all staff outlining procedures in the registration process with the main emphasis on the ongoing maintenance and accuracy of taxpayers' data. The instructions address the question of registration for other taxes by directing that where staff processing registration applications consider that the taxpayer should be registered for other taxes, the taxpayer or their agent should be contacted. In relation to unregistered subcontractors, the Accounting Officer said that such taxpayers generally apply to Revenue for a tax refund. When processing the refund, checks are made to ensure the subcontractor is registered for all relevant taxes and compliance checks are made where this is not the case. These compliance checks have resulted in the detection of taxpayers who do not submit tax returns or who underpay their liabilities. Procedures are also in place to ensure that non-resident sub-contractors are registered for all appropriate taxes.

Employee/Sub Contractor Status

My examination reviewed files relating to Revenue audits in the construction industry finalised in 2004 with particular reference to the classification of workers as between employees and sub contractors and found some evidence of principal contractors being advised by Revenue auditors to reclassify sub contractors as employees. In 1998, a programme of site visits to principal contractors had been undertaken to check whether any persons treated as sub contractors should be reclassified as employees. The status of some 63,000 sub contractors was examined and as a result some 20% were reclassified as employees. A similar special programme commenced in 2001.

I sought the observations of the Accounting Officer as to

·	whether he was satisfied with the level of checking of the classification of workers as between employees and sub contractors
·	whether the special programme of site visits commenced in 2001 was completed or is planned to be completed
·	the extent of the contribution of work of the Joint Investigation Units to the control of RCT, including the classification issue.

The Accounting Officer stated that Revenue have responsibility for administering the operation of all taxes in the construction industry and ensuring that all operators within that sector comply with all their taxation obligations, and not just RCT. Revenue carry out a range of checks in relation to the status of those engaged in the construction sector and also monitor activity in the sector through the issue and processing of RCT forms. He said that Revenue auditors examine the employee/sub-contractor status as a routine part of audits. Approximately 1,500 audits (about 10% of all audits) were conducted on building contractors in 2004. The auditors would have examined the forms that a principal contractor and a sub-contractor complete in respect of each contract (RCT1) which contain details of the duration and type of contracts and a statement that the contracts are not contracts of employment. He pointed out that recent computer enhancements make it easier to identify cases where an employment arrangement rather than a contract arrangement may exist e.g. where sub-contractors are receiving regular payments under deduction of tax from one principal contractor.

The Accounting Officer informed me that in 2004, Special Compliance Districts initiated a number of key projects to tackle tax evasion and in the construction sector concentrated on major infrastructure projects. Surveillance of construction sites allowed Revenue to develop a profile of those engaged on sites and to use this information to carry out site visits where risks were identified. These site visits have led to cases being referred for possible prosecution and informed the selection of cases for future audits. Investigations into the construction and property development sectors focusing on all taxes and duties are continuing in 2005.

The special programme of site visits, which commenced in 2001, was suspended in September 2002 to allow Revenue to provide audit staff with Health and Safety training to enable them to move around the sites. The programme was not resumed following an analysis of the degree of misclassification uncovered (of the 984 subcontractors examined only 65, i.e. 7% were misclassified). However, officials who are engaged on construction site visits have now been provided with the recognised training courses to enable them to move around the sites.

The Accounting Officer informed me that the focus of the Joint Investigation Units crosses all taxheads and all areas of business activity. While no specific RCT projects were undertaken, the Joint Investigation Units have regularly examined taxpayers operating in the construction, forestry and meat industries and have dealt with RCT compliance and classification issues as they arose. Their compliance interventions also focus on other tax heads and duties including the operation of PAYE, VAT and Income Tax. No separate statistics are kept of RCT classification issues as the classification issue has not presented itself as a significant risk and the main focus of these Units is on areas where persons are working and claiming social welfare allowances.

Internal Audit

The Revenue Internal Audit Section examined RCT repayments and offsets to sub-contractors and refunds to principals who had overpaid RCT in June 2004 as part of a general audit of repayments. A sample of 55 repayments and offsets to sub contractors were examined with satisfactory results. Since the introduction of RCT into the ITS system, the volume of refunds to principals had increased dramatically from an annual level of about 30 to about 4,000 per annum. Previously, the principal had to apply to have the amount refunded or included in the balancing of the annual return. In the ITS system a refund is automatically triggered for all taxes where the amount received is greater than the charge on record. The Internal Audit found one case where refunds were incorrectly made to a principal as a result of a supplementary payment of RCT, correctly due, being treated by the ITS system as an overpayment, and automatically refunded. In light of the identification of that problem, the Collector General's Office temporarily suspended the automatic refund facility for RCT. A subsequent review found 399 cases where improper refunds totalling €912,000 had been made. All refunds to principals greater than €10 are now blocked by the system and must be manually processed. 388 of the cases found have been resolved and the moneys recovered, and 11 cases, which received refunds totalling €14,000, are still to be resolved.

I asked the Accounting Officer whether he was satisfied that incorrect repayment had not occurred in respect of any other taxhead in ITS.

The Accounting Officer stated that he was satisfied that the issues that resulted in incorrect automatic repayments of RCT were generally related to the migration of RCT to the new ITS environment. Steps have been taken to specifically address the issues identified in relation to RCT and additional validation procedures have been implemented. In relation to taxheads other than RCT, situations where taxpayers do not use the returns provided or do not clearly indicate the circumstances of the payment give rise to some potential for incorrect repayments. The validation systems in place and the maturity of the other taxheads within the ITS environment provide assurance that similar issues to those identified in relation to RCT are not a significant concern.

General Management

In relation to management of RCT generally, I also asked the Accounting Officer

·	what action was planned to improve the compliance rates for monthly and annual RCT returns
·	the extent of frauds in relation to RCT and the action taken in response
·	whether he was satisfied with the operation, control and administration of RCT and that it is achieving its objectives.

The Accounting Officer informed me that it has only proved possible to accurately and reliably compute compliance for the monthly return commencing in January 2005. The compliance rate within one month of the due date is 52%. The Accounting Officer informed me that compliance rates for monthly returns are currently significantly below PAYE/PRSI (P30) compliance rates. This is to be expected, as compliance case working for PAYE/PRSI has been a core element of Revenue's compliance programmes for a number of years. As case working has been extended to include RCT since the beginning of 2005, Revenue anticipates that compliance rates will improve considerably for RCT in the coming years. For 2005, the Collector-General's division has introduced specific compliance targets for RCT in its business plans. The computerised risk analysis system will form a significant part of Revenue's continuing focus on improving compliance behaviour across all taxheads.

Establishing compliance rates for annual returns prior to 2003 has also proven to be unreliable. Since 2003, formal compliance campaigns have been introduced. The compliance rate for the 2003 return at the time of issue of the compliance programme in August 2004 was 60%. This has now risen to 81%. The compliance rate for the 2004 return at the time of issue of the compliance programme in May 2005 was 57%. Matching annual return data processed electronically with sub contractor deduction certificates will help identify principals who have engaged sub contractors but not submitted annual returns.

The Accounting Officer informed me that twelve cases of RCT fraud were investigated by Revenue in recent years. Two cases involved collusion among large numbers of individuals and companies (97 in one case and 24 in the other) including principal contractors and these cases were referred to the Gardaí whose enquiries are ongoing. The remaining ten cases where serious suspected abuse of the RCT system were identified were referred for investigation by Revenue's Investigation and Prosecutions Division (IPD) with a view to prosecution. To date one of these cases has resulted in a Court conviction and the defendant was sentenced to 240 hours of Community Service. In two other cases, the defendants failed to appear in Court and bench warrants were issued for their arrest. The remaining seven cases are under active investigation by IPD.

He said that the main weakness identified in these frauds, was the fraudulent issue by principals of deduction certificates in respect of work never carried out and payments that were never made. The tax shown as deducted on these certificates was bogus and not remitted to Revenue. He said that the functionality of the ITS system allowed Revenue to respond quickly to these fraud cases and identify the deduction certificates that were being used in the fraud. An analysis of the alleged frauds identified six common traits in these cases and a development was introduced to the ITS system to identify potentially bogus claims and principals who were not returning adequate amounts of RCT deducted. A risk evaluation was carried out to make recommendations to counter such frauds.

In relation to the operation of RCT generally, the Accounting Officer stated that the serious compliance problems that RCT was introduced to tackle still exist today and are compounded by the highly competitive nature of the industry where non-payment of tax debts is seen by some as a way to gain a competitive advantage. He said that Revenue faced new challenges arising from the increased level of activity in the construction sector and the increase in the number of non-resident contractors. The difficulties in tackling non-compliance in the construction sector are recognised internationally and different jurisdictions have come up with their own responses to the problem. The main focus and purpose of the RCT system is to secure payment of tax by subcontractors who might not otherwise pay. Most operators in the construction, forestry and meat processing industries are relatively tax compliant in terms of returns and payments. Revenue's compliance programmes monitor the returns and payments made by principal contractors. Registered subcontractors are subjected to a returns and payments compliance regime that annually reviews their entitlement to hold a C2. Unregistered subcontractors suffer a tax deduction of 35% and their compliance is monitored when they apply for a refund or offset of this tax. While the unregistered subcontractor who does not apply for a refund or offset is not being monitored at this point in time, they have suffered a deduction of tax at 35%, which might not otherwise be achievable. With the capture of the data from the annual return, Revenue will be in a better position to analyse and profile these cases and put in place a comprehensive and efficient response.

The Accounting Officer stated that Revenue's new structure has increased its capability to respond more quickly to this complex and changing environment. Initiatives already started by the regions have increased Revenue's understanding of the RCT sector and its risks and these projects will continue. While the RCT system is still mainly paper based, ITS and AIM have streamlined processes and allowed Revenue to monitor compliance more effectively than heretofore. As a result of the tightening up of procedures and the enhancements that have been made to the underlying computer systems, Revenue is satisfied that the RCT system is still achieving the objectives for which it was put in place. He said that the computerised risk analysis system will increase Revenue's effectiveness at tackling non-compliance in the sector.

2.9 Stamp Duty on Electronic Share Transactions

Background

The introduction of a new electronic system (CREST) operated by a UK company for the settlement of transactions arising from the sale or transfer of shares in UK and Irish registered companies was noted in my 1996 Report. Under Section 105 of the Finance Act, 1996, Revenue entered into an agreement with the operating company for the collection and payment to Revenue of Irish stamp duty. Before the CREST system went live Revenue tested a range of individual transactions to ensure that the amount of stamp duty due would be correctly calculated by the system.

Operation of the CREST System

Under the agreement the stamp duty collected is lodged by the operating company to designated bank accounts in trust for Revenue and is transmitted weekly, three weeks in arrears, to the Central Bank. Prior to the transfer of funds a daily breakdown of stamp duty payments collected is forwarded to Revenue by the operating company. The weekly receipt of funds is confirmed to Revenue by the Central Bank. My 1996 report also noted that a direct link with the new system was under development that would download further transaction details to Revenue. That data would facilitate verification that the correct amount of duty was paid over by the operating company, and also facilitate audit procedures. Under the agreement with the operating company Revenue was given the right to undertake a system audit of the company.

In order to participate in the CREST settlement system, brokers are required to become members of the system and put in place guaranteed payment arrangements. The system matches the details input by both parties to a sale and completes the transaction, the respective bank accounts are debited and credited with the agreed amount and, where applicable, the stamp duty liability of 1% is also collected from the account of the purchasing broker. €220m was collected by Revenue through the CREST system in 2004. Table 13 shows the total stamp duty on share transactions for the years 2000 to 2004 and the CREST payments and refunds for each year.

Table 13 Electronic Share Transactions and Stamp Duty 2000 - 2004

Year	Collected through CREST System	CREST Refunds	Paper Based Transactions	Total Stamp Duty on Share Transactions
2000	€212m	€25m	€44m	€231m
2001	€306m	€25m	€65m	€346m
2002	€272m	€32m	€63m	€303m
2003	€250m	€28m	€34m	€256m
2004	€255m	€35m	€40m	€260m

Exemptions and Section 75 Returns

Legislation provides for exemption or relief from stamp duty on share transactions in certain circumstances. The main instances are outlined in Table 14. Closings relief is provided only on a 'pay and refund' basis, while the other three exemptions are obtained on a self-assessment basis by brokers inputting the relevant exemption code to the CREST system. Stamp duty is not deducted by the system from exempt coded transactions. However, data subsequently provided in electronic form by the system to Revenue includes the unique identifier number of each transaction, date of transaction, whether shares are Irish, broker identity, number and identity of shares, value of transaction, broker self assessment code in relation to exemptions or relief, and the amount of stamp duty assessed and charged by the system.

Table 14 Exemptions/Reliefs under Stamp Duties Consolidation Act, 1999

Exemption/Relief	Criteria	Stamp Duty
Beneficial Ownership did not change	· Broker is acting in an agency capacity · Legal title only is transferred · By Electronic Transfer only	Stamp Duty not payable
Closings Relief	· Broker is acting in an agency capacity · Both contracts due for completion on the same day · Both purchases are closed within 25 days · By Electronic Transfer only	Stamp Duty payable but refundable
Market Maker	· Broker registered by the Stock Exchange to trade in the relevant securities · Electronic and Paper Transfers	Stamp Duty not payable
Broker/Dealer	· Broker acting in a principal capacity · Securities purchased must be sold on within a calendar month · Electronic and paper transfers	Stamp Duty not initially payable, but due if no resale within a calendar month

Member firms that have claimed broker/dealer exemption through the CREST system must submit a report to Revenue on a six monthly basis (Section 75 Report) containing details of the actual outcome of each purchase that had been initially coded as a Section 75 exemption on the expectation of resale within a calendar month and of the amount of duty which may subsequently have become due. A certified declaration is also required from the broker/dealer to the effect that the shares transferred under the Section 75 exemption, and in respect of which stamp duty has not been paid, were transferred on sale to a bona fide purchaser within the permitted period of one calendar month. Refund claims for closings relief must include details of each transaction and a declaration as to why the refund is warranted.

Internal Audit 2001

An internal audit of the payment of Stamp Duty through the CREST system was carried out by the Revenue Internal Audit Section in November 2001. The audit findings noted that

·	A number of brokers had not complied with Section 75 return requirements for the previous six monthly period, and had not been pursued by Revenue
·	Desk-based audits of Section 75 returns are mainly carried out where errors have been discovered in the course of processing refund applications
·	It was not possible to identify all members trading in CREST as the members’ identification numbers were not known to Revenue
·	No Revenue audit of a CREST participant had been carried out since the system was introduced in 1996.

Current Audit Concerns

It was noted in the course of an audit by my staff in February 2005 that those weaknesses still existed. It was also noted that an unsolicited payment of €1.1m was received by Revenue from a broker in November 2003 in respect of stamp duty on 516 share transactions through the CREST system in the period April 2001 to March 2003. The transactions had been coded exempt by the broker at time of purchase under broker/dealer relief (Section 75) but had not been sold on within the required period of one month of purchase thereby negating the relief and incurring a liability to stamp duty. In October 2004 Revenue informed the broker that a further €3.3m comprising interest of €0.1m and penalties of €3.2m was due to Revenue in respect of the late payment of the stamp duty.

As the €1.1m underpayment underlined the significant risk of underpayment of stamp duty which may arise in relation to exemptions, and as the failure to obtain Section 75 returns and declarations deprived Revenue of a key tool to police compliance in that area, I sought information from the Accounting Officer as to

·	whether the systems and procedures operated by Revenue were adequate to ensure that all of the stamp duty due to the Exchequer from transactions on the CREST system was promptly identified and collected
·	the circumstances and outcome of the case in which interest and penalties totalling €3.3m had been demanded by Revenue in October 2004
·	whether a Revenue stamp duty audit had been carried out on the books and records of any CREST member since 1996 and, if so, the outcome of such audit
·	whether Revenue had exercised its right under the 1996 agreement to undertake a system audit of the CREST operating company.

Revenue Response

Adequacy of Systems and Procedures

The Accounting Officer informed me that the operation of CREST had since its introduction in 1996, been the subject of many meetings and correspondence between the Revenue Crest Unit and both the Irish and London Stock Exchanges, individual Member Firms and other interested parties with the objective of educating them in Revenue's requirements for submitting refund claims and returns in relation to stamp duty exemptions. Reclaims sought on the basis of inputting errors by CREST participants had a draining effect on the Revenue resources available to administer the system.

Revenue's approach has been to tackle the deficiencies in reporting through a two-streamed approach - education and compliance leveraging. The relationship-based business model had sought to address the non-compliance in this area and had been successful in assisting brokers in understanding and meeting their obligations. Revenue has also been working to improve audit case selection using business intelligence. A number of meetings to outline compliance issues had been held with the Irish Stock Exchange. A Technical Group consisting of Revenue and Irish Stock Exchange representatives had been established to review difficulties in complying with CREST obligations and it was hoped that this Group would be shortly able to agree a guidelines (Market Norms) document which would outline details of Revenue requirements. Brokers were given an opportunity to get their affairs up to date and had confirmed that there would be full and timely compliance with their obligations from December 2004.

The UK Stamp Duty Reserve Tax exemptions in CREST differ from those in relation to Irish stamp duty and had resulted in confusion for UK brokers in regard to their Irish stamp duty obligations. Having regard to this, there had been a series of discussions and meetings since September 2000 to educate them and to improve the level of compliance and the accuracy of their returns.

The recommendations of the 2001 Internal Audit report had been implemented where considered feasible. It had also been decided that management of the compliance of the CREST activities of the main brokers would be transferred to the Large Cases Division. The transfer would release resources within the Crest Unit to concentrate on the remaining brokers.

The CREST system to date had grown significantly both in terms of the volume of transactions effected and data flows since its inception. For example, the 1996 net stamp duty collected through CREST was €6m (some 12% of the total collected for shares) and in 2004 had risen to €220m (84.5% of the total for shares). Revenue had responded to the increase in the level of business by moving to upgrade its computer system. When implemented, the upgraded system would increase user capability and solve a number of existing performance problems.

The securities market had also evolved over the past few years and that had resulted in a different trading environment from that which obtained at the commencement of CREST. In light of this, the Irish Stock Exchange had approached the Department of Finance with proposals to replace the existing legislative stamp duty exemptions for CREST transactions by a Single Intermediary Relief (the simplified exemption used for UK securities). If such a relief were introduced, it would reduce the present administrative burden both for CREST participants and for Revenue.

Non-Compliance with Broker Reporting Requirements

The Accounting Officer indicated that the main issue of ongoing concern for Revenue had been the failure of brokers to comply with the Section 75 reporting requirements. Due to resource constraints, there had not been a formal procedure in place in Revenue to identify brokers dealing in Irish shares. Additional resources had been allocated to the Crest Unit in the latter half of 2004 to deal with compliance issues. The Business Plan for 2005 included an activity to identify brokers dealing with Irish shares on the CREST system. However, it is difficult to accurately quantify the number of brokers with returns outstanding as the indicator flag used on the CREST system for Section 75 relief is the same as that used for Market Maker relief (see Table 14) for which no return is required. Table 15 sets out the total number of brokers dealing in Irish shares and the outcome of Revenue's exercise to identify the potential number of brokers with returns outstanding for the six monthly periods ending March 2000 to March 2005.

Table 15 Section 75 Returns Outstanding 2000 - 2005

Period ended	Total Number of Brokers Trading in Irish Shares	Potential number of Brokers availing of S.75 Relief	Number of Brokers who submitted six-monthly returns	Potential number of Brokers with returns outstanding
March 2000	191	44	28	16
September 2000	211	51	27	24
March 2001	242	59	23	36
September 2001	235	61	18	43
March 2002	219	76	23	53
September 2002	242	72	12	60
March 2003	220	82	38	44
September 2003	224	87	45	42
March 2004	227	96	46	50
September 2004	238	101	46	55
March 2005	235	104	34	70

In outlining the steps taken by Revenue since 2000 to obtain the outstanding returns together with all stamp duty due, the Accounting Officer reported that where non-compliant brokers were identified, they were advised of their obligations and given the opportunity to bring their affairs up-to-date. Furthermore, where a broker submitted reclaims on foot of the Section 75 exemption, these were withheld if their appropriate returns were outstanding. Those actions had resulted in more brokers becoming compliant and in the collection of outstanding stamp duty where appropriate. The exercise also indicated that as 45%-50% of brokers with a potential obligation to submit a Section 75 return had less than 100 trades exempted in the period, the extent of potential underpayments from these brokers is small. Having analysed the year 2004, only 10 brokers had in excess of 10,000 trades in the six-monthly periods and there were no issues regarding their understanding of their Section 75 obligations.

Reconciliation of CREST Payments Received

The weekly payments notified to Revenue by the operating company are checked against the weekly amounts of stamp duty charged on the CREST computer, and subsequently with the Central Bank confirmation of payments lodged. However, due to the design of the CREST computer system, checks of weekly payments made by the operating company against relevant underlying transactions can only be carried out on behalf of the Crest Unit by expert Revenue computer personnel. Such checks, which were carried out in 2001 and again in early 2005, consisted of examining the data-feed from the operating company to identify the transactions on a specific date, the stamp duty paid on each transaction and the total yield for that date. Crest Unit then compared that data with the payment advice for that date. In the context of the proposed upgrading of the computer system, a request had been made for that facility to be directly available to the Crest Unit users. Differences arising from the checks are rare, with only two instances in the past six months. The previous discrepancy prior to that was in November 2003.

Underpayment of €1.1m

Following a desk-based audit in May 2003, it appeared to Revenue that the firm in question was availing of Section 75 exemption but had failed to submit six monthly returns. The firm was advised that all reclaims would be suspended and was requested to examine the position. After further contacts, a payment of €1.1m was received in November 2003. Outstanding Section 75 returns for the period May 2001 to April 2003 were subsequently submitted in June 2004. The formal Section 75 declaration by the broker was not received but had recently been sought. Revenue assessed interest at €104,809 and penalties at €3,254,940. Following correspondence, the penalties were mitigated to €281,443 in June 2005 in line with Revenue policy and in recognition of the cooperation received from the firm in question as well as the level of neglect involved. There was no mitigation of the interest. A reminder subsequently issued in July 2005 requesting payment of the interest and the mitigated penalty.

Revenue Audit of Brokers

The Accounting Officer stated that the Crest Unit regularly undertook desk-based audits to confirm the bona fides of exemptions claimed. In any case where desk-based audits detected an underpayment of stamp duty, the underpayment was pursued and collected. Regular field visits were made to brokers to discuss record keeping and compliance issues with them. Although an external Revenue CREST audit had not to date been carried out on any brokers participating in the CREST system, the desirability of such audits was identified during 2004. Accordingly, computer based audits of a number of CREST brokers were planned for later in 2005. A team had now been put together to carry out these audits with the Crest Unit providing the technical expertise in the development of the audit plan and the audit itself being facilitated by officers outside the Crest Unit with the appropriate level of audit and computer skills.

Revenue Audit of CREST System

Arrangements had been made with the operating company to conduct a system audit in London before the end of 2005. The audit will be carried out by the same team including assistance from the Revenue Computer Audit Services Unit. It was anticipated that the results would also be of benefit during audits of individual brokers.

General

In conclusion, the Accounting Officer noted that while the existing systems and procedures in place were not designed to accommodate the level of business presently generated through the CREST system, he was confident that, as with all self-assessed taxes, where underpayments of stamp duty were identified they were pursued and collected. The existing CREST computer system was being upgraded to offer the necessary response to present day demands. It was expected that the features of the upgraded system would in turn require management to adopt new practices and procedures in the manner of identifying and collecting stamp duty. In all, the additional measures currently being taken (including the audit of the operating company and some of the broker members) would increase Revenue's effectiveness in improving compliance.

Mr. John Purcell

I thank the Vice Chairman. The committee, as he says, is just covering part of the report today, dealing with chapters 2.1 to 2.7, inclusive, and also the Vote. I will go through each of them, very briefly. Chapter 2.1 sets out my statutory mandate for the audit of Revenue and gives a summary of the tax collected in 2004. Net tax rose by over €3.5 billion in the year and the bulk of the uplift in the tax take is accounted for by increased income tax and VAT. Chapter 2.2 gives some details of the €172 million written off by Revenue on 2004. The increase of €53 million in the amount written off is mainly due to a review of old insolvency debt which led to Revenue write-off action. Each year internal audit examines a sample of write-offs to check that the laid down procedures were complied with. As was the case last year, it identified problems with the application of what Revenue call "commonality checks". These are checks which were introduced following my in-depth examination of write-offs in 2002 and are designed to establish whether the cases considered for write-off have related entities that also have liabilities. Revenue has since implemented an enhancement to its computer system to address the problem. The results of the internal audit examination were otherwise generally satisfactory.

Chapter 2.3 shows that at the end of March 2005 €1.2 billion was owed to Revenue, representing an improvement of €146 million on the position at the same time last year. The committee will see from table 6 that nearly €700 million of the debt relates to the pre-2003 period.

Chapter 2.4 summarises Revenue audit activity in 2004 and shows a further increase in yield, a contributory factor being the targeted work on undeclared income underlying the bogus non-resident accounts and previously undisclosed offshore bank accounts. The traditional random audit programme, which has been discussed at length by the committee in the past, was not carried out in 2004. For 2005 Revenue relaunched random audit as the taxpayer compliance testing programme and involved a selection of some 400 cases for audit. The programme was scheduled for completion last month and an evaluation of it is planned for this December. One of the programme's objectives is to try to get a handle on the level of under-declaration of tax liabilities.

Chapter 2.5 sets out the results of Revenue's prosecution of cases for serious tax evasion and for the first time refers also to the prosecution of customs and excise offences. The difficulties of successfully prosecuting serious tax offences have been aired here on many occasions. Although only one case was decided in court in 2004, there has been an increase in court activity this year. It is fair to say that we should see a growing volume of prosecutions going through the courts in the future.

Chapter 2.6 summarises the progress being made on the various special investigations carried out by Revenue. The return from these investigations now exceeds €2 billion. Chapter 2.7 records the generally satisfactory outcome of my review of Revenue's control over the payments and administration of the SSIA scheme. In effect, the financial institutions are responsible for much of the day to day operations of the scheme, with Revenue acting in a supervisory capacity. It is, perhaps, interesting to note that Revenue may use the power of attachment against SSIA proceeds to collect unpaid tax. The report also gives details of the outturn of the scheme to the end of March 2005, which shows that the level of uptake - and therefore the annual cost to the Exchequer - has settled at about four times the original tentative estimate made by the Department of Finance. As the Accounting Officer for that Department states, there were no targets, as such, set for the scheme and the fact that the uptake was so strong was seen as a positive outcome. He also informed me that it was never intended that there should be a monetary contribution to the cost of the scheme from the financial institutions. Finally for now, the Vote shows that the cost of running the Office of the Revenue Commissioners in 2004 was €387 million.

Vice Chairman

Has Mr. Daly an opening statement?

Mr. Daly

I thank the Vice Chairman and members of the committee for the opportunity to make this statement. Paragraph 2.1 shows net receipts at €35.775 billion. This represents an increase of €3.56 billion, or 11%, on the figure for 2003 and was €2.21 billion in excess of the budget target figure of €33.563 billion. This surplus over the target figure was mainly due to strong yields from capital gains tax, stamp duties and VAT and also to the success of Revenue's "legacy" investigations.

Paragraph 2.2 deals with tax write-offs. The amount written off in the year was €172.5 million in comparison to €119.4 million in 2003. The increase is mainly due to a review and write-off of old insolvency debt on record. As I have said before to this committee, Revenue, like every tax administration or business, inevitably experiences some bad debt. Our objective remains to minimise this in every way possible and we will only write it off where we are satisfied that it is genuinely uncollectible or uneconomic to pursue. Amounts written off should of course be viewed in the context of the amount collected. As a percentage of the total tax collected in 2004 the amount written off was about a third of 1% of gross collection, including PRSI, of €48.7 billion.

It is worth noting that excluding insolvency, the total tax written off for all other reasons in 2004 is €84 million, which is over €5 million less than the corresponding figure for 2003. Almost 62% of the debt written off was over six years old and just about 8% was less than three years old.

Paragraph 2.3 deals with outstanding tax and shows the balance outstanding at 31 March 2005 as €1,217 billion. This is down €146 million from 2003. This is the equivalent of 2.5% of gross tax receipts for 2004, which is a record low. In fact, it is among the lowest - if not the lowest - debt to collection ratio of any tax and customs administration, worldwide. It clearly illustrates our continuing success in improving payments compliance in recent years. Taxes outstanding have now fallen every year from a high of €5.466 billion, or 62.5% of gross receipts, in 1985. Just ten years ago, outstanding taxes were €2.6 billion, or 15% of gross receipts. While I am pleased with this progress, we have no intention of resting on our laurels. We have a new statement of strategy for the next three years in which we have set ourselves a target of eliminating debt over five years old, unless it is under active enforcement or court proceedings, by 2007. We will collect approximately 96% of the March 2005 debt figure through our further efforts.

Paragraph 2.4 reports on the Revenue audit programme. The audit programme is an established and successful means of ensuring compliance with the self-assessment system. The number of audits completed in 2004 is up slightly on the 2003 count. However, the yield was substantially up by almost €120 million to €549.6 million. These traditional audit programmes, from which we continue to get very good results, are part of Revenue's overall compliance activity. Just as we have modernised our organisation to meet new challenges, so we are modernising our entire approach to compliance. Our compliance interventions, whether they be audits or otherwise, are increasingly risk-driven and based on extensive sectoral and taxpayer analysis. We are using computer technology to select cases based on risk profiling and during the audit process itself. Most importantly, we are increasing the scale of real-time activity on the ground through visits to premises, surveillance, site visits, etc. All such interventions are driving our compliance agenda and, as such, we propose to specifically recognise and reflect these in future performance reports from the Revenue Commissioners.

Paragraph 2.5 deals with prosecutions for serious tax evasion. The pay-off for the intensive efforts invested in the past two years, through the establishment of the dedicated investigation and prosecutions division, is bearing fruit, with seven convictions to date in 2005. Custodial sentences were imposed in two cases and in two others the judges made community service orders. Each year, we also take approximately 1,000 Revenue prosecutions in the customs and excise area and in respect of filing offences relating to returns. As of today, we have a further 78 serious tax evasion cases in the prosecution pipeline. I hope this level of activity will go some way towards reassuring those who are sceptical about Revenue's willingness to go down the prosecution route.

Paragraph 2.6 refers to the special investigations programme and I would like to update the committee regarding the ongoing investigations. The amount for the bogus non-resident account investigation now stands at €822 million. This is made up of €225 million in DIRT paid by financial institutions, €227 million under the voluntary disclosure scheme and €370 million paid in the investigation since then. This investigation is 98% complete. The figure for the NIB-CMI investigation stands at €55.5 million. This investigation is 90% complete. The Ansbacher investigation stands at €53 million. Progress on this investigation is painstaking but continues to yield results. The follow-through from the Moriarty, Mahon and Flood tribunals stands at €36.2 million. This investigation continues but is cognisant of the reality that the tribunals are still active. The offshore assets investigation stands at €769.5 million. The follow-through phase of this investigation, identifying those who did not voluntarily disclose, has begun. We have obtained six High Court orders against financial institutions and material is now flowing to Revenue on foot of some of these. We expect to have sought orders against all relevant institutions by year-end. All these orders will provide us with further information on the identity of Irish residents holding offshore accounts. Members will recall that one of the starting points of this investigation related to offshore trusts held in Jersey. A total of 254 persons came forward to make voluntary disclosures of such trusts when we started this investigation. We have now identified those who did not and they are being pursued as we speak.

Last but by no means least, the insurance products investigation stands at €372 million after the initial voluntary disclosure phase. We have now started the follow-up phase, with, using the powers given to us in the Finance Act 2005, visits to insurance companies to access their records. The running total as a result of these investigations stands at €2.1082 billion, which is an increase of over €302.2 million since I last reported to the committee on 21 July 2005. Although work on these Revenue special investigations is time consuming and complex, significant results are being achieved as the figures show.

Paragraph 2.7 deals with the special savings incentive account scheme. Revenue is well advanced in the preparations for the maturity process of SSIAs. A comprehensive set of guidelines has been issued to all financial institutions setting out how the maturity process will be managed. These guidelines were compiled following extensive communications with the institutions. Revenue's approach is to ensure that, in conjunction with the financial institutions, the maturity arrangements operate in a simple way that can be easily understood and followed by all account holders.

Vice Chairman

I thank Mr. Daly. May we publish his statement?

Mr. Daly

Yes.

Deputy Fleming

I welcome Mr. Daly. The Comptroller and Auditor General's final comment was that the cost of running the entire Revenue Commissioners operation was €329 million. The gross amount collected totalled €41.8 billion. That indicates to me that the cost of the operation is less than 0.75% of the actual gross revenue collected. That is an outstanding result. How does that compare internationally to the costs of running a revenue operation? Those operational costs seem to be decreasing as a percentage of the money collected each year. A few years ago, I believe the figure was approximately 2% to 3%.

Mr. Daly

We should also get credit for the PRSI we collect, which would bring the gross figure up to €48.7 billion. However, that is only another €6 billion. The cost of running the organisation in 2004 was 0.85% of gross yield. That figure has been progressively falling since 2001, when it was just under 1%.

I do not have any figures with me on international comparisons, but I recall seeing a benchmarking exercise sponsored by New Zealand. We figure pretty well in that comparison and would be up there among the best of them. However, there is one caveat. We are a combined tax and customs administration, so the figure of 0.85% relates to tax and customs activities. Other administrations have separate tax and customs divisions. When they produce a figure, the comparisons are not always valid. We are pretty good and are in the top four or five. However, there is always room for improvement.

Deputy Fleming

Mr. Daly stated, "As of today, we have a further 78 serious tax evasion cases in the prosecution pipeline." How many cases would he expect to go before the courts when they emerge from the other end of that pipeline?

Mr. Daly

The majority of them will go before the courts in court. Five of the cases are in court at present and bench warrants have been issued in a further two cases, which can also be regarded as being within the court process. The Director of Public Prosecutions has issued directions to prosecute in four cases, so they will definitely come to court. Some 13 cases are with the DPP and I am confident that most of those will come out with the right answer. Five cases are with the Revenue Commissioners' solicitor's office and 48 others are under investigation. The question mark is over the 48 cases under investigation. However, we have a rigorous admissions process and cases do not generally get into the prosecution pipeline unless they are highly likely to end in the court process. We are rigorous in what we allow into the process because of the amount of time invested in mounting prosecutions. One investigation is currently suspended for good operational reasons, into which I will not go.

Deputy Fleming

Mr. Daly can understand why the matter is of concern to the committee in that only one case, which resulted in a suspended sentence, was decided in court last year. Six cases were decided in 2004 and just three in 2003. A sea change seems to be occurring at long last.

Mr. Daly

I would like to emphasise that point. It is a continuous source of comment that Revenue is wimpish about prosecutions. While it has taken us some time, we are well on the way to having prosecutions as a normal part of our response to serious tax evasion.

Deputy Fleming

Mr. Daly can understand why it is an issue for us. We regularly hear of prosecutions for social welfare offences involving minuscule amounts compared to these cases. It is a question of equity in public administration.

Mr. Daly

That comparison is often made. However, there are significant differences between social welfare and Revenue prosecutions, not least in the burden of proof that rests on Revenue. In almost all serious tax cases, most of the evidence is not within Revenue but outside. We must apply for court orders and rely on third party statements and search warrants. It is an extraordinarily difficult process. Moreover, most of the serious Revenue prosecutions are prepared on the basis that they will be tried on indictment, so the process is more difficult.

Deputy Fleming

With regard to the €172 million in tax written off, what were the circumstances and the amount of the single biggest write-off in the year under review? What type of case was it? Why was the amount so large?

Mr. Daly

I do not have the figure for the single biggest write-off. However, I can say with great certainty that it would have been an insolvency case in which a company went to the wall and we had to write off the amount involved. I can get the figure for the Deputy.

Deputy Fleming

Can Mr. Daly give an idea of the scale of the biggest write-offs?

Mr. Daly

The average figure for a write-off is approximately €6,000 to €6,500. This includes smaller and more significant cases. One or two significant business failures will increase that average substantially.

Deputy Fleming

The Comptroller and Auditor General's report states:

Write off procedures provide that where a commonality check identifies related entities with tax liabilities greater than €250,000, the case should be referred to the Collector General's Dedicated Pursuit Unit for review prior to any write off.

That system has not operated completely satisfactorily.

Mr. Daly

It did not operate completely satisfactorily in that 29 cases in the year checked by the Comptroller and Auditor General were not recorded as having been carried out by Revenue. As Mr. Purcell stated, we have changed our computer system with the result that, in effect, write-offs cannot happen unless there is a mandatory completion of the commonality check.

Deputy Fleming

When did that change come into being?

Mr. Daly

In May of this year.

Deputy Fleming

Did it happen as a result of this year's audit or was it to happen in any case?

Mr. Daly

I must give credit to the Comptroller and Auditor General. I do so whenever I can.

Deputy Fleming

With regard to——

Mr. Daly

I am sorry. On checking my briefing notes, I find we had already identified the problem. I apologise to Mr. Purcell.

Mr. Purcell

I almost got some credit. The concept of commonality checks was introduced as a result of the audit we carried out a couple of years ago. Part of the arrangements for the write-offs is that an internal audit will examine a certain sample. In the course of an audit, it was found that the commonality checks were not carried out satisfactorily, as they had not been the previous year - I apologise for that slight barb.

Deputy Fleming

Everybody is happy. With regard to the pure random audit when the system did not operate satisfactorily in 2004, the Comptroller and Auditor General's report states, "The programme selected 400 cases ... The target date for completion of the programme is September 2005 and evaluation of the programme is planned for December 2005." Mr. Daly should be able to give some indication of what resulted from that random audit process, which was due for completion in September 2005.

Mr. Daly

I will give the Deputy a flavour of the issue. Some 400 cases were allocated to the various regions and to our large cases division. Most of these cases are complete or well advanced, although some have turned out to be more tricky than anticipated. However, I still believe we will meet the target for completion by the end of the year. We have received reports on 132 cases, with 101 cases yielding nil. The yield from the balance is approximately €300,000, which gives an average of perhaps €10,000 per yielding case.

However, I wish to give a health warning in this regard, namely, that as the cases completed to date are likely to be the less complex ones, it would be dangerous to draw conclusions from them. That is an early flavour of the results but I would prefer to return to the committee next year with the final results.

Deputy Fleming

Will Revenue have the information by the end of this year?

Mr. Daly

We will not have the information until the end of the year.

Deputy Fleming

Depending on when the Vote is signed off, I would like the information to be sent to the committee by way of correspondence so we do not to have to wait until this time next year to read it in the Comptroller and Auditor General's report.

Mr. Daly

Yes.

Deputy Fleming

We will not draw any conclusions but a number of them would be——

Mr. Daly

It would be premature to draw conclusions.

Deputy Fleming

The issue of attachment orders has not been dealt with. I have an inkling that these are a neat way for Revenue to do its business and are less troublesome than sending out burly sheriffs and their men in Hiace vans with trailers. It is a more civilised way of doing business. Why does Revenue not use more of these orders?

Mr. Daly

We are using more of them. It is a growth area for us. In 2004 we issued 949 attachment orders and got €10 million or €11 million from that process. To the end of September 2005, we have issued 1,861 orders, nearly double the number for the previous year, and the yield was approximately €22 million.

Deputy Fleming

It is a big step.

Mr. Daly

It is almost a doubling of the use of attachment orders. That is not to say we are backing away from the sheriffs, Hiace vans and all.

Deputy Fleming

I understand that.

Mr. Daly

There is a process of enforcement, ranging from the gentle to the more strident reminder, and on to intervention by our own collection people in the Collector General's office and the districts. It is only when it gets beyond this that we consider either solicitor or sheriff enforcement or move on to what we call exemplary enforcement, which only takes place in a small number of cases and includes such measures as examination of means, forced sales, committal orders, bankruptcy, citation of executors and so on. We issued some 38,000 certificates to sheriffs in 2004, as a result of which €250 million was recouped, either directly or indirectly. It is an important aspect of our approach and the figures are growing. To June 2005, the sheriff yield is some €128 million.

Deputy Fleming

Page 14 of the Comptroller and Auditor General's report states that the holder of an SSIA account must remain resident, or ordinarily resident, throughout the period the account is held. What mechanism is in place to check the residence status of a person who, for example, spends some time working abroad and keeps his or her PPS number up to date by bank standing order or some other means? People who have been sent abroad by their employers for a period during the five-year lifetime of their SSIA account might not be aware of the residence requirements. There may be a bombshell awaiting such people in that they will be obliged to return everything the State has given them over the previous five years. Will Mr. Daly outline the verification system in respect of the residence requirements?

Mr. Daly

Our checks on the SSIA system have taken place through the financial institutions, to some 30 of which we have paid compliance visits. Our work involves extracting a sample of accounts for scrutiny and considering, as far as possible, all the qualifying criteria. For example, we verify that a person does not have two SSIA accounts, did not borrow money to set up the account, has not deferred repayments on other loans, is over 18 years of age and fulfils the residence qualification. In regard to the latter, someone who goes abroad for six months or a year will not be disqualified from holding an SSIA. We have already issued maturity guidelines to the financial institutions, a summary version of which we will publish eventually for everybody. We do not want to do so yet because there is no need to rush into this. These guidelines will make clear that a person can go abroad for some three years before being disqualified from the benefits of their SSIA. The provisions are quite generous in this regard.

Deputy Fleming

What checks took place to verify the status of those persons who claimed non-residence for taxation purposes in 2003? What system of checks is in place generally for a given tax year?

Mr. Daly

Most of those of interest to us in this context are high-worth individuals whose details are now handled by our large cases division. During the course of this year, that division is undertaking a number of audits of individuals who have claimed non-residence. We are using this process to test our ability to verify claims of non-residence and qualification for such status. Members may be aware that I have been asked by the Minister to report to him on our ability to monitor claims to non-residence. I expect to do so before the end of the year when the audit programme has been evaluated.

Deputy Fleming

I wish to focus on this issue because it is one that concerns many people. The public observes some of these wealthy individuals jetting in and out and there is concern that they are not paying tax. Mr. Daly may be able to enlighten us in this regard. Consider, for example, a person who divides his or her time equally between Ireland, Britain and another location on the Continent, spending some 100 days in each and having non-resident status in all. Where are such people caught if they spend no more than six months in any country? I understand that similar non-residence rules apply in general throughout the OECD. There may be slightly different rules in the United States. Is it possible that a person who has a home in two or three places can be non-resident in each of those locations?

Mr. Daly

It is theoretically possible but it does not happen in reality. Everybody must have a home or base somewhere. The majority of such persons base themselves in low-tax regimes. I do not agree that there are many people who are resident nowhere although I cannot be certain about this. One would have to trace the individuals and their interactions with other jurisdictions and tax administrations, which is something we have not yet done to any great extent. By and large, if such persons do not see Ireland as attractive because of our tax regime, one can be sure they will go somewhere with a more favourable system.

Deputy Fleming

There are concerns that people need only tick a box on a form to claim non-residence. Mr. Daly spoke about the Revenue Commissioners' review of its ability to verify claims to non-residence. What evidence do they ask of those who claim such status to support their claims?

Mr. Daly

The onus should be on the taxpayer to verify his or her status. During the audit, we have asked - and will continue to ask - those claiming non-residence to offer proof. A person claiming to be outside the State for more than 183 days in a year must produce evidence of this, including receipts, credit card statements, travel plans, diaries and so on.

I do not want to say that the system works satisfactorily from our point of view. I prefer to await the evaluation from our large cases division. For a person who claims non-residence, the consequences for them of not meeting the criteria are extremely serious in terms of their exposure to additional taxation. Most of them take it seriously and monitor their movements carefully. Information which may be anecdotal suggests that at least one person has an entourage member whose sole function is to make sure the residence rules are not breached.

Deputy Fleming

Why has it taken until now for this issue to be examined?

Mr. Daly

It is not the case that this issue is only now being considered. It has taken up to now to examine it in a focussed way and to deal with individuals in comprehensive manner. The large cases division is partly our own initiative but is also a mirror of what has happened in more progressive tax administrations in recent years.

Deputy Fleming

Do the Revenue Commissioners expect to have that report by the end of the year?

Mr. Daly

The Minister has asked me to report but has not given me a deadline because he understands that when we report, we must do so on the basis of valid facts.

Deputy Fleming

Will the report be available to the committee at that stage or will it be confidential within Mr. Daly's own operation?

Mr. Daly

The Deputy may have to put that question to the Minister.

Deputy Fleming

The committee members could ask Mr. Daly to make a report to them.

Mr. Daly

I will write to the Minister. As the Deputy noted, I am sure I will be back before this committee again.

Deputy Rabbitte

I thank Mr. Daly for the efficient collection of so much money with which to run the country. I want to discuss the list of yields from the special investigations which he read out. When I think back to the number of times over the years that I was told there was no serious tax evasion and no pot of gold out there, in some cases by Mr. Daly's more distant predecessors, I do not know whether to laugh or cry. However, it appears that a good job is now being done.

After the €822 million that Mr. Daly mentioned in respect of the bogus non-resident account investigation, the next biggest figure, of €769.5 million, is for the yield from the offshore assets investigation. That seems to be an extraordinary haul. This may be naïve, but one cannot presume that it was money which was salted away outside the country. Could some of it have been the proceeds of legitimate business transactions which perhaps were not fully exposed to tax?

Mr. Daly

I am unsure whether I am picking up the Deputy correctly. In the main, the yield of €770 million came from underlying income that had not been declared for taxation purposes. It could have been and, indeed, in some cases was, income that had been declared for tax here but that had been placed offshore and which had earned interest offshore for which tax had not been paid. However to my mind, the bulk of the money that funded those offshore accounts was undeclared income, money taken out of businesses, or funds and inheritances that were simply not declared.

Deputy Rabbitte

Almost by definition, are we referring to high net worth individuals?

Mr. Daly

I do not know whether that is necessarily a conclusion to which one could come if one examines the average yields over the years from the various investigations. We can take the total yield divided by the number of cases that paid the money as a fairly crude measure. In the offshore account investigation, the overall average paid to us was €51,000, including both big and small cases.

It is interesting to break it down further. At the outset, I mentioned the 254 trust accounts held in a Bank of Ireland subsidiary in Jersey. The average amount paid in respect of those accounts was €414,000. We have now identified and are pursuing approximately 40 additional accounts. Certainly, the trusts in Jersey involved big money and it would be reasonable to conclude that some high worth individuals were involved. However, if one looks beyond that to the totality of the offshore investigations, the average comes down. Hence, it probably depends on one's definition of high worth.

Deputy Rabbitte

These people had the opportunity to avail of one amnesty or another but did not do so.

Mr. Daly

I think so. They certainly had the opportunity to avail of the 1993 amnesty and it is most likely they would have had the opportunity to avail of the 1988 amnesty.

Deputy Rabbitte

Has Revenue any figures regarding cases where it has managed to get behind individuals who did avail of the amnesties and who came to its attention for some reason? Has there been a significant number of such cases or can they be counted on the fingers of one hand?

Mr. Daly

As the Deputy is aware, we have had this discussion with this committee before. It is quite difficult for Revenue to get behind the amnesty because, in effect, the legislation created a Chinese wall between ourselves and the chief special collector, who was responsible for dealing with the amnesty. While I had some figures available for an earlier sitting of this committee, I do not know whether I can retrieve them quickly.

Over the years, something like 320 amnesty certificates have been displayed to us in the course of inquiries and investigations. As the Deputy is aware, the general approach is that if an amnesty certificate is shown, Revenue should normally back off and assume the individual in question had regularised his or her affairs under the amnesty. However, a mechanism exists to apply to the appeal commissioners seeking permission to look behind an amnesty certificate, if it is suspected or if we are reasonably satisfied the certificate did not cover all the tax evasion or tax moneys undeclared by the individual. I believe we have tried to do so in approximately 14 cases. These figures may not be absolutely up to date, but in approximately 14 cases we applied to the appeal commissioners and in six of them we were granted permission to look behind the amnesty certificate. In those cases, we reopened the investigations and we secured additional yields. In other words, these people had availed of an amnesty but did not make a full declaration under its terms and so we followed through and secured additional yields. However, I do not have figures in that respect.

Deputy Rabbitte

As far as the comprehensive audits are concerned, in the main are we talking about information that Revenue came across while examining the bogus non-resident account issue? Did issues other than those specifically regarding DIRT arise as a result of the Revenue Commissioners' investigation?

Mr. Daly

By definition, comprehensive audits are those in which we examine all the tax heads in respect of a particular taxpayer. The subjects are selected on the basis of a considerable number of criteria, including cases identified during the special investigations. In addition, each tax district stratifies its taxpayer population into risk categories.

At present, we are rolling out a new computerised case selection system, escort. It is populated with a considerable amount of data that we know about taxpayers and it then produces cases for examination on the basis of risk rules. Moreover, each district is always pro-actively gathering intelligence by reading the newspapers, listening to stories of extraordinary gains in business dealings and screening the ordinary income tax returns and corporation returns. All these criteria feed into the selection of cases for comprehensive audit. As I stated, comprehensive audits are those to which we pay most attention and which produce the highest yields.

Deputy Rabbitte

If one judges from the figures to hand, many of them appear to have arisen from the DIRT examination. Is that fair?

Mr. Daly

I believe so and I believe I have the relevant figures. While I do not have separate figures for comprehensive audits, the total figure of 16,231 audits for 2004 includes just over 2,000 audits which started with an investigation of a bogus non-resident account but which then went into other issues. A further 817 audits started with offshore accounts declarations and then proceeded into other areas.

Deputy Rabbitte

I want Mr. Daly to confirm that I am reading correctly table 8 in the Comptroller and Auditor General's report, which pertains to the yield from comprehensive audits. For example, if one takes the category that yielded over €1 million, 27 individuals yielded more than €145.5 million and ten corporation tax audits contributed €31.5 million. Do the total figures of 3,502 and 556 represent the total number of audits for income tax and corporation tax, respectively? Do the figures 264 and 308, respectively, represent audits where no additional tax was due? Subtracting 308 from 566 corporate audits leaves one with a figure of approximately one-half or 40%, which were found to have additional liability. Is this interpretation correct?

Mr. Daly

Yes, that interpretation is correct. These are comprehensive audits. The total audit figure is 16,000 so one would need to return to table 7 for that.

Deputy Rabbitte

It is a large rate.

Mr. Daly

It is but those audits are largely targeted. We generally carry out considerable risk analysis and profiling before we carry out a comprehensive audit. We expect these cases to be risky and to get a yield. A total of 56 cases in the overall audit programme in 2004 had yields of over €1 million. The two highest published cases involved a yield of €2.98 million from a corporate case and a yield of €6.4 million, which was the highest income tax published settlement, both of which began as bogus non-resident account cases. These investigations are not simply concerned with collecting the figure of approximately €2 billion that we have collected; they are also concerned with giving us avenues into other cases of tax evasion and revealing other insights which we can follow through.

More importantly in the long run the fact that we show we follow through and our determination gives us a compliance bonus that we cannot quite identify in figures. We receive what one of my colleagues called the credibility bonus along the way. Compliance improves every time we mount an investigation.

Deputy Rabbitte

Is this true of the building industry?

Mr. Daly

I gather we will have a session about the building industry. There has been considerable activity on building sites in the past year and there are problems with tax compliance in the construction industry, which has experienced a boom. We have carried out a number of measures. During certain years, special investigations are carried out into particular sectors, such as insurance or offshore accounts, and next year will be devoted to the construction industry to a certain extent. We expect to devote considerable resources to on-the-ground activity, including audits.

Deputy Rabbitte

Is the year in question 2006?

Mr. Daly

It has happened in 2005.

Deputy Rabbitte

The Revenue Commissioners have visited a relatively small number of building sites this year in, for example, Dublin.

Mr. Daly

I did not bring the briefing material on the construction industry with me because I thought we would deal with it at our next meeting with the committee. There is a broader picture of activity in the Dublin area, which is not reflected in just 35 site visits. If I could locate some material, it would do no harm to possibly put it on the record.

Deputy Rabbitte

What does the line in the Comptroller and Auditor General's report about random audits not being carried out in 2004 because of the change in Revenue strategy mean? Does it mean that the Revenue Commissioners are doing something better or is it a euphemism for the Revenue Commissioners being too busy with special investigations and other matters?

Mr. Daly

Special investigations take up a considerable amount of our time. It arose generally from very detailed discussions with this committee over probably the last two years about random audits. It emerged that what we were classifying as random audits were not really random. We were driven by a need to make the best use of our resources. Every auditor wishes to get a yield from every audit so we fell into a practice of having targeted random audits, if I can use that phrase. We had a long discussion with this committee, particularly Deputy Curran, about the value of this and the conclusions we could draw from it. We all acknowledge that if a random audit is targeted, it is not possible to draw the type of conclusion we want.

We agreed last year to park the existing random audit programme and introduce a more sophisticated and truly random audit from which conclusions could be drawn about the levels of compliance and the effectiveness of our screening operations. This is why we parked our original random audits and why we are doing 400 truly random audits this year. We will be able to draw conclusions from these audits over time.

Deputy Rabbitte

I have been a member of this committee for some time but I have never heard of participation privilege until recently. What is participation privilege in Revenue parlance?

Mr. Daly

It is something that has been abandoned. I am not au fait with it because it has not been a feature in the Revenue Commissioners in recent years or during my time with them. I would prefer if I could send Deputy Rabbitte a note about it unless there an expert on it here.

Deputy Rabbitte

It is not operated anymore?

Mr. Daly

No.

Deputy Rabbitte

If I was to apply to the Revenue Commissioners to bring a considerable sum of money back to Ireland from abroad to create employment, I would not be able to plead participation privilege?

Mr. Daly

We would love if Deputy Rabbitte were to bring back money to create employment but this would no longer be the particular incentive. I can send the Deputy a note on the matter.

Deputy Boyle

I welcome Mr. Daly to the meeting today. I saw a property hoarding on Thomas Street on my way to the Dáil today. It was from a fairly reputable auctioneer, displayed on the upper floors of a building and stated that full planning permission had been given for three apartments. The hoarding contained the words "no social or affordable", which is not very grammatical but is presumably a coded reference to no riff-raff. The last line of the hoarding contained the words "loads of tax relief", which was not even slightly euphemistic. Does Mr. Daly believe this particular use of the taxation system to promote the various property tax relief schemes is appropriate?

Mr. Daly

It is a very tricky question for me to answer. As Deputy Boyle knows, tax reliefs are a matter of policy which I cannot comment on.

Deputy Boyle

This concerns applications and how they are promoted.

Mr. Daly

There are no restrictions, in so far as the Revenue Commissioners are involved, about how they are promoted. We may have personal views about whether it is appropriate but there is nothing in the tax system that precludes people from advertising these tax reliefs in an aggressive way. Tax reliefs are policies initiated for particular social or economic reasons and it is reasonable to advertise them to ensure the success of the scheme. The Advertising Standards Authority of Ireland might be the expert about whether the particular wording or placing of the hoarding in question is appropriate.

Deputy Boyle

This leads to my next question. Is it a breach of advertising standards to talk about "loads of tax relief"?

Mr. Daly

I do not think it is a breach of advertising standards. Tax relief is a reality. Questions might arise if the way in which it is advertised is offensive or misleading, for example, if the fact that it is placed beside the reference to no social or affordable housing is offensive to some people. I cannot make any further comments on this issue.

Deputy Boyle

I am asking by way of a preamble because there is an ongoing policy debate about the effectiveness of tax reliefs and what they cost as tax expenditure. The Department of Finance indicates the figure is approximately €500 million every year on specific property tax reliefs. The construction industry would argue that the increase in construction itself brings about additional taxes in terms of employment taxes and VAT. Have the Revenue Commissioners made any measure of whether this has happened? Is there a balancing sum?

The Comptroller and Auditor General's report mentions €200 million in unpaid taxes in the construction industry and there are further comments about unpaid pension contributions. Is someone doing a balancing audit regarding what is coming in from the construction industry as opposed to its tax liability?

Mr. Daly

From Revenue's point of view, one must start with the fact that we will not have really detailed material on the cost of these tax reliefs in terms of tax foregone until next year. As the Deputy knows, we started this process last year and, in some cases, provision was made for it in the Finance Act 2005. We have been collecting much of this data in respect of 2004's tax returns, which are due either in October or November of this year, and we will analyse it as soon as we possibly can. The data will be made available as soon as possible.

At times, we can work out figures for the tax yield from a particular sector, construction or otherwise, and the increase from year to year. I cannot speak for anywhere else but, in Revenue, there has not been any attempt made to balance the books, as it were. To measure the value of tax reliefs or incentives solely in terms of the tax foregone minus or plus the additional tax created in the construction industry would be a rather narrow approach. They were established for a reason. I will not get into the relevant policy as it is not for Revenue to decide what or when tax reliefs are applied. They are set up for good social and economic reasons and many of them have delivered in this respect.

Deputy Boyle

I do not disagree. This committee is concerned with figures and one of the elements in deciding whether reliefs are effective is the lack of cost benefit analyses prior to their introductions, as they are proceeding and when they finish.

Mr. Daly

Studies were carried out on some of them a number of years ago. In the current debate, there seems to be common cause about making a greater attempt to do cost benefit analyses. However, this issue is under discussion in the context of the review of incentives and reliefs and is included in the budget and Finance Bill process. I cannot comment on it.

Deputy Boyle

Before leaving this area, it seems that Mr. Daly has an expectation that the building issue will arise at a further meeting. We have an item of correspondence from a chartered accountant. Will it be dealt with today or held for a future meeting?

Vice Chairman

It is relevant to the chapter to be discussed at the next meeting. We have other chapters to deal with before the end of the year.

Deputy Boyle

I understand and am prepared to hold back on today's correspondence. I will ask a few questions about Mr. Daly's statement to cure my curiosity as much as anything else.

Vice Chairman

The Chairman has indicated he will have that information at another session.

Mr. Daly

If I could go back to Deputy Rabbitte's point about the 35 site visits in Dublin. I would hate for the committee to think this is the full record of the past year's interventions in Dublin in the construction industry. Certainly, there were 35 site visits but there were 1,650 compliance checks in the first six months of this year. Dublin has set up a Revenue district specifically dedicated to dealing with high risk construction industry cases. The district has completed 80 audits so far this year and its yield has been €4.5 million in tax, interest and penalties.

Many other investigations of high risk cases are taking place in Dublin. In one district alone of the six Dublin districts, 300 relevant contracts tax field audits were completed in the first half of 2005. This is not the full story but it has been replicated right across Revenue. For example, the division in the south east dedicated well over half of its audit activity in 2005 to the construction industry. We are getting good results but there are compliance issues, on which we can go into more detail.

Deputy Boyle

To respond to that and ask one more question on the building area before moving on to the opening statement, Mr. Daly cited 2006 as the year in which the Revenue Commissioners will pay particular interest to the construction industry. Given the figures he has just mentioned, to what extent does he believe the scale of activity will be upgraded? Will it be doubled?

Mr. Daly

The process of doing our business planning for 2006 is at an advanced stage. I expect that at least 20% or 25% of our audit resources and interventions in compliance will be focused on the construction industry next year. It is part of Revenue's new approach, namely, there will be a sectoral approach from year to year depending on the risk we identify in particular sectors. This year, we are focusing for a time on the fishing industry and have brought in a good yield. We focused on hairdressing in certain areas and got a good yield. We focused on events and concerts and got good yields. It is a new approach to a certain extent. We take a sector, identify a risk, put resources into it, get a result and move on to something else. Unfortunately, there will always be something else to move on to.

Deputy Boyle

I thank Mr. Daly for avoiding the word "catch" when referring to the fishing industry.

Mr. Daly

We did some trawls.

Deputy Boyle

The sentence in the opening statement dealing with the Ansbacher investigation states, "Progress on this investigation is painstaking but continues to yield results". What are the factors prolonging this and what is Mr. Daly's definition of "painstaking"?

Mr. Daly

"Painstaking" means this examination has been ongoing for several years. A total of 289 court cases are involved in the Ansbacher investigation. To date, 147 of these have been concluded and 72 have paid us approximately €42 million. A total of 45 are non-resident and are covered by double taxation agreements and, ultimately, paid us nothing. However, we still needed to go through the process of verifying that. A total of 25 had no additional liability and five successfully claimed the amnesty.

In another 28 cases, people have paid us money on account and we are working these to conclusion. A hard core of cases is difficult in that we must make extensive use of High Court orders against financial institutions and third parties to extract the data we need to pursue the matter. It is painstaking in the sense that it is like drawing teeth. It is painful for us now but will be painful for them eventually. This is not an investigation we intend to back away from no matter how long it takes. We are making progress and every couple of months yields another case where we make a breakthrough. I will not go into this now but, in one or two cases, if we make a breakthrough in terms of the core issue in the case, it could lead to settlements in many other cases.

Deputy Boyle

My final question seeks confirmation. Concerning the offshore assets investigation, am I to understand from a reply Mr. Daly gave Deputy Rabbitte that 254 people initially came forward but that Revenue has identified those who did not and is pursuing them? Did Mr. Daly mention a figure of 2,000 being investigated regarding offshore assets or did that figure refer to another investigation?

Mr. Daly

In the first phase of the offshore assets investigation, the voluntary disclosure phase, 13,473 people made voluntary disclosures, paying €769 million. That phase led to knowledge of 300 trust cases in Jersey. This first tranche was our first breakthrough and it started the investigation into offshore accounts. Some 254 of those trust cases came forward in the voluntary disclosure scheme and we are chasing up the rest. All accounts in that tranche have been identified and those who did not participate in the voluntary disclosure scheme are being contacted.

Deputy Boyle

What is the status of the other financial institutions? Of those identified, which ones have come forward and which ones have not?

Mr. Daly

Six High Court orders have been served on financial institutions requiring them to provide us with details of offshore accounts. We are receiving this information and will contact the people concerned. Before the end of the year we will have sought High Court orders against the remaining institutions. I hope that by the end of the year every institution that must give us information will be doing so. We will follow up on those cases in this continuing operation.

Deputy Curran

I welcome Mr. Daly and I have only a few questions. A figure of €770 million has been calculated in respect of offshore accounts. Deputy Rabbitte asked about the average yield and whether the individuals concerned were of high financial worth. Mr. Daly responded on the 254 cases in Jersey and it is likely that high worth individuals with assets offshore would not hold them in the institutions the Revenue Commissioners are investigating. It is likely the offshore assets are held in institutions with no Irish base. Has any progress been made outside the institutions on which court orders have been served?

Mr. Daly

Some holders of offshore assets would have these in institutions as described by Deputy Curran but a sense of loyalty to Irish-based institutions has emerged from our investigation. A sizeable amount of the money involved is in Irish institutions.

Deputy Curran

Mr. Daly makes the statement based on what we know is held in Irish institutions. As we do not know what is in the offshore institutions, is there any way of determining how much might be involved?

Mr. Daly

I make the statement not solely on the basis of knowing what is in Irish institutions but also on information from material we come across in some of these investigations. We follow the money trail in our inquiries and investigations and while it pointed to some money in non-Irish institutions, I believe the bulk of it was in Irish-based institutions.

We cannot use existing revenue or tax laws of this State to investigate institutions without an Irish base. However, a number of developments have taken place internationally. There is an increasing level of co-operation between tax administrations worldwide with mutual assistance and engagement that allows us to get information from our colleagues in other administrations. Two legislative developments have assisted this effort. The savings directive within the EU requires the exchange of information between member states. It facilitates the exchange of information on returns of interest earned by those resident in member states to the authorities of the member state where the interest was earned and the exchange of that information with authorities where that individual is resident.

The OECD has sponsored the idea of tax information exchange agreements with what were traditionally tax havens. Although this process is slow, it is advancing and I understand one country has signed a tax information exchange agreement with a country traditionally regarded as a tax haven. The latter is making great efforts to regularise its affairs. There is no immediate answer to this but contact, information exchange and mutual assistance are growing.

Deputy Curran

Is the Office of the Revenue Commissioners pursuing this or is it a closed shop?

Mr. Daly

Yes, we are pursuing it and it is not a closed shop. We are pursuing it because it may assist in investigating cases of tax evasion. The Revenue Commissioners are not responsible for introducing issues of equity about Irish financial institutions, but in application of the tax code we do not like to isolate any particular group or sector. The level of international co-operation is encouraging and external events have facilitated this. Findings on the financial resources behind the terrorist attacks of 11 September 2001 and other attacks have led to a tightening of financial controls and increased and enforced co-operation between institutions. All of this is grist to our mill. The introduction of money laundering reports and suspicious transactions reports, which are now almost worldwide, leads to a considerable amount of information and co-operation. We analyse this information and follow up on it when we can.

Deputy Curran

Moving on to the opening statement in respect of prosecutions for serious tax evasion. Mr. Daly stated that 78 cases are in the pipeline at present. The following issue has come up in this committee over the years. Has anyone been prosecuted for aiding and abetting tax evasion?

Mr. Daly

There was one prosecution several years ago of which I do not have details. An accountant was convicted of aiding and abetting tax evasion. In this committee we have discussed the difficulties we had in successfully prosecuting charges of aiding and abetting because of the narrow manner in which the legislation was drafted. Last year we made proposals to the Minister for Finance and in the Finance Bill 2005 he has broadened the definition of the offence. It is now an offence if a person is knowingly concerned in the fraudulent evasion or attempted fraudulent evasion of tax by the person or any other person, is knowingly concerned in, or is reckless as to whether the person is concerned in, directly or indirectly facilitating the fraudulent evasion of tax by any other person.

That is a broader definition and gives us a fighting chance of prosecuting cases. This definition will only become law after the Finance Bill 2006 is passed but we examine every case to see if we can make a charge of aiding and abetting. It is prospective legislation but if the offence has taken place we would like to prosecute it.

Deputy Curran

The legislation takes effect from that point so it is an offence we will see prosecuted in the coming years.

Mr. Daly

I would hope so. There are no cases at present and we must bear in mind that the offence of tax evasion will have to take place after the Finance Bill 2006 is enacted if we are to use this legislation in respect of aiding and abetting.

Deputy Curran

Do the Revenue Commissioners feel it is operational and practical?

Mr. Daly

They do. It is a question of getting the cases that fit the bill for it. Some of the professional bodies are not comfortable with it, which probably means that we are.

Deputy Curran

I fully appreciate that it is early to be given this information and I am pleased to see progress made in truly random audits. The first figures given by Mr. Daly indicated that approximately 20% or 25% of the 130 cases examined had an outstanding tax liability. Was that in line with expectations?

Mr. Daly

I am not sure if I had any expectations in terms of what it would deliver.

Deputy Curran

It is approximately one in four. I appreciate the sample is small and incomplete.

Mr. Daly

It is small and incomplete. In 1998-99 prior to targeting random audits, approximately 20% of audits yielded liabilities. That figure increased over the years as we targeted cases.

Deputy Curran

As one would expect.

Mr. Daly

With a health warning, this seems to be back in line with results from truly random audits conducted in 1998-99. I do not want to flag an expectation. We will see what is yielded from it.

Deputy Curran

I raise this issue because one in four persons or entities audited has some type of tax liability, regardless of size, which brings into question the broader concept of compliance. If one in four people is not compliant, the next step must be to discover the underlying cause. One incorrect return in four of all the companies and individuals making returns is a large number.

Mr. Daly

That is if one in four turns out to be the ultimate figure. One must also consider what makes up the €300,000 yield. It may include one large settlement.

Deputy Curran

I was not considering the figure, I was examining——

Mr. Daly

It would mean that the yields from some of the other cases were extremely small. It would be a challenge if the figure turns out to be one in four, and a particular challenge if it continues to be one in four after we analyse these results and have considered the type of evasion that occurred, what we can do about it and how we can factor it into our risk programmes. We want to establish a benchmark from which to see significant improvement in the future.

Deputy Curran

The committee should be kept informed on that because it is interesting.

Deputy Dennehy

I welcome Mr. Daly. The other side of the issue regarding random audits is that previously we argued that the Revenue Commissioners took the easy option in many cases and dealt almost entirely with compliant taxpayers. The focus was on people within the net. That is the reason for the Ansbacher and offshore accounts and other scams. We found the Revenue Commissioners concentrated on easy targets. I appreciate it is ridiculous to call what were conducted random audits because they were targeted. One immediate result of the change is that the figure of one in four will become one in ten or one in 20 because innocent people will also be included. The benefits reaped will include getting a measurement of real compliance.

I am concerned that the situation will return to compliant taxpayers being put through the mill and further scrutinised, which was the easy option taken for many years. Potentially large catches were not included and we discovered that in the past the wrong group of people was targeted. I appreciate the point made by Deputy Curran and that the reason for returning to random audits is to obtain an overall measurement. The Revenue Commissioners should bear in mind that it should be balanced.

The details on write-offs include a small amount of pre-1990 figures for income tax. Is it realistic to discuss bills or accounts that are 14 or 15 years old? I realise the Revenue Commissioners want to keep these cases live because a person might win the lottery but is there a practical reason for keeping old accounts on the books?

Mr. Daly

I will answer those two questions. On the issue of compliant taxpayers, the focus of our approach is to analyse the risk so when we tackle someone in an audit or for another reason, we are focused on the fact that he or she has been identified as a risk. For the most part the people we audit are not compliant. This is apart from the truly random audits which amount to approximately 400 cases each year. That is not a large number.

Deputy Dennehy

I wish to clarify that I am discussing the new procedure that will be in place in 2006. I am concerned with the new random audits. I presume a person's tax number will come up like a lottery number. If a person's number comes up, they will be audited.

Mr. Daly

It is completely random and is selected by computer. By definition, compliant taxpayers will be included and that cannot be avoided if it is to be truly random. We will make it as easy as possible. If we begin an audit because a person was selected at random, and it is obvious within the first hour that they are entirely compliant, such as a little old lady who won the lottery, we will not persist and cause difficulties. That would be a waste of resources and would create bad publicity. We would be sensitive but we must begin with truly random audits and follow them through. I might win that lottery myself and be selected.

Deputy Dennehy

Do not give up the day job.

Mr. Daly

On the question of write-offs, table 6 of the Comptroller and Auditor General's report explains how old the debt is. A total of €16 million is due from periods earlier than 1990-91. We do not want to keep it on the books but much of it is debt that has been examined, is at enforcement stage and we believe a realistic prospect exists of recovering it. A realistic prospect of recovery is considered possible when we believe the individual or entity can pay but will not do so. If someone has the ability to pay what they owe us and will not, it is not fair to other taxpayers to walk away from it. Most people with old debt can pay but simply will not do so.

Deputy Dennehy

We had to recommend changes before to Ministers and have asked if more resources are required. Surely a procedure must be available to prevent someone from avoiding paying money owed for 14 years. It is a total of €16 million.

Mr. Daly

That figure is reducing all the time. Our ambition is that next year nothing should be owed from prior to the previous five years unless it is at enforcement stage or in court. The extent of enforcement activity by sheriffs, solicitors and attachment is whittling down that figure.

The activity we have had on debt reduction in the last four or five years is quite extraordinary. The trick with debt is to tackle the young element and perhaps we have not always been successful in that regard. Each year we collect 99% of current debt and do not let it build up anymore. The approach is to ensure that the current debt does not build up while gradually whittling back the historic debt that is in court or at enforcement.

Deputy Dennehy

Could Mr. Daly explain the figures for income tax? I appreciate that the figures exclude PAYE workers, but I do not understand the variation between years. For example, outstanding tax in 2004 was €2 million, while the figure for 2003 is €69 million. Where does most of this outstanding debt come from? There is a major variation between 2003 and 2004 in what is owed. Why is that so? Was 2003 a bad year?

Mr. Daly

I think it is a reflection of the fact that it is a more current year. We are looking at tax outstanding for 2004 in the context of what is outstanding at March 2005, whereas for the previous year, we are looking at a year later. In other words, there is a year's additional collection activity reflected in the figure.

Deputy Dennehy

If Mr. Daly were to return next year, would the figure for 2004 be higher than the current €2 million?

Mr. Daly

The figure will be lower because we will have had a year of collection activity. However, there will be another figure for outstanding tax for 2005. I am not sure if I understand the question being asked.

Deputy Curran

: Does the fact that, by March 2005, there was only €2 million outstanding for 2004 mean that Revenue was very efficient in collecting current tax in that year?

Mr. Daly

I think that would have a lot to do with——

Deputy Curran

: There is very little that has not been collected.

Mr. Daly

My colleague has advised me that there will be charges added on to the 2004 figure. In other words, 2004 has not matured yet in terms of the tax charges that would accrue at the end of the year.

Deputy Fleming

Is that a tax year or a calendar year?

Mr. Daly

A calendar year, as I understand it. I am sorry, I may have misled the Deputy. I was referring to €292, which is the total figure.

Deputy Dennehy

Yes, but €212 of that is carried over. There are two sets of figures, one is the amount outstanding for 2004 of €2 million and the other the amount outstanding for 2003 of €69 million. No matter how one goes about arriving at those figures, there seems to be an anomaly.

Mr. Daly

I think the answer is what my colleague has pointed out to me, that is, the amount outstanding for 2004 will be added to as assessments are sent out and as people whom we know should pay their income tax do not do so.

Mr. Purcell

I may be of help in explaining this further. The figures were arrived at using information provided by the Revenue Commissioners. The rate of compliance in terms of returns is somewhere around 80% for 2004. Ultimately, on the basis of experience, Revenue will get up to 98% or 99% compliance on returns. When those returns come in, I would be surprised if the figure of €2 million is lower next year. I expect it will be higher in respect of the year 2004. It is simply the case that all the bills are not processed, in a sense. I hope that is of some help. It is somewhat confusing but I hope I am right in what I have said.

Mr. Daly

I think I misunderstood the question. The figure for 2004 has not matured yet.

Deputy Dennehy

I have a query relating to the special savings incentive scheme. While I am wary of dabbling in policy issues, it troubles me somewhat that often when a policy decision is taken, it is examined in a negative rather than critical light. Some comments on the SSIA scheme have upset me in that context. This is an incentive scheme to encourage people, particularly the young, to save. We all realise that with younger people, it is often a case of spend whatever one has today.

Several critics scoffed and argued that the SSIA option would only be taken up by very wealthy individuals and not by young people. The former Minister for Finance and Deputy, Mr. McCreevy, said in the Dáil that he would be happy to see the scheme maximised, resulting in significantly more savings and, therefore, greater costs. I remember him saying that essentially he could not put a figure on the cost, but the greater it was, the more successful the scheme. The scheme is now being criticised because the estimated cost is rising but I believe it has been one of the greatest success stories.

My query relates to distribution of income levels with regard to the SSIA scheme. At the time of its introduction, critics argued that the option to join the scheme would only be taken up by very wealthy people. In fact, approximately 77% of participants in the scheme earn less than €50,000 per annum. Is that correct? The figures indicate that 50% of participants earn between €20,000 and €50,000 and approximately 28% earn less than €20,000. Am I correct in my interpretation?

Mr. Daly

That is correct and over the years, since 2002, that pattern has not changed. Approximately 28% of participants have incomes of less than €20,000 and a further 49% have incomes of between €20,000 and €50,000. This means that 77% of participants have incomes of less than €50,000 per annum.

Deputy Dennehy

In that context, do the representatives from the Department of Finance believe the scheme is a success? I appreciate that they will not want to discuss policy issues, but did the scheme achieve its objectives? The Comptroller and Auditor General is concerned that the scheme may have an impact on inflation. Is there any downside to the scheme? We all appreciate that there will be a cost to the Exchequer, which was factored in and the Government is quite happy to bear the 25% interest cost. Can the Department representatives identify any downside to the scheme now?

Mr. Barry

Far be it from me identify a downside to a scheme introduced by the Oireachtas on the proposal of our former Minister for Finance, Mr. McCreevy. The scheme was set up to encourage people to save and thereby take money out of the economy. To that extent, it has achieved its objective.

Deputy Dennehy

Mr. Barry does not appear to see any downside apart from the cost to the Exchequer.

Mr. Barry

No scheme is perfect.

Deputy Dennehy

It appears to me that the scheme is being examined in the context of trying to find negatives. I am anxious that we would continue with some type of initiative that encourages young people to save rather than spend. We are concerned about expenditure on mortgages, for example. We must do something to balance that expenditure.

There are more than 1 million SSIA accounts, of which 450 were disqualified since the scheme commenced. Is this the lowest level of disqualification of any tax related scheme to date? Do any concerns exist in terms of the 450 disqualifications for what, I presume, were technical reasons?

Mr. Daly

The Deputy mentioned the age profile of subscribers, of whom approximately 18% were under 29, 25% between 30 and 39 and 23% between 40 and 49. By and large, the scheme has been loaded towards younger subscribers.

In terms of the 450 disqualifications, monitoring of this scheme was conducted by financial institutions and we oversaw that process. The institutions have reported 700 cases of non-compliance with the rules. When we examined those cases, 450 contravened the rules and were ceased. In a majority of these cases, contributions were not maintained as required, particularly during early stages. Age guidelines were not met in a small number of cases. There appears to have been general compliance with the scheme. We have carried out compliance checks with financial institutions but have not found any significant attempts at creative thinking with regard to the scheme.

Deputy Dennehy

That is possibly because the majority of the people involved are PAYE workers who are used to being tax compliant. The scheme's estimated annual cost to the Exchequer was €127 million. Does Mr. Barry believe that it would have been impossible to forecast its true cost?

Mr. Barry

With the benefit of hindsight, it is easy to see what has happened. The costing was done on the basis of various assumptions and projections.

Deputy Dennehy

It is similar to the guesstimates made for other projects, the costs of which triple over the ensuing 15 years. If the critics had their way, this scheme would have cost a fraction of what it did because the uptake would not have been significant.

Mr. Barry

If it was not taken up, it would have obviously cost less.

Deputy Deasy

When Mr. Daly appeared before this committee on a previous occasion, a number of us raised the issue of strengthening the law with regard to aiding and abetting. I thank him for subsequently including that issue in the Finance Act. Have any prosecutions been made under the provision with regard to aiding and abetting tax avoidance or evasion?

Mr. Daly

There have been no prosecutions to date but, as the Deputy said, the law was strengthened in the Finance Act and the definition of the offence was broadened to include being knowingly concerned with facilitating the fraudulent evasion of tax or being reckless as to whether a person is facilitating such evasion. That definition gives us a fighting chance but it has only been in place since April. We examine each risky case with a view to using this power. While there are no cases as yet in the pipeline, I hope that we will make use of the provision in the future.

Deputy Deasy

I know that it is dangerous for someone in Mr. Daly's position to comment on policy. He is, however, involved in devising Finance Bills and works with the Minister for Finance. A debate has been ongoing in this committee and among members of the public with regard to the costing of provisions. The Comptroller and Auditor General claimed that a problem exists in terms of this committee's work in that we investigate matters retrospectively. It has been suggested that, in addition to the Estimates compiled by the Department of Finance, an Oireachtas body should be established to compile a second set of Estimates for provisions. We recently visited the congressional budget office in the United States, although we did not visit the joint committee on taxation, and the idea is to establish a similar entity here. I know that is not necessarily Mr. Daly's remit but, given that he is involved with legislation such as the Finance Bills, does he have an opinion as to the efficacy of such an entity?

Mr. Daly

That is deep water for me to get into. I find it difficult to comment on the matter because it definitely lies within the political arena. All I can say is that, if the Oireachtas decided to make that type of approach, Revenue would offer its full co-operation in producing facts and figures.

Vice Chairman

That will have to do.

Deputy Deasy

I have one more question which concerns the changing times in Ireland and prosecutions by the Revenue Commissioners. There have been 91 convictions relating to customs and excise and vehicle registration tax offences. Have the number of customs and excise offences increased or decreased over the past few years? I ask because items are becoming more expensive and costs have become a big issue. Is the black market expanding?

Mr. Daly

The numbers of prosecutions are increasing, although it is not fair to make generalisations in this context. In terms of the black market, we have particular concerns about two issues. The first is the sale of laundered oil, an issue on which we have been very active for a number of years. This morning, the International Monitoring Commission made a recommendation in terms of Northern Ireland that particular focus be directed at this activity. We have pursued people who use laundered oil and, in 2004, convicted five people who were involved in the laundering of oil in this jurisdiction. In the same year, we brought 149 prosecutions against users of marked or laundered oil.

The second issue about with which we are particularly concerned is tobacco smuggling. In 2004, we made two convictions involving jail sentences and 87 convictions for ordinary smuggling, which could involve bringing suitcases through Dublin Airport.

Deputy Deasy

How does that compare to previous years?

Mr. Daly

In 2004 convictions for the misuse of marked gas oil was 149, it was 145 in 2003 and 158 in 2002. There were 87 convictions for cigarette smuggling in 2004, 70 in 2003 and 42 in 2002.

Deputy Deasy

So that has almost doubled?

Mr. Daly

Yes, and the figures for 2005, up to the end of August, are also interesting because misuse of marked gas oil is 127. Therefore, eight months in to the year it is almost at the total figure for last year. Cigarette smuggling up to August is 65, compared to 87 in total for last year. There is a lot of activity on the ground.

Deputy Deasy

Due to rising costs in general, I presume that the Revenue Commission's resources have not increased. Can the Revenue Commission cope with current personnel levels? Will it ask the Minister for more resources to deal with this? Does it rely on the Garda to help?

Mr. Daly

As a combined tax and customs administration, we try to ensure that the two areas work in tandem and share information. If we tackle, for example a cigarette smuggler or an oil launderer, we are not satisfied to get only the excise on the cigarettes. Instead we initiate a full audit on the person's tax affairs. That approach is very successful. It is more painful for the individual. One needs to take the question in the round in terms of overall resources and revenue including the special investigations and the additional focus we have on the construction industry. We have some 6,700 people in Revenue. The numbers have not changed over the years. However, I look at resources not just in terms of bodies but in terms of the focus, deployment, productivity and the use of technology to get an extra dividend. We constantly examine resource levels and if we come to the conclusion that we need extra resources, we would not be shy in asking the Minister.

Vice Chairman

Before coming to Deputy Fleming, Mr. Purcell would like to respond to a previous question from Deputy Dennehy.

Mr. Purcell

It is a clarification on the special savings incentive account scheme. An objective reading of the chapter shows that there is no criticism, implicit or explicit, of the scheme. It is outside my remit to express an opinion on the merits of policy. As a result of the scale of the scheme, which will cost the Exchequer more than €2 billion, it, and its controls, must be examined. We look at the way Revenue did it and in association with the financial institutions that operate the scheme on the ground. There is good reason for doing so. The DIRT tax scheme was operated by the financial institutions at one remove from Revenue. I need not repeat the lessons of that episode. This was the main thrust of what we did.

The second part of it was to look at the objectives of the scheme, in so far as there were stated objectives. The Accounting Officer of the Department of Finance referred to two objectives, namely, to increase savings and to remove demand from the system. In a situation where there are tentative estimates and where the outcome is a fourfold multiple of that, it is reasonable to ask questions. The taxpayer, who is funding the scheme, would want to know the basis for the original estimate and the factors that led to the setting of the Exchequer inducement of 25% to support the scheme. I received a reply to those questions and in the chapter I refer to that reply without any comment.

One of the main risks, recognised at the beginning, was that people would shift existing savings into this new saving scheme to get the bonus. That was not envisaged or permitted under the scheme. One might ask how that is controlled. The accounting officer says this is done by examining particular accounts in the financial institutions. It is an important question because it was seen as one of the risks.

On the impact of the scheme on inflation, I record the response of the Accounting Officer without any comment of my own. The chapter is included in my report because a significant amount of money is involved novel and there were questions to be asked, to which responses have been given. How people interpret the bare facts that are set down is not up to me, it is up to them.

Deputy Dennehy

I hope there was no suggestion that public representatives should not raise issues. If I suggested any criticism of the Comptroller and Auditor General, it was unintentional. He does not write the headlines and the newspaper reports but some of the comments, even about this report, were extremely negative. Commentators may have taken it out of context - perhaps they did not have the briefing paper - but when I read that something cost four times the estimated cost, I will come to this committee and make no apologies to anyone, appointed, elected or paid employee, for making, in a balanced way, comments concerning any programme, initiative or item of expenditure. I will have my say and I will make no apology for it. I hope I will not be criticised for raising these matters. I dealt with the comments as listed here. I also referred to critics of this and not to the Comptroller and Auditor General.

This is one of the few occasions on which I have had to comment on the contribution of a member. I have had concerns about this committee for the past year. I will comment on any item that comes up here publicly or within the committee so that it goes into the media. I will comment at our private meetings but I will make my comments openly without fear of contradiction from anybody. I will deal with facts, not innuendo. If I bring in a newspaper comment, as others have done today, so be it. I have not done so today. When this scheme was launched, there were critics - the Comptroller and Auditor General was not among them - who were proven wrong. People other than the Comptroller and Auditor General were involved. I am concerned by the suggestion that I should not question the issue or the Comptroller and Auditor General's report. I will do it as others have done in the past. I did not cast any aspersions whatsoever on the Comptroller and Auditor General.

Vice Chairman

Mr. Purcell wants to make a further comment but, for the benefit of the public representatives, witnesses and officials present, I wish to say that nobody has been restrained in what they have wanted to say. Everybody has had his or her fair say on the issues raised, as has the Comptroller and Auditor General.

Mr. Purcell

I was trying to clarify the context in which it should be read. I was not in any way questioning members' rights and nor would I do so, certainly not in here. It was purely for clarification and that clarification has now been given. Members of the media are here and I can clarify my position in case it has been misrepresented because, as the committee knows, I do not engage with the media on these matters. I say what I have to say here. It was not a rejoinder in any sense. It was a good opportunity to put on the public record the approach I take to matters of this sort, which are important in terms of materiality.

Deputy Fleming

I have one question for Mr. Daly but I wish to comment on the SSIA scheme. The Comptroller and Auditor General says the scheme was launched on the basis that it would cost €127 million per annum or €635 million over its lifetime. Due to the take-up, the cost will be €2 billion. I am concerned that, when those facts are published, people will say that interest in the scheme was grossly underestimated and that had the Government done its sums correctly in the first instance and arrived at a more accurate estimate from day one, it would not have proceeded with the scheme. I am worried that a debate like that - not so much the comments made here but those made outside - would have an unintended negative effect in the public arena. People will suggest that the scheme costs the Exchequer at least three times what it should have cost and people will come to the erroneous conclusion that the scheme should not have proceeded. Due to the fact that the cost of the scheme started with one figure and will end up with another, people might challenge the value of the scheme but I reject the idea that it should have not been put in place. Projects estimated as costing one figure and ending up costing three times that is a theme running through Irish society at present. I reject the notion that a scheme is necessarily ill-advised in those circumstances.

I ask Mr. Daly what section of the population was the subject of the 400 random audits carried out in 2005? He says people are selected by computer and I suspect a large organisation such as the Revenue Commissioners has excluded the high net worth individuals, the error prone cases and other special cases. If that is the case, it will be possible to extrapolate the results. If this is a proper random sample, what is the margin of error in the results?

Mr. Daly

At the outset we were advised by a statistician as to what would be regarded as a statistically valid sample. We were also conscious of the fact that the more cases that were audited, the more valid would be the outcome. We are also obliged to ensure that we do not divert scarce Revenue resources just to achieve greater numbers. The total of taxpayer population includes 350,000 Schedule D or self-assessment cases and 100,000 companies or individuals liable for corporation tax, giving a total of 450,000. Our statisticians have told us that 400 is a statistically valid sample. I cannot give details on the margin of error but I can write to the committee or, more appropriately, provide it with a more detailed outline of how the cases were selected and what the margin of error might be when I return to report on the results of the first analysis. I am not avoiding the question but would like to talk to our statistical people.

Deputy Fleming

When a statistical sample is taken, a balance must be struck. For example, Mr. Daly could have selected 800 and the statistician might have said it would reduce the margin of error. A sample of 800 might have a margin of 5% while 400 might have 10%. However, a sample of 400 out of 450,000 is one per thousand.

Mr. Daly

Approximately 0.1%.

Deputy Fleming

I make the point about statistical sampling because that is what we are discussing. When people carry out the opinion polls that appear every day, they usually poll 1,000 people, out of an electorate of 3 million, because it is said that sampling one in 3,000 gives a margin of error of 4% to 5%. The Revenue Commissioners have actually sampled a higher percentage than the average opinion poll. When the results are available, I do not want to hear that it was not really a random sample and cannot be extrapolated upon. If there is a suggestion of that, I want the sample scrapped. If it cannot be extrapolated upon, it is not a valid sample and I want to avoid that at the outset. Does Mr. Daly understand?

Mr. Daly

I have spent most of my time as Chairman of the Revenue Commissioners discussing targeted random samples. I have no intention of coming back to go through that process. This is a statistically valid sample but I do not know the margin of error involved. I take on board the point regarding the opinion poll.

Deputy Fleming

The statistician will know the margin of error.

Mr. Daly

Yes. I will not be returning with an excuse that this is not a representative sample. We have agreed that the real extrapolation from this is something which needs to be done over a period of years because it is the emerging trend that is most important with regard to the Revenue Commissioners getting their act together.

Deputy Fleming

I have made my point.

Vice Chairman

That concludes our examination of Chapters 2.1 to 2.7, which can be disposed of. Vote 9 remains open and Chapters 2.8 and 2.9 will be dealt with before the end of the year.

The committee will agree the agenda for the meeting of Thursday, 27 October 2005 as follows: the 2004 annual report of the Comptroller and Auditor General and appropriations accounts, Vote 33, The Department of Health and Children, Chapter 4.1, the National Treatment Purchase Fund. The committee will meet the Secretary General of the Department of Health and Children and the chief executive officer of the Health Service Executive on that date.

The committee adjourned at 1.45 p.m. until 11 a.m. on Thursday, 27 October 2005.