COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 8 Dec 2005

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

Mr. J. Purcell (An tArd Reachtaire Cuntas agus Ciste) called and examined.

Vote 9 — Office of the Revenue Commissioners.

Mr. F. Daly (Chairman of the Revenue Commissioners) called and examined.

Chairman

I apologise for the delay. We had difficulty in establishing a quorum as there was much activity in the House. Today's session concerns the 2004 Annual Report of the Comptroller and Auditor General and Appropriations Accounts, Vote 9 — Office of the Revenue Commissioners, Chapter 2.8, relevant contracts tax, and Chapter 2.9, stamp duty on electronic share transactions. There is no relevant correspondence.

Witnesses should be aware that they do not enjoy absolute privilege before the committee. The attention of members and witnesses is drawn to the fact that as and from 2 August 1998, 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 produce 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 the 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 be exercised only with the consent of the committee. Persons being invited before the committee are made aware of these rights and any persons identified in the course of the 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 a 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 a Minister of the Government or the merits of the objectives of such policies.

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

Mr. Frank Daly

I am accompanied by Mr. Liam Irwin, deputy secretary and head of the strategic planning division; Mr. Paddy Molloy, principal officer, head of the statistics branch; Mr. William Fadden, principal officer in charge of the Dublin stamping district which deals with CREST; Mr. Sean Nolan, assistant principal officer in the operations policy division; and Mr. Tom Dowling, assistant principal officer, the liaison officer with the Committee of Public Accounts and the Comptroller and Auditor General.

Chairman

Will the officials from the Department of Finance introduce themselves?

Mr. David Denny

My name is David Denny, from the organisation, management and training division of the Department of Finance.

Mr. Paddy Barry

My name is Paddy Barry, from the budget and economic division.

Chairman

Chapters 2.8 and 2.9 of the Report of the Comptroller and Auditor General read:

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 12.

Table 12 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 13.

Table 13 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 PrincipalContractors

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/RegistrationStatus

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.

2.9Stamp Duty on Electronic ShareTransactions

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 14 shows the total stamp duty on share transactions for the years 2000 to 2004 and the CREST payments and refunds for each year.

Table 14 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 15. 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 15 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 ReportingRequirements

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 15) for which no return is required. Table 16 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 16 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 Chairman. Chapter 2.8 marks a return to a subject that I last addressed in my report on the accounts for 2000. I refer to relevant contracts tax, which is the name given to the 35% tax deducted by principal contractors from subcontractors if they do not have a C2 certificate. While the main sector in which the system is used is the construction industry, it also applies to forestry and meat processing operations. In the construction industry in particular, there is often a thin line between being classified as an employee and as a subcontractor. The distinction has relevance in terms of PRSI liabilities and the applicable form of taxation.

Up to the mid-1990s, although the Accounting Officer may dispute this, I felt, and there was evidence, that the Revenue Commissioners had an ambivalent attitude to the classification of such workers. This stemmed from the premise that having the guarantee of getting proceeds of a 35% tax deduction at source was preferable to taking one's chances with voluntary compliance or effective detection or pursuit. That changed in 1998 with an extensive programme of site visits which resulted in the reclassification of 12,000 subcontractors as employees. While a new programme of site visits was instigated in 2001, it was suspended in September 2002 to allow health and safety training for inspectors. The programme was not resumed as analysis of the results up to that point had uncovered a misclassification rate of only 7%.

As far as the general control framework is concerned, the examination of annual returns from contractors constitutes a valuable source for the identification of cases to be followed up in respect of matters such as inconsistencies and omissions in the returns. However, owing to pressure of other work, the extent of the examination was less than what would be regarded as being desirable. To improve matters, Revenue intends to issue comprehensive instructions on the best practice to be applied in checking annual returns. In addition, an information technology facility to capture the data on the annual returns is under development. This will serve to better inform follow-up action.

Tackling non-compliance in the construction industry can be problematic owing in particular to, among other factors, the mobility of labour. Moreover, a boom accentuates the problem and the arrival of non-resident contractors is an additional complicating factor. To satisfactorily respond to the new scenario, Revenue has been obliged to improve its performance. This has involved getting out more to see what is happening locally and developing computer systems that will help identify where tax is most at risk. It is too early to form a view as to the effectiveness of the new approach but Revenue is satisfied that relevant contracts tax is still an important instrument in protecting the tax base in this sector.

Chapter 2.9 deals with the system for collecting stamp duty on share dealings. The bulk of Irish share dealings are now transacted through the London-based electronic CREST system. Stamp duty of 1% is deducted in all cases where the broker has not inputted an exemption code. Duty collected is paid over on a weekly basis to Revenue and €255 million gross was received through this route in 2004. The main exemptions and reliefs are outlined in table 15 in chapter 2.9. These include a broker dealer exemption where shares are purchased by brokers with the intention of resale within one month. They are required to make a six monthly return to Revenue of all transactions where this exemption was claimed and to pay stamp duty on all cases where the planned resale did not materialise within the month.

The CREST system was introduced in 1996 and the increasing use of this avenue for dealing in shares in recent years suggests that it would be worthwhile examining if Revenue's controls are keeping pace with developments. Our audit earlier this year suggested room for improvement in this regard, especially in the area of identification of brokers dealing in Irish shares and following up on brokers who had failed to make their six monthly returns of exempt transactions. At that stage, there had been no field audits of brokers or take-up of the right to audit the operating company's system in London. The Accounting Officer responded very positively to the audit findings and set out a number of enhanced measures being undertaken to strengthen oversight of the arrangements.

The Vote is quite straightforward and covers the administrative cost of collecting the billions of euros worth of tax we hear about. The net cost of doing this in 2004 was €327 million.

Mr. Daly

Chapter 2.8 deals with relevant contracts tax. This is a special tax deduction scheme for the construction industry which was introduced in 1970 to deal with problems which were endemic in the industry of engaging workers who were often mobile and difficult to trace, often on a cash in hand basis, coupled with a poor record of complying with tax obligations. The scheme was extended to the meat processing and forestry industries. Over the years, some changes have been made to the scheme but it still retains the basic features of a withholding regime — at 35% — unless a subcontractor has a permanent place of business and a good tax compliance record, of relying on paper vouchers to evidence payments between contractors and subcontractors. As with any such system, there are inherent risks.

In recent years, we have re-examined the operation of relevant contracts tax and put additional resources into policing the tax. Our focus, working where appropriate with the industry, has been driven by the objectives of reducing the regulatory burden of the scheme, ensuring that businesses fully understand the workings of the system, encouraging them to get the employment status of their workers right and improving the level of compliance by businesses and individuals with their tax obligations. We are working on reducing the regulatory burden through providing on-line services via the Revenue on-line service scheme. This makes it cheaper and simpler for businesses to file their relevant contracts tax returns and pay the tax. We hope to expand this service in future by allowing for further on-line transactions in the relevant contracts tax area.

We have met and continue to meet industry representatives to ensure they fully understand the workings of the relevant contracts tax system, the compliance requirements and the need to get the employment status of their workers right. Most importantly, we have put an intense focus on improving our ability to police relevant contracts tax effectively and to identify very quickly and tackle those businesses and individuals who fail to comply. Our new organisational structure has put us in a better position to target riskier cases with real-time interventions and we have invested heavily in bringing relevant contracts tax into our mainstream integrated taxation services computer system, thus enabling us to capture, analyse and match relevant contracts tax data and use it to target non-compliance.

Our new computerised risk assessment selection tool, known as ESKORT, which enhances our capabilities to detect those who are non-compliant and target resources at them, will in future be populated with relevant contracts tax data, as well as that coming from other sources. A valuable side effect of ESKORT is that it will allow us to minimise the number of interventions with compliant tax and duty payers.

The construction industry makes a substantial contribution to the economy, accounting for around 19% of gross domestic product, and had a level of output of approximately €28 billion in 2004. It directly employs more than 220,000 people. The amount of relevant contracts tax collected from the industry was approximately €612 million in 2004 and exceeded €617 million at the end of October 2005. Revenue is very conscious of the significant risks arising in the operation of relevant contracts tax but the risks would be immeasurably higher without it and, accordingly, given the significance of the construction industry to our economy in recent years, the response of Revenue has been to devote increasing resources to policing it.

In 2004, we devoted 18.6% of our audit programme activity to the industry and carried out 3,036 audits across all our main programmes out of a total of 16,321 audits. These audits yielded approximately €57 million out of a total audit yield of €549.6 million, amounting to approximately 10% of the total audit yield recovered in 2004. Approximately 45% of the audits were nil yielding, a figure that is not out of line with the percentage of nil-yielding audits across all programmes. Our focus on construction continued in 2005 with up to 20% of audit and compliance interventions being targeted on the construction sector. Up to the end of October 2005, we had carried out more than 4,400 compliance interventions in the sector yielding in excess of €73 million. Obviously, that total will rise by the end of the year.

In these interventions during 2004 and to a greater extent in 2005, our nationwide focus has been on various construction and infrastructure projects, both large and small. Not only have we been carrying out site visits to gather real-time information, we also have been looking at key risks in the industry such as VAT avoidance schemes, property syndicates, issues relating to the use of bogus labour hire arrangements, fraudulent claims for VAT and relevant contracts tax, cash and other payments to contractors and subcontractors. Much of this work is ongoing and reliable final results are not available yet.

We are finalising our plans for 2006 and will be targeting 25% of all our audit and compliance activities on the construction sector. We will continue to tackle suspect principal contractors and sub-contractors, continue our programme of site visits to gather research and intelligence to identify persons who are not on our register or who are not tax compliant, identify and challenge avoidance schemes and continue to focus on the ongoing issue of the proper classification of workers within the industry. Our prosecution programme and our enhanced computer developments will support all this activity. In particular, as we will be capturing relevant contracts tax data electronically, our ability to identify risk cases and target our resources accordingly will be greatly enhanced.

We have already undertaken an in-depth review and evaluation of the risks in the sector and a comprehensive action plan has been agreed by the management advisory committee in Revenue to implement some technological and administrative changes and legislative proposals. I am confident that these developments, together with the increased resources targeting the sector, will greatly increase tax compliance in this sector. We will continue to refine our risk evaluation and further target our resources in the light of emerging results and insights from the 2005 and 2006 results.

Chapter 2.9 deals with the CREST system of collecting stamp duty on shares transferred by electronic means. A gross yield of €255 million was recorded for 2004. The collection of stamp duty, which commenced in 1996 through the CREST settling system, is a unique collection tool in Revenue. The agreement signed that year between the operating company and Revenue underpins the collection and represents an early example of public-private partnership. The agreement affords a significant advantage to Revenue owing to the fact that the cost of collecting the duty is relatively negligible as the bulk of the duty automatically flows from a single source — the operating company — to the Central Bank on a weekly basis. Moreover, the administrative burden on Revenue in handling that flow is minimal. In addition, the system reflects the modern trend of moving from paper-based collection systems to electronic systems, a trend Revenue has been to the forefront in promoting.

The compliance interventions taken by Revenue in respect of potential stamp duty for trades settled through the CREST system are ongoing and developing in sophistication. This is particularly demonstrated by the use of computer-based techniques for conducting desk-based audits. These techniques encompass activities such as the examination of statutory reports to ensure compliance and the identification of customers who have failed to engage properly with Revenue.

The annual Revenue business programmes envisage a greater use of such techniques and the extension of computer usage in the external auditing by Revenue of its CREST customers. Additionally, the upgrade of the Revenue CREST computer is expected to be completed next year and the enhanced facility will contribute to and further strengthen the compliance interventions undertaken by Revenue.

Chairman

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

Mr. Daly

Yes.

Chairman

I welcome Deputy Burton to the committee. She replaces her party leader, Deputy Rabbitte. On today's rota, Deputy Ardagh will be first to ask questions and Deputy Burton will be second. Deputy Ardagh has 20 minutes.

Deputy Ardagh

Regarding chapter 2.8 and RCT, the intention behind one of the financial resolutions in last night's budget — Financial Resolution No. 2 — was to tax the income earned by people in the country but who are not domiciled or ordinarily resident here. My understanding is that it was on a remittance basis until now.

The Comptroller and Auditor General referred to the number of non-residents working on construction contracts in particular. In the Gama situation, some employees were paid here while other payments were made abroad. By cutting out this loophole, the Taoiseach stated there would be a saving of €50 million in 2006, €75 million in 2007 and €100 million in 2008, which are significant figures. Obviously, there was a great need to cut off this avenue of tax avoidance on behalf of many people who work here but get paid from abroad and properly get funds put into bank accounts abroad.

What is the position in respect of this matter? How did it come about? How serious is it? Having inserted that resolution, what effect does Mr. Daly believe it will have on the amount previously forgone? Will its RCT element be easier to manage and how beneficial will it be overall?

Mr. Daly

I presume everybody knows the history of the remittance basis and that we inherited it from the British. It was a scheme whereby, if one was not resident or domiciled here, one's contract was effectively with a company abroad — outside the United Kingdom — and one was paid abroad. Only the income remitted here was taxable here.

This scheme has been in existence for a very long time and was largely used in earlier years in respect of highly skilled individuals in the financial area, for example, people with particular expertise. In recent years its use has been significantly extended, particularly in the construction industry. Deputy Ardagh mentioned the Gama case, which is on public record, but other situations have been identified where we became aware of major contracts involving non-domiciled persons engaged and paid abroad under foreign contracts. It became the case that many people employed in the construction sector were being paid on the remittance basis. In our view, this was leading to an inequity in the system. It led to the Construction Industry Federation putting forward its view that this practice was making it less competitive for Irish firms to engage in the industry.

The other aspect of the issue that came to light was the situation where arrangements were put in place for employees in other sectors, such as banking, international transport, information technology, pharmacy and architecture, to be paid on the remittance basis. I will not confine the matter to the construction industry. Having examined this matter over the past year or two, we took the view that the area's growth was such that it was creating competitive inequities and a significant loss of revenue. Had it not been dealt with, it would effectively have led to a two-tier tax system in this country. That is the background to the change.

Concerning the resolution's effect on the construction industry and whether it will make RCT easier to manage, my answer is "Yes and no". It will make the system more straightforward as there will not be any issues about deciding what has been remitted. In an overall sense it means people will pay a little more tax, which means there may be some compliance issues.

The general view in Revenue is that we have upped our game in the construction area, as the Comptroller and Auditor General said in his opening statement. We will deal with the matter on that basis. Will it be beneficial in the overall sense? I have outlined the background. The country was beginning to lose significant revenue. Inequity in the system and competitive issues were growing. In the overall sense, my answer is "Yes".

Deputy Ardagh

To get into the nuts and bolts of chapter 2.8, during the Comptroller and Auditor General's 2004 examination, he was to follow up a number of issues identified in the 2000 report. I wish to address a number of items. One was the progress made in pursuing outstanding arrears of €38 million to €44 million. It was stated that an examination of all cases would be completed in the autumn of 2005. Has this been done?

Mr. Daly

The latest position is that almost all the issues the Deputy refers to have been addressed. In our response to the Comptroller and Auditor General, we pointed out that this was an effect of old arrears being carried forward into a new integrated taxation services, ITS, system and we would need to confirm the position in respect of many of them. We have been doing so. Some included assessments that had been paid, assessments covered by credits in other periods or RCT credits withheld. In many cases the assessments have turned out to be quite unsound and we could not confirm them. For example, in one swathe of 14 cases sent to our Fingal district, there was no liability in a single one that we could stand over, which is reflective of a pattern throughout the country.

The current position is that, by and large, those cases in which we are satisfied that we can stand over the liabilities or estimates have been brought into our ITS system and are being pursued in the normal way. We must deal with the other cases on the basis of write-off. I do not have precise figures as it is difficult to identify these cases within the system. There was much that we could not stand over.

Deputy Ardagh

It effectively has been completed.

Mr. Daly

Some of it is still being pursued in our normal compliance regime but it is in the system.

Deputy Ardagh

Electronic processing of annual RCT returns was scheduled to be completed by December 2005. Has that been completed?

Mr. Daly

It is more or less on target. The 2004 returns are being captured for the system by a private company and will be available in early 2006. This is a significant development as it brings together much information. Considerable progress can be made when we receive the data in the system, principally in terms of matching data from the RCT35, the annual return, with the RCT30, the monthly return.

This enables us to identify subcontractors who have claimed money back but where the principal has not paid tax. It also enables us to identify cases where the principal pays but the subcontractor never submits a claim and one would wonder what is the reason for this. It will provide us with a complete picture of subcontractors vis-à-vis individual principals and of all principals in identifying suspect relationships. If there is a suspect principal who continually engages with certain subcontractors the suspicion extends to the subcontractors. In the case of employee relationships and the difficulty in identifying the correct classification, it will give us a picture of the pattern between a principal and a sub-contractor indicating that payments are so regular and consistent that it indicates the relationship is otherwise.

Deputy Ardagh

I have very little time and just a few short questions. I invite Mr. Daly to define large cases. How many does the construction business unit of the large cases division have and how effective is the unit in terms of bringing money to the Revenue Commissioners?

Mr. Daly

The parameters of the large case unit include any corporate body with turnover in excess of €125 million and any high worth individual with wealth in excess of €50 million. I do not have a breakdown for the number of construction companies.

To the end of September the large cases unit had completed 43 audits in these large construction areas, yielding €13 million. Some 18 property developer audits were under way and €8.5 million has accrued from one of the completed audits. These are extensive audits and some will continue into 2006. In 2006, the target for the large cases divisions is to undertake 31 property developer audits, 42 other construction sector audits and 60 assurance checks in those major construction sectors.

Deputy Ardagh

What is the expected return?

Mr. Daly

I expect very good results from that in 2006.

Deputy Ardagh

I refer to the question on employees and subcontractors and Mr. Daly's programme of checking. The Comptroller and Auditor General mentioned that in 1998 a programme of site visits of principal contracts was undertaken to check if persons treated as subcontractors met that criteria. Some 63,000 sub-contractors were examined and 12,600, 20%, were reclassified as employees. In 2001 a similar programme was undertaken but was suspended in September 2002 for health and safety reasons. How can examinations take place of the order of those in 1998?

Mr. Daly

It was suspended in 2002 because of health and safety issues. Our people had to be trained and in 2001-02 a very small proportion of subcontractors had to be reclassified, some 65 out of 984.

Deputy Ardagh

Fewer than 1,000 sub-contractors were examined in 2001-02 whereas 63,000 were examined in 1998.

Mr. Daly

It was a small number. Specific outputs, including tax compliance, will be required from each audit and intervention in the remainder of our 2005 programme and our 2006 programme. Every district will be working to a number of reclassifications and this is one of the key performance indicators. Reclassification is not all we do and, as the Comptroller and Auditor General stated, issues remain on PRSI and different tax structures for employees and the self-employed. In 2005, our east and south-east region devoted 50% of audits to special construction industry projects. It examined the status of 500 subcontractors during that time and only three were wrongly classified. This is a difficult area but the committee should not have the impression the Revenue Commissioners do not take this matter seriously.

Deputy Ardagh

I refer to CREST and stamp duty. One unusual case in February 2005 involved an unsolicited payment of €1.1 million. I do not know if it was carried out by the internal audit section of the Revenue Commissioners or by the Comptroller and Auditor General.

Mr. Purcell

It was carried out by neither but arose in the course of other work done by the Revenue Commissioners.

Deputy Ardagh

In November 2003 an unsolicited payment of €1.1 million was received regarding money that was not collected for stamping of shares.

Mr. Daly

We have a slight quibble with the term "unsolicited payment" because we had initiated compliance action. Our last discussion with this committee referred to taking credit for work done. We had started the process of engaging with that broker about section 75 returns although we did not know the sum was €1.1 million. At the end of that process a cheque arrived for €1.1 million.

Deputy Ardagh

I understand stamp duty of 1% exists on share transfers, provided it is not within the business and the shares are not resold by a trader within a month.

Mr. Daly

That is correct. If it is a broker-dealer relationship and the shares are sold within a month, stamp duty is not applicable.

Deputy Ardagh

It was the intention of this broker to sell the shares but he did not do so. There is great difficulty in respect of British traders of Irish shares.

Mr. Daly

The entire area of exemptions and reliefs is probably the most difficult aspect of this CREST operation. Other than that, it is an extremely effective operation. We depend on brokers to send section 75 returns within a particular period. Compliance issues largely relate to the non-receipt of those returns. We have made much progress. We identified all of the brokers, we know which of them should be making section 75 returns and we pursue them. A sizeable amount is involved in that particular issue.

Deputy Ardagh

On that case, an "unsolicited cheque" of €1.1 million was received. Mr. Daly stated another €3.3 million was then owed in penalties and interest. Discussions and negotiations ensued and that figure was reduced from €3.3 million to €281,000. Was that cheque received?

Mr. Daly

Yes, it was.

Deputy Ardagh

My understanding is that in July 2005, a reminder of the amount due was issued to the firm involved. When was it paid?

Mr. Daly

It was paid in August 2005.

Deputy Ardagh

Was it? They paid on the reminder notice.

Mr. Daly

We did mitigate the penalty quite substantially. However, I should state the circumstances on stamp duty are unique. An extremely onerous penalty regime of 1% per day exists. One can see what happened in this case. It involved payments of €100,000 interest and penalties of €3.2 million and it would be difficult to——

Deputy Ardagh

A rate of 1% per day is difficult to uphold.

Mr. Daly

We have powers to mitigate under the legislation.

Deputy Ardagh

With regard to the Comptroller and Auditor General's queries, I just read that brokers were given an opportunity to get their affairs up to date. They confirmed they would be in compliance with their obligations by December 2004. What does the phrase "were given an opportunity to get their affairs up to date" mean?

Mr. Daly

It means, in effect, to get their section 75 returns up to date. That is the only area where we have an ongoing problem. In the vast majority of cases, section 75 returns do not result in any payment to us. There is no underpayment. It is a question of getting the record right. The vast majority of these brokers are UK brokers. Our system is unique and it has involved education, persuasion and mild coercion to get them compliant with our different system.

Deputy Ardagh

The dreaded word could have been applied to those UK brokers to get them to come on line.

Mr. Daly

Is the word "coercion"?

Deputy Ardagh

No, amnesty.

Mr. Daly

That word is not in my vocabulary. I suppose we gave them an opportunity to get their affairs up to date, recognising the unique circumstances in which the CREST operation has evolved. It is a hugely effective operation from our point of view. However, they are UK brokers and we are over here. The Irish trades are probably a relatively insignificant part of their work, so the job involves persuasion. I believe it is going quite well and is quite successful. Most important, we now have a firm handle on what brokers are due to send us these returns and we have a compliance regime in place. We are conducting an audit of the operating company, CREST, which is being done by quite sophisticated computers and Revenue auditors.

Deputy Ardagh

I want to ask a final question on the matters of the outstanding tax cases. Will Mr. Daly give us a summary of the amounts collected and the number of up-to-date cases on offshore DIRT and Ansbacher accounts?

Mr. Daly

I have the figures somewhere. Usually I refer to this in my opening statement but I did not wish to add to it.

Deputy Ardagh

It would have deflected from the extremely important work done on relevant contract tax.

Mr. Daly

The total yield to date is €2.136 billion, which is an increase of €28 million since I was last before the committee. Does the committee want the breakdown? I can circulate the relevant document.

Deputy Ardagh

If it can be circulated, that will be fine.

Deputy Burton

With regard to the changes announced in the budget yesterday on the remittance basis of taxation, my understanding on the basis of parliamentary questions I asked is that Gama was granted an exemption on PRSI by the Department of Social and Family Affairs. As Deputy Ardagh pointed out, that was because of its domicile not being in Ireland and relationships within the European Union. Is it true that as a consequence of the Department granting this PRSI exemption, the company then qualified for the remittance basis regarding income tax? Is it also true that as a consequence of that, the 1,200 Gama workers who benefited from the PRSI exemption flew below Revenue's radar regarding payment of either income tax or registration as workers?

What is the respective roles of the Revenue Commissioners and the Department of Social and Family Affairs regarding the announcements in yesterday's budget? Does Revenue have any role in the initiation of PRSI exemption?

Mr. Daly

I do not want to talk about a particular company or individual taxpayer.

Deputy Burton

I asked a parliamentary question and the Minister for Social and Family Affairs replied. He gave me a list of all of the companies that received PRSI exemptions. For the most part, except in the case of Gama, they are all executives or individuals coming to work in Ireland legitimately for a period of time but staying within the social welfare system of their own country. In Gama's case, the figure was 1,200 for the year the Minister supplied me with information. As a consequence of that exemption they were allowed to be dealt with on a remittance basis for income tax purposes. Therefore, they left the PAYE system.

Mr. Daly

If I can deal with the general principle, the determination of the Department of Social and Family Affairs on whether a worker is in the PRSI system is not directly relevant to his or her tax position. The application of the remittance basis to individuals, whether they be at that company or any other company, is dependent on the matters I mentioned earlier in response to Deputy Ardagh. They are whether the person is non-domiciled or non-resident, whether the contract is abroad and whether he or she is paid abroad. That is the situation Deputy Burton is discussing and is primarily what determines whether a worker is within the remittance basis.

It would not be correct to state that the fact a person is on a remittance basis or has a particular PRSI treatment means he or she falls below Revenue's radar.

I can assure Deputy Burton that in the particular case to which she referred, that is not the position.

Deputy Burton

Then or now?

Mr. Daly

Either way.

Deputy Burton

I will come back to the Department of Social and Family Affairs later.

It is commonly understood around Dublin that the Revenue had to stop making visits to building sites because of the introduction of new health and safety regulations. Prior to the implementation of the new legislation, staff of the Revenue Commissioners were able to visit all parts of a site or job, not just the front office or cabin. However, under the new regulations, they could not visit the entire site because they did not have hard hats, high visibility coats, safety boots, and a safe pass or its equivalent. Effectively, over a significant period of time — and I would like to know how long that was — the Revenue Commissioners had to abandon visits to building sites, apart from visits to front offices. What is situation now in that regard because it generated a lot of comment within the building industry, particularly among workers?

Mr. Daly

The Deputy is quite correct that the 2001 operation was suspended because of health and safety considerations, the safe pass issue and the fact that Revenue staff had to be trained. Staff have now been trained and the position now is best exemplified by the figures for 2005. We have paid 629 site visits this year, with no restrictions. We plan to conduct more visits in 2006, again with no restrictions. The period during which there were, effectively, no extended site visits encompassing the operations area of sites, was of a couple of years duration. However, such visits have now resumed. There were 629 site visits in 2005 and there will be as many, if not more, in 2006.

I know a perception exists that such visits do not happen but all I can do is give the Deputy the relevant figures from the various regions. It is not just a question of site visits either. The total intervention by Revenue in 2005 in the construction sector exceeds 4,500 cases. We have been extremely active in terms of property development and infrastructure audits, site visits, compliance visits and in various other areas.

I can give the Deputy a flavour of what is planned for 2006. As I mentioned in my opening statement, approximately 25% of all our audit compliance staff will be focused on the construction sector. All non-resident subcontractors will be dealt with by one Revenue district in Dublin. Such subcontractors, operating nationwide, will be brought together under one district, which will give us a greater handle on their activities. For some time now we have had a nationwide C2 monitoring group, involving staff from every district. We will be bringing that group into a more structured environment. It will be administered from Dublin and will have a remit to monitor all suspect principal contractors and subcontractors. We will have a full-time officer in Dublin co-ordinating that work and staff from every region in the country will form part of that group. There is a lot of activity scheduled for the construction sector in 2006 but this is not a sudden conversion on our part. There has been quite a lot of activity in 2005, much more so than in 2004, for example.

Deputy Burton

There were a number of years when Revenue staff could not go on sites because of a lack of safety clothing and safe passes. Was that a resource issue? Did Revenue make a submission to the Minister to the effect that the new health and safety regulations effectively barred Revenue inspectors from sites? Did the health and safety issues impact on the joint teams from Revenue and the Department of Social and Family Affairs? There was a time when joint teams went to sites.

Relevant contracts tax, RCT, has major implications for social welfare and is referred to in the report of the Comptroller and Auditor General. With RCT, the real loss is more likely to be in the area of PRSI. Is Mr. Daly happy that Revenue had to suspend operations for a given period? Was there a resource issue at play? Is Mr. Daly happy with the level of co-operation from the Department of Social and Family Affairs? There is a reference in the Comptroller and Auditor General's report to RCT and how it relates to the Department of Social and Family Affairs. It is also covered in the chapter on that Department. Is Mr. Daly happy that he had several lost years, which became notorious?

Mr. Daly

There was never any question of Revenue not having resources to provide safety boots, hats or any other equipment. We have over €350 million to run the office and it would be extraordinary if we could not find the money to pay for that sort of equipment. It was not an issue of equipment or resources, but rather of training. We had to ensure our staff were qualified and had safe passes, following health and safety training. The operation was suspended in September 2002. I have referred to our activity in 2004 and the increase therein during 2005. There was a year or two when a level of activity, justified by the way the construction industry was growing, was not there. I can only explain why that happened. The results we found in the 2001 and 2002 operations did not convince us there were major compliance problems. However, we are back, very firmly, in the construction area this year and will be even more engaged next year.

I am very happy with the level of co-operation with the Department of Social and Family Affairs. I am also very happy with the more recent agreement we have reached regarding the parameters of information that can be exchanged between us concerning subcontractors, which will enable the Department to verify whether those subcontractors are claiming benefit. That is a very positive development. We still have joint investigation units, involving staff from Revenue and the Department of Social and Family Affairs working together, where necessary. I believe there is more we could do in that area and indeed, we could do more with other agencies also. I have no problem with that idea and it is something we will be advancing in the future.

Deputy Burton

I received a reply from the Minister for Finance to a parliamentary question last week to the effect that there are 59,982 subcontractors in the construction industry, 771 in meat processing and 1,392 in forestry. Mr. Daly has already referred to the fact that, in his view, these are very high-risk sectors. On page 23 of his report, the Comptroller and Auditor General states that "the status of some 63,000 subcontractors was examined and as a result some 20% were reclassified as employees". That is a very high rate of incorrect classification, with serious consequences for the PRSI system. We all understand the attraction for young men of earning more than €1,000 per week on a construction site, being dealt with as subcontractors, with the main contractor taking care of the paperwork. They are not interested in talk of social insurance. However, this will have consequences further down the road. That level of incorrect classification is extraordinarily high. A code of conduct supposedly has been agreed between IBEC, trades unions, the Revenue Commissioners and the Department of Social and Family Affairs. It is a commonly held view — certainly among trades unions — that the use of subcontractor status will be damaging to the industry in the long run. It is difficult to persuade young men who earn a lot of money to be in the PRSI system but, down the road, they will not be covered for anything. Increasing numbers are not even in the construction industry pension fund. Has Revenue any response to this?

I am a bit confused, although I was glad to hear that there will be better co-operation between the Revenue Commissioners and the Department of Social and Family Affairs. Is the decision of whether one is an employee or a subcontractor decided by the scope section in that Department, by the Revenue Commissioners or by both? The non-compliance rate of 20% implies that the loss to the Exchequer in PRSI, if not income tax, probably runs to several hundred million euro each year, with terrible consequences for the social insurance fund down the road.

Mr. Daly

I certainly share the view that people should make sure of their entitlements for the future and that they are in the correct schemes. Revenue's prime concern is tax and, in so far as classification as an employee or a subcontractor impacts on that, we strongly hold the view that it is our business to scrutinise such matters.

The Deputy mentioned the high rate of reclassification in 1998 and 1999. However, the rate was only 7% in 2001 and, according to our regional research in 2005, has fallen to three out of 500 — I am not sure what percentage that represents but it is certainly very small. While this is a difficult area, the reality in most of these cases is that Revenue makes the decision on whether somebody is classified for the purposes of tax. We do not accept at face value any assertion made by principal contractors or subcontractors as to self-employment status. We explore the true nature of the relationship between them, having regard to criteria set down in the agreement mentioned by the Deputy, the guidelines on employment versus self-employment and extensive case law. No primary legislation exists for this matter.

We examine issues such as the degree of control, the obligations and the integration involved in the relationship between contractor and employee. We then have to go through the listed criteria, a document on which is before the Deputy, to determine whether someone is an employee or self-employed. In respect of each contract, the principal contractor and the subcontractor have to sign an RCT 1 form, a declaration that the work is not employment but a genuine contractual relationship between the two. We go through all these matters.

It is a difficult area because, as the Deputy noted, employees do not want to be classified as such, which is possibly shortsighted of them. In many cases, they see themselves as setting up a business and becoming entrepreneurs. They want to do their own thing. On the other hand, principal contractors often do not want to bring people in as employees because that means making them subject to the PAYE system and other regulations. I assure the Deputy that it is part of our remit to investigate every case and we will be doing so on every audit and compliance visit we make next year.

We also receive many appeals, a process for which exists. It is a mistake to believe that we can tell someone he or she is an employee. All we can do is tell the contractor that we plan to reclassify Mr. X as an employee and issue an assessment if the contractor does not deduct PAYE. That brings the employer into an appeals process, which does not necessarily result in success for us. It is difficult but we do try.

Deputy Burton

Is there not a gap in our legislation arising from the responsibility of the Department of Social and Family Affairs for PRSI, which generates more revenue for the Exchequer from employers and employees than does the self-employment rate? The latter, which is only 5%, provides few entitlements.

Mr. Daly

There is a lesser rate.

Deputy Burton

Is it the case that a gap exists? Is Mr. Daly happy with the level of co-operation offered by the Department of Social and Family Affairs?

Mr. Daly

I am happy with the level of co-operation. We are conscious of various factors when we make a determination of our respective interests. While I have no problem in discussing this matter further, there is a good level of co-operation on the ground and at the central policy operation levels. In the near future, we will begin to exchange a lot of information in a structured way, which was not possible before because we had not computerised the processes.

Deputy Burton

I want to ask about the 12 cases of fraud referred to by the Comptroller and Auditor General on page 25. Two of the cases involved collusion among large numbers of individuals and companies, 97 in one case and 24 in the other. Both may have been the subject of criminal proceedings by the Revenue Commissioners. How many fraud cases are outstanding or being prosecuted? Were rings of contractors and subcontractors involved in sets of arrangements? Was it related to the repayment of RCT?

Mr. Daly

We referred two major fraud cases to the Garda for investigation. As these investigations are ongoing, I do not want to go into great detail but will give a flavour of the cases. One involved collusion among 97 persons which amounted to outright fraud and criminality rather than tax evasion. Nine principals allowed their names to be used for the issuance of RCTDCs, more commonly known as C45 forms, 169 of which had been certified. These forms provide for an entitlement to reclaim money. No work was done, however. It was a bogus transaction in which the principal signed the forms and gave them to colluding subcontractors or individuals. The money was returned and shared between the principals and the others. We are working with the Garda on the investigation into this matter. Already, 13 people have come before the courts, seven of whom have been convicted.

The second case involved 24 persons and companies and had much the same modus operandi. The people involved have not yet been brought to court but some are on their way. Some 12 cases, including the aforementioned two, were mentioned in the report. Two convictions have already been made. One individual was sentenced to 16 months in prison and fined €18,700. That conviction is currently under appeal to the Circuit Court. Another person was sentenced to 240 hours community service in lieu of a six-month custodial sentence.

Deputy Ardagh

What did that person do?

Deputy Burton

Was it building or painting?

Mr. Daly

I have no idea but I can write to the committee. Two other cases were dropped owing to insufficient evidence but the others are in the investigation process. In addition, investigations have commenced on five new cases and two new cases have also been accepted for investigation. I referred earlier to the reporting template or output that we require from our districts next year and that includes the definite view that if we come across a serious case where evidence might stand up in a court, we prosecute as well as trying to recover the money.

Deputy Burton

What is the financial scope of these frauds? What amounts of money are we talking about?

Mr. Daly

I am not sure about the overall figure but in the first of the two major cases, cheques were issued amounting to €837,000. In the second case cheques were issued amounting to more than €1 million, some of which has been frozen because we got to it before the cheques were cashed. The scale of the others would not be as great. Those were two criminal collusion rings. Those cases happened because the controls in place at the time were not as effective as today's. I would not say this could never happen again but I would be surprised if it did because of the controls we have introduced.

Deputy Burton

One understands that people related to the construction industry have featured prominently in Revenue's Ansbacher and overseas inquiries, certainly in the published lists of people making settlements. What have been the consequences for companies that are still trading or have passed on to younger members of the families? Is any risk profiling done?

Mr. Daly

I do not have figures for the number of construction related individuals or companies involved in Ansbacher but any company, including its directors, or individual that comes to our attention achieves a risk rating with us. I mentioned our new computerised risk system ESKORT. In that, and in our ITS system, individuals who have come to our attention would have——

Deputy Burton

Revenue carries out only approximately 16,000 audits a year. Given the numbers of connected parties and individuals thrown up by the various inquiries who would have a high risk profile, is it not essential to expand significantly the number of audits carried out, especially where people are on a self-assessment basis?

Mr. Daly

The Ansbacher investigation is still live, so anybody who came to our attention within that, either within or connected to the individual companies, is still under investigation. Therefore, attention is focused on them.

The question of the number of audits we carry out comes up regularly. As I said before, while we have a target each year of doing 16,000, 18,000 or 20,000 audits or interventions, it is not the only way we police the tax system. I am convinced of the need to do more real-time activity and that has been our goal in restructuring the organisation over recent years with special compliance districts and the large cases district. We aim to do everything on the basis of intelligence, information and risk rating, so if we do 16,000 audits or 20,000 audits, they are targeted at the people we suspect have compliance issues. As we discussed in this committee, there is also a random audit programme which means anybody can be chosen.

I am anxious not to be hung up on whether it is 16,000 or 20,000 audits. Revenue performs many new types of intervention and compliance activity which are getting good results. Audits by definition are after the event. While they are valuable, have brought in much money and drive compliance, they are not our only activity. To return to the construction industry, next year we will be examine major road, airport and power station projects looking, for example, at chargeable gains arising from land purchase by the National Roads Authority and a couple of bypasses. Getting out there is more valuable than doing an audit a year or two after the event. It is a change of focus.

Chairman

Are some of the special investigations reaching a conclusion and is Revenue maintaining the same level of resource and staff on these investigations or is it transferring key officers to other areas?

Mr. Daly

The Ansbacher investigation is difficult so the resource and expertise is maintained as ever without diminution and there will be no walking away from that. The NIB-CMI investigation is nearly complete and is now a tidying up exercise. We have a team on the tribunals but we must keep pace. We cannot go ahead of the tribunals and compromise anything that might come from them.

Deputy Ardagh

Are staff members employed on a daily rate or on a salary?

Mr. Daly

Unfortunately on a salary, like myself. They receive no bonus either. The DIRT and bogus non-resident account investigation is effectively complete and is a tidying up exercise. The two major live investigations are the offshore assets investigation, which has moved into the post-voluntary disclosure phase, and the insurance investigation, which is going to court in January or February for High Court orders against insurance companies.

Chairman

Do they maintain the same level of resources in general terms?

Mr. Daly

Absolutely, and we must maintain those levels. We will not move people from those areas to investigate the construction industry. When I say 25% of our audit will concentrate on the construction industry next year, that is excluding those special investigations.

Chairman

A ruling by Revenue that VAT would apply to the total cost of refuse collection by private contractors caused concern recently. Could Mr. Daly give us some background on that and why this occurred at this time?

Mr. Daly

We discussed this with the Irish Waste Management Association in November but it was not new. Last June we issued clarification that VAT was applicable to the combined charge of the collection disposals fee and the landfill levy. We did this in response to concerns that it was not being applied consistently throughout the country and because some waste operators had told us their competitors were not charging VAT on the collection disposal fee. We issued clarification last June and published it in our tax briefing. It has come to attention lately because the Irish Waste Management Association expressed concern about it and stated there would be an impact on bills now going out for 2006. It is the legal position and under an EU directive we had no option other than to tell them it was the correct treatment. Every waste operator must apply that treatment, not just some.

Chairman

Was the anomaly that private collectors were charging VAT on the portion of their charge which represented the cost of lifting the bin but not for the service provided at the landfill site?

Mr. Daly

Yes. I am not absolutely sure of the details but the correct treatment is to apply VAT to the combined costs of collection and disposal, and to the landfill levy. Some had been applying VAT to the landfill levy but not to the collection and disposal element. That was the difficulty and it gave rise to a competition issue.

Chairman

I am sure Mr. Daly is aware that refuse collection is an emotive political issue, as is the privatisation of refuse collection, and there have been protests in various local authority areas. This ruling will add between 8% and 9% to the costs of refuse collection where VAT was not previously applied and will add fuel to the flames of protest. In the context of joined-up Government, did the Revenue Commissioners contact the Department of the Environment, Heritage and Local Government to inform it of the impending issue or did they operate in a clear blue sky?

Mr. Daly

I am not sure if we contacted the Department of the Environment, Heritage and Local Government. VAT is regulated at EU level and is very clearcut. There was no doubt about this, no question of interpretation. Many waste operators were charging VAT correctly but others were not and it was incumbent on us to clarify the position. We did it last June but it seems to have only become an issue in the past month when the Irish Waste Management Association came to see us.

Chairman

There are a number of issues involved.

Mr. Daly

I take the Chairman's point about joined-up Government but if some operators apply VAT correctly while others do not, it is our responsibility to ensure they understand what they must do.

Chairman

How did the anomaly arise and how was it allowed to continue for several years?

Mr. Daly

It is an issue of clarity and has only become an issue in the past couple of years, with the growth of private operators. It does not apply to local authorities because they are exempt from VAT.

Chairman

Will the Revenue Commissioners go after arrears?

Mr. Daly

We will look at each case and decide the degree of negligence or whether clarity was an issue.

Chairman

Is competition an issue where local authorities and private collectors operate in parallel in local authority areas, if local authorities are exempt from VAT? Does another EU directive not make it illegal to favour a public service provider over a private service provider, as seems to be the case here?

Mr. Daly

If two entities provide essentially the same service then there is an issue. Our job is to apply the law as it stands. Local authorities are exempt from VAT but private operators are not and we must operate within that. The wider issue of competition is something we are conscious of and interested in.

Chairman

Peripherally?

Mr. Daly

Not just peripherally. This is a bigger problem outside Dublin where there are more private operators.

Chairman

It is not a matter of great concern in Dublin which will reinforce the view among my constituents that if it were a Dublin issue it would not have happened.

Mr. Daly

I assure the Chairman that the Revenue Commissioners have no regional allegiances one way or another. I am not from Dublin and assure members that this simply clarifies the VAT position.

Chairman

I fully understand the Revenue Commissioners' position but Mr. Daly will appreciate the difficulties when this happens. Bills are now going out for 2006 and there will be an increase in the charge of between 8% and9%, plus whatever annual increase would have been applied anyway. In total they will go up by about 12% in circumstances where the Exchequer does not need the money. Policy makers will not thank the Revenue Commissioners for a ruling that will bring grief in the way of more protests on the streets. There will be more illegal dumping because people will refuse to pay the additional charge for private collection. Many will leave it behind local authority houses or dump it on greens or on the country roads. I know exactly what the Revenue Commissioners' position is and why they must act as they do but there seems to be a lack of joined-up Government when this happens because it is of no particular benefit except to the Revenue. What is the estimated yield on this? The Irish Waste Management Association suggests it is €30 million.

Mr. Daly

I am not sure of what the yield might be. The yield was not an issue. The Revenue Commissioners have had to make many rulings that were not welcomed but for sake of equity it is our responsibility to do so. We have been berated in the past, not least in this committee, for being too soft and maybe too conscious of the greater public interest. In the long run that does not benefit us. This ruling is based on a clear interpretation of the law. We made it some time ago — it is not new. Many operators were applying the correct treatment and it would be unfair to them to allow a situation to continue where they were put at a competitive disadvantage.

Chairman

Fair enough. When the Minister for Finance yesterday announced the abolition of a whole series of tax relief schemes he referred frequently to consultants. What input did the Revenue Commissioners have to the evaluation of tax relief schemes? Did they advise the Minister on which schemes should be kept and which abolished?

Mr. Daly

It is well known that Indecon and Goodbody were engaged to advise on particular reliefs. Other reliefs were examined by Revenue and the Department of Finance. We examined pensions and patents and were involved in pre-budget discussions. We studied the consultants' reports as part of the process leading up to the budget and Finance Bill.

Chairman

When these schemes were introduced did Revenue carry out an ex ante examination or cost-benefit analysis of them?

Mr. Daly

No. I recall the Minister saying in his speech that one of the conclusions reached was that for future schemes there should be a proper evaluation of their benefit. There was no pattern of ex ante evaluations in the past though some evaluations were carried out during the lifetimes of some of the schemes. The answer to the question is “No”.

Deputy Burton

I wish to return to the Budget Statement of the Minister for Finance yesterday. This goes back to Mr. Daly's earlier comments. Public-private partnerships are mentioned as being an important vehicle for delivering infrastructural projects. Do the Revenue Commissioners have a statement setting out the tax treatment of public-private partnerships, for example, with roads being constructed under these partnerships with significant capital investment by the State?

Has a policy been laid down on the treatment of the capital value of the road or the public good which comes about from bridges, roads, etc. built as a result of the public-private partnership? Does this qualify for capital allowances for the private investors in the partnership? Clearly the public element would not be seeking capital allowances. Is that included in the cost borne by the State with regard to the PPP? To echo the Chairman's comments, are the Revenue Commissioners involved in computation of the tax implications of the scheme as part of the input process?

Related to this, it was announced yesterday that the development of private hospitals scheme would continue and be expedited. Will the capital value of the private hospitals scheme qualify for capital allowances in the ordinary way? I assume it will. Do the Revenue Commissioners have a protocol dealing with how these would be valued? There is a reference in the Minister for Finance's statement that relates to bringing forward reliefs for private hospital developments. It states the reliefs will be brought forward to bring about the capital investment amount. The reliefs were over a seven-year period. I am not sure what the Minister meant in his statement, so is it possible for the witness to clarify it?

Mr. Daly

I may be misleading the Deputy if I gave an off-the-cuff answer to those questions. I can investigate the matters and come back with the answers. There is a mixture of questions about tax and other issues, and I could not be sure at this moment of the correct answers. I would prefer to provide the correct answer.

Chairman

Will the witness clarify a matter regarding tax reliefs which is puzzling me? Are these reliefs tradeable assets, where a beneficiary who does not have sufficient income to avail of them completely can sell them to another person?

Mr. Daly

They are not.

Chairman

Is the witness sure of that?

Mr. Daly

I may have to consult experts, but I believe they are not.

Chairman

I have been given examples where an investor puts money in a project and, for example, his income was not sufficient to avail of the total capital allowances. A third party would then purchase the allowances and enjoy them.

Mr. Daly

My view is that tax reliefs cannot be purchased. I will look to clarify the issue.

Chairman

Is the tax relief attached to the particular project or the individual investor? For example, would it be attached to the private hospital, nursing home, multi-storey car park or crèche?

Mr. Daly

Conditions would not necessarily be the same for every scheme.

Chairman

There is a market, the details of which I do not fully understand. I would like the witness to clarify the issue.

Mr. Daly

I have been caught without expert advice. I would prefer to give an informed answer on the matter rather than speculating.

Deputy Burton

In a public-private partnership, would a road, for example, be included in valuation and would it attract capital allowances on the books of the PPP? The reference in the budget document relating to private hospitals stated there would be a new option for investors to claim all relief in year one, but at a restricted 50% rate. In other words, what was allowed over seven years is to be brought forward. Although it is not a matter for the Revenue Commissioners, I presume this is to make the option more attractive for private investors.

Mr. Daly

That is a matter of policy as announced by the Minister. I cannot be sure of the answer to the other point, and I would prefer to write to the Deputy with the answer.

Mr. Purcell

I have little to add on both issues of the chapter, the relevant contracts tax and the CREST. It is fairly clear that much progress is being made by the Revenue Commissioners, particularly in the case of the CREST which may not be that well known. There is sometimes value in us examining a particular area that may otherwise go unnoticed. It can act as an impetus for the Revenue Commissioners to take a fresh look at these issues, particularly matters such as CREST where the scale of activity has increased in recent years.

The RCT will always be with us and I understand the Revenue Commissioners' position on the matter. However, it is fair to recognise diligence — although I did mention ambivalence earlier — in the matter of status of employee or subcontractor. Much progress has been made there and on the technical end of matters, which should be of much assistance to the checks carried out by the Revenue Commissioners. I hope this would lead to more revenue for the national coffers.

Chairman

Is it agreed to note Vote 9 and dispose of Chapters 2.8 and 2.9? Agreed.

There is no other business. The agenda for Thursday, 15 December 2005 is as follows: 2004 annual report of the Comptroller and Auditor General and the appropriation accounts, report of the Comptroller and Auditor General into the PPARS computer system, if published. If the report is not published, the agenda will be Vote 33, Department of Health and Children (resumed), value for money report No. 49 of the Comptroller and Auditor General, dealing with waste management in hospitals.

Before Deputy Burton arrived today the Comptroller and Auditor General informed the committee he would be signing off on the PPARS report either this evening or tomorrow. There is a commitment from the Tánaiste that the report will be published on Monday. The agenda next week probably will be the PPARS report.

The committee adjourned at 2.10 p.m. until 11 a.m. on Thursday, 15 December 2005.