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COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 9 Nov 2006

2005 Annual Report of the Comptroller and Auditor General and Appropriation Accounts.

Vote 9 — Office of the Revenue Commissioners.
Chapter 2.1 — Revenue Account.
Chapter 2.2 — Tax Written Off.
Chapter 2.3 — Outstanding Taxes and PRSI.
Chapter 2.4 — Revenue Audit Programme.
Chapter 2.5 — Prosecutions.
Chapter 2.6 — Special Investigations.

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

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

Relevant correspondence received by the committee states the minutes of the Minister for Finance of 24 July 2006 considered last week by the committee are relevant to the subject matter of today's meeting.

Witnesses should be aware that they do not enjoy absolute privilege. Their attention and that of members 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 identified in the course of the committee's proceedings. These rights include the right to give evidence; the right to produce and 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 or 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 invited before the committee are made aware of these rights and any person identified in the course of proceedings who is not present may have to be made aware of them 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 they should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable. Members are also reminded of the provisions of Standing Order 156 that the committee shall 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 policy or policies.

I welcome Mr. Daly and invite him to introduce his officials to the committee.

Mr. Frank Daly

I am accompanied by Mr. Liam Irwin, deputy secretary, strategic planning division, and accountant general of the Revenue Commissioners; Mr. Paddy Molloy, principal officer in charge of statistics branch; Mr. Paddy O'Shaughnessy, principal officer, administrative budget branch, and Committee of Public Accounts and Comptroller and Auditor General liaison officer, and Mr. Tom Dowling, assistant principal officer, administrative budget branch. Our senior press officer, Mr. Dave Coleman, is in the Visitors Gallery.

Will the representatives from the Department of Finance please introduce themselves?

Mr. David Denny

I am from the organisation, management and training division.

Mr. Paddy Barry

I am from the budget and economic division.

I ask Mr. Purcell to introduce Vote 9 and chapters 2.1 to 2.6, inclusive.

Chapters 2.1 to 2.6, inclusive, of the annual report of the Comptroller and Auditor General read:

2.1 Revenue Account

Basis for Audit

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

I am also required under Section 3 of the Comptroller and Auditor General (Amendment) Act, 1993 to carry out such examinations as I consider appropriate in order to ascertain whether systems, procedures and practices have been established that are adequate to secure an effective check on the assessment, collection and proper allocation of the revenue of the State and to satisfy myself that the manner in which they are being employed and applied is adequate. Sections 2.7 to 2.10 refer to matters arising from this examination.

Revenue Collected

Revenue collected under its main headings in 2005 is shown in Table 2.

Table 2: Revenue Collected

Gross Receipts

Repayments

2005 Net Receipts

2004 Net Receipts

€m

€m

€m

€m

Income Tax

14,177

2,837

11,340

10,695

Value Added Tax

15,591

3,465

12,126

10,717

Excise

5,549

158

5,391

5,066

Corporation Tax

6,003

500

5,503

5,335

Stamp Duties

2,693

20

2,673

2,070

Custom Duties

234

8

226

174

Capital Acquisitions Tax

261

12

249

190

Capital Gains Tax

2,016

34

1,982

1,528

Total

46,524

7,034

39,490

35,775

Of the net receipts of €39,490m, a total of €168m was paid during 2005 under Section 3 of the Appropriation Act, 1999 from the proceeds of tobacco excise to the Vote for Health and Children. €39,240m was paid into the Exchequer which represented a prepayment of €250m. The amount prepaid at the end of 2004 was €332m.

2.2 Tax Written Off

The Revenue Commissioners have furnished me with details of the €143m of taxes and PRSI written off during the year ended 31 December 2005. Details of the total amount written off and the distribution according to the grounds of write-off are shown in Table 3 and Table 4.

Table 3: Taxes Written Off

Tax

2005

2004

€’000

€’000

Value Added Tax

48,433

72,369

PAYE

23,992

36,862

Corporation Tax

15,431

8,326

Income Tax

23,839

16,385

Capital Gains Tax

2,264

868

Other Taxes

4,653

1,120

PRSI

24,689

36,618

Total

143,301

172,548

Table 4: Grounds of Write-Off

Grounds of write-off

2005

2005

2004

2004

No. of Cases

€’000

No. of Cases

€’000

Liquidation/Receivership/Bankruptcy

1,263

69,928

2,097

88,519

Ceased trading – no assets

2,032

34,981

2,760

40,447

Deceased and Estate Insolvent

132

1,340

176

1,350

Uneconomic to pursue

60,911

19,358

19,359

23,162

Unfounded Liability

187

2,160

209

1,983

Grounds of write-off

2005

2005

2004

2004

No. of Cases

€’000

No. of Cases

€’000

Cannot be traced / Outside Jurisdiction

588

9,680

586

9,615

Compassionate Grounds

206

1,627

248

2,322

Uncollectible due to financial circumstances of taxpayer

439

4,225

706

5,150

Examinership

4

2

0

0

Totals

65,762

143,301

26,141

172,548

In 2005, €3.9m was written off on an automated basis, consisting of cases with small balances (less than €500) which were uneconomic to pursue. Cases under general investigation, potential Ansbacher cases, and cases under the control of the Criminal Assets Bureau are excluded from all write off procedures. The largest single amount written off in 2005 was €8.2m in respect of Corporation Tax owed by a company in receivership. There were five other cases where the amount written off was greater than €1m.

The Internal Audit Branch in Revenue undertakes an annual examination of tax write offs. The 2005 audit examined a sample of 192 cases representing 32% (€45m) of the value of non-automated write offs (€140m). In one of the cases examined involving a write off of €211,200, the tax liability was based on system-generated estimates for a company which Internal Audit found had never traded. As a result of the internal audit, the write off was reversed and the estimate discharged instead. In another case involving the write off of €94,851, Internal Audit raised questions in relation to the evidence on file supporting the grounds of write–off i.e. compassionate grounds. The District concerned is re-examining the case and is to furnish a full report to Internal Audit on the outcome. Internal Audit also examined the results of the ten automated write off runs and confirmed the application of the authorised selection criteria for each run.

2.3 Outstanding Taxes and PRSI

Table 5 reflects the activities and transactions in the twelve-month period ended 31 March 2006. Table 6 sets out an aged analysis of the balance outstanding at 31 March 2006. The tables were prepared on the basis of information furnished by the Revenue Commissioners.

Table 5: Outstanding Taxes and PRSI

Analysis of Balance at 31 March 2006

Balance at 31 March 2005

Tax or Levy

Net Charges Raised

Paid

Written Off

Balance at 31 March 2006

Under Appeal

Available for Collection

€m

€m

€m

€m

€m

€m

€m

289

VAT

11,056

11,067

51

227

69

158

161

PAYE

10,100

10,106

18

137

1

136

176

PRSI

7,350

7,340

21

165

1

164

292

Income Tax (Excluding PAYE)

2,807

2,808

15

276

59

217

DIRT

184

184

0

0

0

0

140

Corporation Tax

4,436

4,474

11

91

27

64

148

Capital Gains Tax

2,200

2,206

1

141

85

56

3

Capital Acquisitions Tax

249

249

0

3

0

3

8

Abolished Taxes

0

0

0

8

0

8

Relevant Contracts Tax

0

0

0

37

11

26

1,217

Total Debt

1,085

253

832

2.5%

Debt as a % of gross collection

2%

0.5%

1.5%

Table 6: Aged Analysis of Debt at 31 March 2006

Tax

Total tax outstanding at 31 March 2006

Amounts outstanding for 2005

Amounts outstanding for 2004

Due for 2001 to 2003

Due for earlier periods (i.e. > 5 years old)

€m

€m

€m

€m

€m

VAT

227

30

49

117

31

PAYE

137

73

23

26

15

PRSI

165

97

26

29

13

Income Tax

276

4

73

66

133

Corporation Tax

91

19

8

27

37

Capital Gains Tax

141

6

24

18

93

Capital Acquisitions Tax

3

0

0

1

2

Abolished Taxes

8

0

0

0

8

RCT

37

12

9

12

4

Total

1,085

241

212

296

336

2.4 Revenue Audit Programme

Overall Audit Programme

In a self-assessment system, returns filed by compliant taxpayers are accepted as the basis for calculating tax liabilities. The validity of returns is established by the auditing of a selection of cases either through reviewing and seeking further verification of particular details or by the examination of documents and records at a taxpayer's premises. Revenue changed the categorisation of its audit activities in 2005 to reflect the fact that the intervention by Revenue depends on whether the risk is perceived to relate to one or more tax or duty heading or to specific issues or transactions. Assurance Checks are not audits but interventions that may involve tests, verification checks, desk examinations, visits to premises, searches, site visits and telephone contacts for supporting documentation.

The outcome of the 2005 programme of Revenue audits together with assurance activity is summarised in Table 7.

Table 7: Revenue Audit and Assurance Activity

Category

2005

2004

No. of audits completed

Yield

No. of audits completed

Yield

€m

€m

Comprehensive Audits

5,077

323.3

4,058

382.3

Multi Tax/Duty Audits

1,220

52.3

848

18.4

Single Tax/Duty Audits

6,173

122.8

4,409

68.4

Single Issue/Transaction Audits

1,744

26.6

256

4.1

Verification Audits

0

0

6,750

76.4

Total Audits

14,214

525

16,321

549.6

Assurance Checks

98,981

50.4

n/a

n/a

Total Interventions

113,195

575.4

n/a

n/a

(n/a indicates figures not available).

Comprehensive Audits

To facilitate the recording of audit activity under the new audit categories, a new case management system – Audit Case Management – was introduced in July 2005. As a transitional measure spreadsheets were used to record audit activity under the new categories and, because of the administrative burden, Regions were not required to analyse settlements by settlement bands. Therefore, analysis by settlement bands was not available for 2005.

The yield of €323.5m from the 5,077 comprehensive audits completed includes interest charges of €124.6m and penalties of €52.7m. The highest settlements were €4.1m for Income Tax and €9.5m for Corporation Tax. Comprehensive audits were completed in 1,249 bogus non-resident account cases with settlements totalling €57.2m and in 1,594 offshore assets cases with settlements totalling €151.8m.

Risk Analysis System

A risk analysis system (REAP) was piloted in four Revenue Districts in 2005 and will be implemented in all Districts in 2006. The system analyses the information available on taxpayers by running a set of queries or rules through a database of taxpayer information, scoring the results and ranking the cases according to those scores. The rules have been derived from the knowledge and experience of Revenue auditors and are refined to take account of new risks and data sources. Based on the system ranking District officers analyse and assess the risk in each case to select suitable cases and decide on the appropriate intervention.

Random Audits – Taxpayer Compliance Testing Programme

Revenue introduced the Taxpayer Compliance Testing Programme in 2005 to replace the Random Audit Programme. The purpose of the programme is to measure and track compliance with tax legislation and to ensure that all taxpayers run the risk of being selected for audit. 411 cases were selected for audit under the 2005 programme. 53 of the selected cases were "dropped" as the taxpayer had ceased trading, had never traded or was recently deceased. Additional tax liabilities were established in 91 of the 298 cases that were finalised. Settlements totalling €1m were agreed in those 91 cases. The outcome of the finalised cases is summarised in Table 8. Analysis of the results of the 2005 programme will be performed when the outstanding 60 cases are finalised.

Table 8: Taxpayer Compliance Testing Programme — Finalised Cases by Size of Additional Liability

Additional Liability

Number of Cases Finalised

% of Finalised Cases

%

Nil

207

69

< €2,000

27

9

€2,001 to €5,000

24

8

€5,001 to €10,000

13

4

€10,001 to €20,000

11

4

€20,001 to €50,000

14

5

> €50,001

2

1

Total

298

100

2.5 Prosecutions

Under Revenue's prosecution strategy, Regions and Divisions forward cases to Investigation and Prosecutions Division for investigation with a view to criminal prosecution where there is prima facie evidence of serious revenue offences having been committed. These cases are further evaluated within the Division before commencement of the resource intensive criminal investigation work which can take several years before reaching the Courts. In 2005, 91 cases of serious tax evasion were referred to the Division for consideration and 30 were accepted for investigation with a view to prosecution.

Twelve convictions were obtained in the ten cases decided in court in 2005. Summary details of the cases are set out in Table 9.

Table 9: Convictions during 2005 for Serious Tax Evasion

Occupation/Activity

Fine

Custodial Sentence

Oil Distribution Company

4,000

and

Director of above Oil Company

7,400

3 months prison sentence

Stainless Steel & Engineering Company

15,000

and

Director of above company

3 month prison sentence

Retired Farmer

125,000

2 year prison sentence if fine not paid within 3 months

Sales Administrator

10,800

3 month prison sentence suspended on condition of 120 hours community service

Contract Cleaning and Security

6 month prison sentence suspended on condition of 240 hours community service to be completed within 12 months

Endodontist

4,500

Building Sub Contractor

18,700

6 month suspended prison sentence on each of 4 counts to run concurrently

Disc Jockey and Promoter

13,887

Veterinary Surgeon

Pleaded guilty in 2005, awaiting sentence

Shoe Retailer

Pleaded guilty in 2005, awaiting sentence

Of the 84 cases of serious tax evasion on hands in the Investigations and Prosecutions Division at the end of 2005, 36 remained under investigation at June 2006 and seven had been closed. The status of the other 41 cases was

5 are with the Revenue Solicitor's Office

12 have been submitted to the DPP

The DPP has issued directions to prosecute in 9 cases

Bench warrants have been issued in 1 case

14 cases are before the court.

In addition, there were 12 convictions for serious Customs and Excise evasion in 2005.

2.6 Special Investigations

Table 10 sets out the payments made to the end of June 2006 as a result of each of the Special Investigations being carried out by Revenue. A short summary of progress to date in the investigations follows.

Table 10: Payments arising from Special Investigations

Investigation

Cases Involved

Payments to Date

€m

DIRT — Look Back Audits (financial institutions)

37

225

DIRT — Underlying Tax

Voluntary Disclosure Scheme

3,675

227

Post Voluntary Disclosure Investigations

c. 8,500

390

NIB

465

57

Ansbacher

289

62

Pick Me Up Schemes

71

0.8

Mahon Tribunal

27

330

Moriarty Tribunal

18

8

Offshore Assets

13,990

826

Undisclosed Funds – Life Assurance Products

5,150

398

Total

2,223.8

Underlying Tax on Bogus Non-Resident Accounts

A total of 3,675 taxpayers paid €227m under the Voluntary Disclose and Pay Scheme whereby underlying tax relating to funds deposited in bogus non-resident accounts was required to be paid by 15 November 2001 to avail of the incentives of a cap of 100% on interest and penalties and an undertaking not to prosecute or publish details of the settlement. Revenue selected 268 of these cases for liability review. 208 of these were accepted as being correct, additional payments of €5,816,408 were required in 54 cases and six cases are still being examined. Payments on account of €1,097,769 have been received in four of the six open cases. All cases were reviewed for eligibility and 17 cases were deemed to be ineligible. Ten of these have been settled with additional liabilities of €1,669,325. One of these cases was prosecuted and received a two year suspended sentence. The remaining seven cases are at various stages of investigation.

Revenue used their powers under Section 908 of the Taxes Consolidation Act, 1997 to obtain information from financial institutions to help identify bogus non-resident account holders who did not avail of the Voluntary Disclose and Pay Scheme. Eighteen orders under Section 908, seeking information on account holders from 26 financial institutions, were granted. At June 2006, payments of €390m had been received from bogus non-resident account holders over and above the proceeds of the voluntary scheme.

Revenue estimates that the likely future yield from the DIRT underlying tax investigation will be of the order of €20m and will arise over the next couple of years.

Offshore Investments via National Irish Bank

Investigations have concluded in 430 of the 465 cases identified as having invested in an offshore investment scheme operated by National Irish Bank. Settlements totalling €51m have been made in 308 of these cases while the other 122 cases had no liability. Investigations are continuing in the remaining 35 cases and payments on account of €3.2m have been received from 12 of these. Over and above these amounts National Irish Bank has paid €3.1m in respect of Capital Gains Tax on compensation it paid to certain investors. Revenue estimates that a further €4m should be paid and that the investigation will be concluded within approximately 12 months.

Ansbacher Investigation

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

Ten High Court orders have been obtained against financial institutions and third parties requiring the production of books, records and documentation. Some 220,000 documents have been received under the terms of the High Court Orders. Also, documentation has been received on foot of the June 2004 High Court order which allowed for access to certain documentation relating to clients of Ansbacher named in the High Court Inspectors' Report and those persons found by the High Court Inspectors to have failed to co-operate with their enquiry.

A total of 210 cases have been settled to date, 83 of which had total liabilities of €50.77m. This includes a settlement of €7.5m with a Cayman Islands based bank. The other 127 cases settled had no liability and include 66 non-resident cases covered by the provisions of Double Taxation Agreements, as well as 18 cases covered by the 1993 Amnesty provisions. Payments on account of €11.16m have been received in 27 of the 79 on-going cases. As some of the cases are likely to proceed to the Courts, it is not possible for Revenue to predict either the potential yield or the time frame to completion.

Pick-Me-Up Schemes

Pick-me-up Schemes involved expenses for goods or services incurred by a political party being invoiced by the supplier to another trader who paid the supplier as a means of supporting the party. Such payments were not deductible for tax purposes, the VAT was not reclaimable and the invoices issued were not in accordance with the legal requirements. The investigation found a total of 71 cases that apparently avoided tax by engaging in "picking up" expenses, which were proper to political parties. 44 cases have been settled for a total of €552,344 including interest and penalties. Payments totalling €226,165 have been received in connection with ten other cases including Tribunal cases which are still to be finalised. It is proving difficult to conclude certain cases because of the age of the payments, which were made in the 1980s or early 1990s, and the lack of documentation and records gives rise to difficulty in confirming liability. It is not possible for Revenue to estimate with any degree of accuracy the final outcome and yield in connection with outstanding matters.

Tribunals

Matters disclosed at the Moriarty and Mahon Tribunals, which suggest that tax evasion may have occurred, are being investigated as they come to notice. Eighteen cases are being investigated as a result of the Moriarty Tribunal and two cases have been settled for a total of €6.3m. Payments on account of €1.4m have also been received. Twenty-seven cases are being investigated as a result of the Mahon Tribunal and four of these have been settled for €26.5m; payments on account of €3.6m have also been received.

The Moriarty Tribunal is nearing completion and it is not expected that further cases will arise. Revenue does not know if any additional cases will arise from the Mahon Tribunal or when that Tribunal will conclude. In relation to the cases being investigated, a further yield of €5m over the next two years is expected.

Offshore Assets

This investigation is concerned with those who have not paid tax due on funds held in offshore accounts and investments. The voluntary phase of the investigation required taxpayers to give Revenue notice of their intention to make a qualifying disclosure by 29 March 2004 and submit a statement of disclosure and any payment due by 10 June 2004. The benefits of meeting these deadlines were mitigation of penalties, settlement details would not be published and there would be no prosecution. Disclosures were received from 13,651 taxpayers and €650m was received both from this phase of the investigation and from two earlier investigations.

As a follow-up to the voluntary phase, nine High Court orders have been obtained requiring financial institutions to supply details of transactions by their customers relating to offshore operations. Revenue has been receiving information in relation to these Orders but it is not anticipated that all data will be received before the end of 2006. "Challenge letters" have issued in a number of cases and more will issue during 2006. Further information and court orders will be required to identify persons who could not be identified from the information originally submitted. A further €175.7m has been received since the voluntary scheme, arising from reviews of the voluntary submissions and payments from some 339 taxpayers who did not avail of the voluntary scheme. This follow-up work is likely to run for at least a further two years and the final yield from the investigation may approach €1 billion.

Life Assurance Products

Investigations into the use of life assurance investment products to hide undisclosed income or gains began in 2004. The voluntary disclosure phase of the investigation set a deadline of 23 May 2005 for those who invested undisclosed funds greater than €20,000 in such products to give notice to Revenue of their intention to make a voluntary disclosure. Full disclosure and payment was then required to be made by 22 July 2005. The benefits to the taxpayer in availing of the voluntary scheme were that the settlement details would not be published, there would be no prosecution and penalties would be mitigated in accordance with the Code of Practice for Revenue Auditors. About 10,000 notices of intention to make disclosures were received and some 5,150 taxpayers made payments of €398m under the voluntary scheme.

The second phase of the investigation involves identifying those who did not avail of the voluntary scheme. Revenue used new powers provided in the Finance Act 2005 (section 140), which allows it to sample the information held by a life assurance company that relates to a class or classes of policies and policyholders, where there are circumstances which suggest that such policies have been used to invest untaxed funds. The information obtained can only be used to assist in making an application to the High Court for an order to have wider access to the information. Revenue has completed the sampling work in 14 assurance companies. The information gathered from that work and from the voluntary disclosures is being used to assist in applications to the High Court for orders directing assurance companies to furnish details on individual policyholders and policies to Revenue (11 orders were applied for and made in July 2006). Revenue expect this investigation to take a number of years to complete and the final yield may exceed €500m.

Mr. Purcell

Chapter 2.1 sets out my statutory mandate for the audit of the accounts for the Revenue Commissioners and gives a summary of the amounts of tax collected in 2005. We will see that net tax receipts rose by over €3.7 billion in that year, reaching €39.5 billion, which reflects increases across all tax heads.

Chapter 2.2 gives details of the €143 million written off by the Revenue Commissioners in 2005. This sum included a figure of nearly €4 million, written off on an automatic basis, where the amounts of tax outstanding were small and considered uneconomic to pursue. In numerical terms, these make up the vast bulk of cases written off during the year. At the other end of the scale, the largest single amount written off in that year was €8.2 million in corporation tax. The write-offs were tested by the internal audit section of the Office of the Revenue Commissioners for compliance with agreed procedures and were generally found to be satisfactory.

Chapter 2.3 shows that at the end of March this year nearly €1.1 billion was owed to the Revenue Commissioners, which represents an improvement of €132 million on the position at the same time last year. Table 6 indicates that €632 million of the debt is over two years old.

Chapter 2.4 summarises audit activity at the Revenue Commissioners in 2005 and shows that an additional €575 million was assessed as a result of audit activity and assurance checks. Over €200 million of the yield came from targeted work on undeclared income underlying bogus non-resident accounts and offshore bank accounts. As briefly mentioned last week when considering the Minute of the Minister for Finance, Revenue relaunched the random audit programme as the taxpayer compliance testing programme in 2005. Some 411 cases were selected for examination, of which 60 were not examined for good reasons such as a cessation of the operation's trading or the death of the taxpayer in question. This left 351 cases for consideration. I understand 322 have been finalised to date. The result was that close to one third of those examined had additional tax liabilities established. The extra liability involved is in the order of €1.1 million.

Chapter 2.5 sets out the results of Revenue's prosecution of cases of serious tax evasion. Table 9 summarises the convictions obtained in 2005 in this regard. The chapter also refers to the prosecution of serious customs and excise offences.

Chapter 2.6 summarises the progress made in various investigations being carried out by Revenue. The return from these investigations at the end of June this year was just over €2.2 billion. I am sure the Accounting Officer will have the most up-to-date figures for the committee.

Turning briefly to the Vote, the operating cost statement in note 1 of the Vote account shows that the cost of running the Office of the Revenue Commissioners in 2005 was €406 million, compared with €387 million in the previous year.

Thank you, Mr. Purcell. Mr. Daly will now make his opening statement.

Mr. Daly

I would like to thank the Chairman and members of the committee for this opportunity to make an opening statement. The first paragraph under consideration by the committee today, reporting as it does on revenue collected, involves all of the staff in Revenue to one degree or another. The impressive receipts shown are underpinned by an equally impressive growth in the volume of our business. For example, the annual increase in 2005 for PAYE employments was 6%, while it was more than 10% for self-assessment income tax cases. Personal callers to Revenue offices increased by 13%, telephone callers increased by 22% and correspondence by 11%.

All this growth meant that in 2005, Revenue had well over 2 million PAYE employments on its records, there were over 500,000 self-assessment income tax cases and over 250,000 VAT registrations. We received more than 5 million telephone calls, over 3 million items of correspondence and more than 750,000 personal callers to our offices.

The net receipts for 2005 were €39.49 billion, which represents an increase of more than €3.7 billion, or 10.4%, on the corresponding figure for 2004 and some €1.8 billion above the budget estimate. The increase over the budget estimate was mainly due to much better than forecasted yields from stamp duties, VAT and capital gains tax.

Paragraph 2.2 deals with write-offs. The amount written off in 2005 was €143.3 million, in comparison with €172.5 million in 2004. The decrease is mainly due to a reduction in insolvency write-off following on from an increase in such write-offs in 2004. Almost 78% of the debt written off was more than five years old. As I have previously indicated to the committee, Revenue, like every other tax administration or business, inevitably experiences some bad debt. Our objective is to minimise this in every way possible and it is only written off when it is genuinely uncollectible or uneconomic to pursue. Amounts written off should be viewed in the context of the amount collected. As a percentage of the total gross tax, including PRSI, collected, the amount written off was approximately 0.25%.

Paragraph 2.3 deals with outstanding tax and shows the balance outstanding at 31 March 2006 at €1.085 billion, €832 million of which is available for collection, with €253 million under appeal. This is down by €132 million from the 31 March 2005 figure of €1.217 billion. Arrears of tax as a percentage of total gross receipts now stand at an all time low of 2%. The goal of less than 2.5% for arrears of taxes targeted for 2007 in our statement of strategy has already been reached against a background of large increases in charges raised this year.

A recent OECD report places Ireland third best in the OECD in terms of the size of the tax debt. However, the OECD report only includes figures for up to 2004. Given the improvement that I have just outlined, it is possible that even since then we may have moved into the leading position worldwide in this regard. Taxes outstanding have now fallen every year from a high of €5.466 billion — 62.5% of gross receipts — in 1985, to €2.6 billion — 15% of gross receipts — ten years ago, to the 2% published in the current Comptroller and Auditor General's report.

As reported upon in paragraph 2.4, the Revenue audit programme is an established and successful means of ensuring compliance with the self-assessment system. In recent years the routine audit programme has been overshadowed somewhat by the various special investigations but it has always been, and continues to be, hugely significant both in terms of compliance and tax yield.

A total of 14,214 audits and investigations were completed in 2005. The total yield from these interventions, including assurance checks, was €575.4 million. In addition to this yield, Revenue officers collected €7.79 million in arrears of tax in the course of audit interventions. Details of 629 of the cases settled in 2005 were published under the provisions of section 1086 of the Taxes Consolidation Act 1997. The total amount of the tax interest and penalties in published cases was €116.94 million.

Reference is made in paragraph 2.4 to the computerised risk analysis system which categorises taxpayers in accordance with defined risk criteria. This was successfully piloted in four of our local offices during 2005 and is being rolled out nationally this year. We have carried out some encouraging preliminary analysis on this system. The analysis basically involved generating two streams of audit cases in a particular tax district, one audit stream based on the risk analysis system and the other based on the traditional approach. A comparison was then made of the audit yield from these two methods. This comparison showed that the risk analysis system produced both a greater number of yielding audits and a higher average yield. As I have said, these are preliminary results but they do suggest that our capacity for identifying riskier cases will be enhanced by this system.

As regards the taxpayer compliance testing programme — or random audits as it is more commonly known — the number of cases finalised is now 332, up 34 from the 298 mentioned in paragraph 2.4. I am, of course, fully conscious of this committee's, and indeed the Comptroller and Auditor General's, deep interest in this area. One of the lessons we have absorbed on the learning curve is the difficulty in bringing to finality in a set time span a preselected fixed number of audits. Even with the best will in the world, it may not be possible to bring audits to a quick conclusion for a variety of reasons. These reasons could include difficult family circumstances, serious legal issues arising, or points of law being raised in the context of the formal appeal system which is a taxpayer's right.

As I have said at previous committee meetings, one would have to be extremely careful about drawing general conclusions from the results of this type of sample and we will require results from future years before any such conclusions can be drawn. I am happy to say, however, that this process has now well and truly begun and that it will be of significant benefit to Revenue in the future.

Paragraph 2.5 deals mainly with prosecutions for serious tax offences which, as the committee is aware, are now managed by a dedicated investigation and prosecutions division following the restructuring of Revenue. In two of the 12 successful prosecutions in 2005 custodial sentences were imposed and suspended sentences were imposed in four others. The figures for the year reflect both the highest ever number of prosecutions and the highest number of cases under investigation with a view to prosecution.

In addition to the prosecutions for serious tax evasion reported upon there were also a considerable number, more than 450, of Revenue prosecutions in the customs and excise area. As well as this, more than 1,000 convictions were obtained for summary offences relating to the non-filing of tax returns. In 2005, Revenue began publishing details of significant tax and duty cases on our website.

Paragraph 2.6 deals with special investigations. The running total for these investigations stands at €2.261 billion, which is an increase of more than €124.5 million since I last reported to the committee on 8 December 2005. It is an average of approximately €10 million per month since then.

Thank you, Mr. Daly. May we publish your statement?

Mr. Daly

Yes.

There are reports that significant amounts of money owed to compliant taxpayers for relief are not claimed. Does Mr. Daly have an estimate of the amount that could be paid back to taxpayers if these reliefs were claimed? Could he outline the principal reliefs for which claims are not being filed? Could he also indicate whether this is principally PAYE taxpayers to whom small amounts of money are owed? The total may be a significant amount overall, but am I right in suggesting that large amounts are not owed in individual cases? Small sums are owed principally to compliant PAYE taxpayers. While the total sum is significant in individual cases, the amounts are not significant.

Mr. Daly

Figures for the amounts claimed up to the end of October give us a benchmark for this discussion. Revenue made a total of 485,000 repayments up to the end of October. The total amount involved was €353 million. That is factual material on what was claimed and repaid. It is difficult to speculate about what might be claimable.

Revenue ran an intense high profile campaign during August, September and October to encourage taxpayers to claim the reliefs to which they were entitled. The response has been positive in the main areas — trade union subscriptions, bin charges, age, rent, home care and dependent relative credits and medical insurance premiums. There have been significant increases in the numbers claiming and contacting us, which is a positive outcome. I can furnish figures if the committee wants them. There has not been a significant increase in the number of claims in respect of health expenses but in the normal way taxpayers claim these at the end of the year or early in the new year but I expect our campaign will have an impact on this also. We advertised on radio, bus shelters, the DART and the Luas and have a continuing campaign of placing leaflets and claim forms in clinics, doctors' surgeries and pharmacies. We are doing a great deal to encourage people to claim allowances or credits to which they are entitled. The campaign we conducted in recent months had a measurable response.

It is difficult to speculate on the amounts that might be owed because until it is claimed we do not know whether people are entitled to it but I am encouraged by the increase in the number of claims in respect of bin charges, trade union subscriptions, rent and home care credits. They are all part of a positive outcome.

Is it an exaggeration to say, or is it that the information is not available, that there might be a sum of €400 million or €500 million not claimed by taxpayers in a series of reliefs, particularly medical expenses?

Mr. Daly

I am reluctant to put a figure on it but up to the end of October €353 million was claimed and paid. That mirrors what was paid in 2004, when the total was €325 million. In 2003 the total was €295 million. Taxpayers are becoming aware of this and are claiming. To say there is almost the same amount unclaimed would be overstating it but perhaps there is a further €100 million unclaimed.

There is another side to the issue because sometimes people on the margins owing to means-tested entitlements such as higher education grants are over the line until they make their claims. The difference can be significant, even though the amounts may be only €100 or €200 in total. I see examples of this in my constituency work. Revenue should continue to highlight this issue because there are unclaimed medical expenses as people are not aware of their entitlements and, therefore, have not claimed.

Mr. Daly

I expect the number of medical expenses claims will increase in the normal period in which taxpayers usually claim them, early in the new year when they review their tax returns. In the long run we will continue advertising, campaigning and reminding taxpayers about their entitlements. Our strategy is to automate these credits, where possible. We are looking at plans to do some of this in the next year or two. That is the real secret. The tax relief at source system has worked very well where it has been possible to offer it but it has not been possible to do so everywhere. There are other options, for example, we could obtain third party information and possibly on the basis of that information automate the repayments. That is our strategic approach.

Revenue has replaced the random audit programme with the taxpayer compliance testing programme. With regard to the active sample, 91 cases representing 31% of the active sample had an additional liability totalling €1.1 million. That seems like a very high figure. Does Mr. Daly agree with or dispute the figure?

Mr. Daly

I certainly do not dispute the figures. The outcome of the programme in so far as it is completed — there are some cases to be completed — is that of the 332 cases completed, 225 had no additional liability, while 107 had a yield. We can come to several conclusions in this respect. In terms of its genuine randomness, the 2005 programme was light years ahead of anything we had done before and the 2006 programme will be even better because we had a problem with some dropped cases, about which I can talk if the committee wishes.

What would be the figure for 2006?

Mr. Daly

The selection process for 2006 will not encounter the problem of dropped cases that we faced in 2005. In so far as possible, it will be even purer than in 2005, which was the best yet. One can extract all sorts of figures from this result, for example, the Deputy can say 30% yielded, whereas I can say 70% are totally compliant. In material terms, over 75% of cases yielded either nothing or less than €2,000. We had to drop 60 cases for various reasons but it is highly likely that they would have yielded a nil amount. They were replaced by others that might have yielded. I do not wish to argue about whether this is good or bad.

Was Mr. Daly surprised at the figure?

Mr. Daly

I was not surprised; I was neutral on the issue. I would have been surprised if it had been any worse. I had hoped it might be a little better but I am reluctant to draw conclusions from this in respect of the general population. It was a sample of a subset of the population, self-assessed cases. One needs to reach over 85% or 86% to get real money.

Within the yielding cases there is a broad mix of types of compliance error. While a yield of €20,000 is big money, it may come from an individual or company which normally pays millions. To claim that 30% of taxpayers are not tax compliant would be heroic. We should not take that approach. One needs to look behind the figures and examine them over several years.

Are there any numbers for 2006?

Mr. Daly

I have some preliminary numbers but only approximately 20 cases have been completed. In four of those cases, we only got small amounts of money, such as €960, €1,500, €1,700.

The figures are generally bearing up.

Mr. Daly

This year, 2006, is a little bit better at 20%. It is early days and I would not read anything into the figures for 2006. In the results of the 2005 programme, there were two serious outlier cases involving €50,000 and €100,000. Most statisticians will say that one has to be careful about reading anything into outlier cases.

Have there been any prosecutions with the aiding and abetting provision introduced in the Finance Act 2005?

Mr. Daly

No, there have not been. As we debated the last time, it is a prospective provision and can only be dealt with in future cases. As a result, there has not been a conviction under that provision. In every case we examine for prosecution, we also look at aiding and abetting or facilitating tax evasion.

Mr. Daly mentioned a review on a regional basis by the Revenue Commissioners of the effectiveness of the Finance Act's provisions. For example, in the life assurance cases, are the commissioners finding individuals that were aiding and abetting tax evasion?

Mr. Daly

In regard to the life assurance investigation, we are only getting down to the nitty gritty of following through on those who did not voluntarily disclose. It would normally be in that phase that we would come across the real modus operandi to create evasion. In so far as there was evasion in the insurance area, it happened up to 30 years ago. Again the offence would predate the actual aiding and abetting legislation.

I am not asking Mr. Daly to be clinical with regard to the prosecution element. Are the Revenue Commissioners finding reasonable evidence to suggest there is quite a good deal of aiding and abetting?

Mr. Daly

In the same way as the bogus non-resident accounts and the offshore accounts with the banks, in some cases there was an element of encouraging people to put money into these products because it would be hidden from Revenue. However, I do not wish to brand all insurance companies and brokers with the same label.

Does Mr. Daly believe that in some cases people did not know what was happening?

Mr. Daly

Some of the individuals.

Mr. Daly

In the life assurance cases it is quite possible. It is different to the earlier investigations. If individuals set up a bogus non-resident account or deliberately opened an offshore account, I would find it difficult to believe they did not know what they were doing.

Mr. Daly said that before.

Mr. Daly

In the life assurance cases, it is possible there were people who were innocent parties. We are taking a slightly different approach to this investigation. We are taking into account that many people who took out these products were fully compliant. We are going to much trouble to contact these people to avoid making inquiries or investigating them. We are doing that by setting reasonable thresholds. We have asked the insurance companies to notify the individual policyholders, as required under the High Court order, that the Revenue Commissioners would be informed about the policies. They were also asked to send to policyholders a declaration for the Revenue Commissioners which they could send to us stating they did not have a tax liability with the product. By and large, we are taking the view that we will not investigate them further unless there is something obvious on our system to indicate there might be evasion. We recognise there is tax evasion but in the insurance investigation there are more genuinely compliant people than there were in either of the earlier investigations.

Essentially, Mr. Daly believes in many cases individuals did not know what they were doing.

Mr. Daly

It is different to say they did not know what they were doing. Many people genuinely took out these products with after-tax income such as lump sums on which there was no tax liability. We have no interest or intention of going after these people.

Mr. Daly stated in a newspaper that many people who hid money in single premium policies were caught during the probe into bogus non-resident accounts. When an individual was asked to fill out the non-resident account declaration, one was asked to declare any other financial products one held. How many did not disclose on these forms?

Mr. Daly

I do not have the figure. In the bogus non-resident account and offshore account investigations, we insisted the individuals sorted out all their affairs.

Would it have been a quite sizeable figure?

Mr. Daly

I really cannot speculate. I will not have it until the end of the insurance investigation.

Some cases were dropped on compassionate grounds and one case is being re-visited. Revenue is an organisation not associated with compassion. From a Deputy's perspective, what are compassionate grounds?

Mr. Daly

In general write-off cases?

Mr. Daly

They are defined in a set of guidelines. A customer may be unable to pay due to his or her financial circumstances. For example, he or she may be dependent on a social welfare pension or other small payments. The individual might have low income, be ill, old, infirm or have no significant assets. I deal with compassion every day. I get many letters from people in difficult circumstances. The real trick is to weed out the genuine cases and the ones appealing to my compassionate nature. There are people who get into trouble and whose circumstances change from the time they incurred the tax liability.

Does Mr. Daly determine that? Does it arrive on his desk?

Mr. Daly

I do not want to be inundated tomorrow with thousands of letters. The case workers in the various tax districts will make a recommendation on writing off a tax liability. Ultimately as Accounting Officer I sign off on every case. I do not examine every case because if I did I would be doing nothing else. Every month I receive a list of write-off cases which have been through a rigorous process. The list informs me who the individual is, the address, the amount and the grounds for the write-off.

They must fit into those criteria listed.

Mr. Daly

Yes. Occasionally, as part of my responsibility as Accounting Officer, I will call for the papers on a number of the cases in each monthly list to ensure I am not signing off on a matter I should not. I receive letters as chairman from people who appeal decisions, having fallen on hard times. I take them extremely seriously and refer them down to the individual case worker and get the report. I am surprised at the Deputy's belief that we are not a compassionate organisation, since that is very much the case. Given the job that we do, we are vitally compassionate.

We come from the same town and people will know the old joke that when Frank Daly comes to the sailing club, people run down to their boats and paint over the numbers.

Mr. Daly

I do not want to delay the committee, but my boat, which the Deputy knows is modest, was being taken from the water with the general boat lift a few weeks ago. I could not be there, since my son was to marry the same day. I received a text message in the middle of the wedding to say that my boat was now out of the water on the sling but that the people who were to do the rest of the work had some tax problems.

What happened?

Mr. Daly

My boat is intact.

On a serious point with regard to yachts, I believe the Revenue Commissioners recently investigated boats being brought over and found that a considerable number were liable for tax. Is that continuing? Has there been a resolution to the investigation?

Mr. Daly

It is a regular investigation in the sense that one of the things for which our special compliance districts, very much a feature of the restructured Revenue, are responsible is active intervention and investigation regarding non-compliance on the ground. It supplements our audit and compliance programme. People get out there and see what is happening. There would be no such cases in Dungarvan, which is a very modest marina, but in some cases boats and yachts are indicators of wealth that may not have been declared to the Revenue. There are figures somewhere for the VAT recovered on yachts in the last year, but I do not have them with me today.

I have a final question. ISME put a figure on the value of the black economy, €1 billion per month. I believe that the figure per year was €13 billion.

Mr. Daly

I have seen over the years a great many figures regarding what the black economy might be worth in this country and others. Various studies are carried out from time to time, mostly by academics. One academic, Professor Friedrich Schneider of the University of Linz, speculated in 2004 regarding the size of the black economy in various countries. He placed Ireland somewhere in the middle. I do not have figures except to show where Ireland stood in the list. He acknowledged, like various other experts, that there is no real way of measuring the black economy, meaning that it is very difficult to speculate about what it might be worth.

The random audit that we discussed earlier is in some ways ultimately a measure of what is not being paid in tax but should be paid. As we refine it, one can gain indicators. A random audit is, however, by definition an audit of people who are already on our books. It does not take account of people who might not be registered. We have a programme run by the special compliance districts that essentially tries to get people on the register who might be in the totally black economy, not paying us anything. I cannot find the figures for that, but we may get 2,500 to 3,000 people every year. We get them on our records and into the tax system.

I do not believe that the black economy here is huge. However, it exists, and I would never be complacent in that regard. The work that we have been doing in recent years has increased tax compliance in this country. Yesterday, I attended a conference in Ennis talking about the culture of compliance and how we might promote that in this country. I was answering a question that I had asked myself: whether we are now a compliant country. It would be naive to say that we are, but I believe us to be more compliant than ever before. We are headed in the right direction fast.

Given the set of figures under each heading in this report, the Revenue Commissioners are to be commended on their work. No major questions jump out regarding any heading and the progress made so far has been very positive, yielding substantial sums. The low debt ratio in comparison to the overall tax take is good.

I am not nitpicking here, but I wonder about the figure of €8 million and the other smaller sums written off over the five-year period. Is there not any indicator in the local office that the client is falling behind in tax from year to year and that there is an emerging problem? Would that not provide grounds for early engagement with that client to ensure that the problem does not grow? I appreciate that sometimes it is not economic to chase them, but if one gets them earlier, larger figures may not emerge. How did the €8 million arise? Was it from a single transaction, or did it grow over the years?

Mr. Daly

I thank the Deputy for the positive comments. He is absolutely right that our strategy is now to intervene as early as possible, and I believe that we are getting much better at it. That has benefits for both Revenue and the individual taxpayer. In the past, debt accumulated and the matter got out of hand so that taxpayers were not able to deal with it. Our very definite policy now for several years has been to intervene as early as possible and not let the debt accumulate in the first place. We work with the taxpayer if he or she has a problem, and that may include instalment or other special arrangements to pay the debt off and get to grips with it. No matter what instalment arrangements we put in place for a debt, we always insist that the current debt be paid first. If one does not do that, one merely adds to the problem.

The €8.2 million, the largest single amount written off in 2005, stemmed from an unusual situation whereby the debt accumulated extremely quickly. I do not wish to talk in great detail about the case, since it would identify the company and that would not be correct. In that case, an asset was disposed of and the proceeds deposited. In the meantime, however, it became extremely clear that there was no substance to the company. We agonised a great deal over the issue, which was an unusual one.

The three other larger amounts, €2.5 million, €2.4 million and €1.1 million, respectively, were income tax liabilities incurred by employees who had exercised their share options. I suppose that it was a product of the boom a few years ago. As members know, income tax on share options is not payable until they are exercised. By the time those three individuals did so, they had left the country and we have been unable to trace them. If they ever return, we will certainly reinstate the debt.

One of the bigger cases, concerning a write-off of €1.7 million, was a bankrupt.

Are those pure tax figures, or do they include penalties and interest?

Mr. Daly

They are tax figures.

In regard to the last issue raised by Deputy Deasy, that of the black economy, the Revenue Commissioners focus in the context of these reports on the numbers of people registered who are compliant year-on-year.

Given rising business costs and the competition in the changing economy and society, I take the opposite view regarding the black economy. It is a problem that has grown rapidly in recent years. I have received numerous complaints from business people in respect of individuals who sell goods and services on a door to door basis, or, for products that are more suitable to business, on a business to business basis. What steps are the Revenue Commissioners taking to minimise or reduce the numbers of people who are involved in the black economy? I do not refer to people who may register at some point but to the different sectors that are currently under investigation by Revenue. It has investigated builders, the transport sector and so on. However, the black economy element of such business sectors is growing. Therefore, Revenue must reach beyond the norm. Within the organisation, what or who is engaged in such investigations? Have the Revenue Commissioners received many complaints from businesses, chambers of commerce or so on? IBEC was mentioned earlier. This is a growing problem and in recent years I have received quite a number of complaints in this regard.

Mr. Daly

Recently, I have not received any formal complaints from any bodies regarding the black economy. However, I am aware they make statements in this respect. I would be quite happy to engage with or talk to any organisations or individuals who can provide instances that we can tackle. When I stated that I do not believe it is growing, I did not mean to appear complacent in this respect as I am not.

As for tackling it, the ordinary revenue audits and investigations continue. The special compliance districts to which I referred earlier are key to this matter. The Deputy's point related to people who go door to door. It pertains to the cash economy such as a fellow in a van. We have been trying to put people on the ground to ascertain what is going on in an area and to challenge it through real-time interventions. In addition, we have identified different sectors in which we believe there might be problems such as those described by the Deputy. In 2005, we targeted the high profile construction industry sector and the results were very good. If members wish, I can provide the committee with results for 2006.

In 2005, we also conducted sectoral or targeted projects in respect of the fishing, waste disposal, motor, beauty and hairdressing and security industries, as well as the guesthouse and fast food sectors. In future years, our approach will also be to examine individual sectors. If we can target sectors in which we can state that a black economy dimension exists, given the information the Deputy or someone else might have, we will certainly focus on them.

Mr. Daly mentioned all the different industries, sectors and so on in which the Revenue Commissioners undertook investigations. In such investigations, Revenue investigated those who are operating.

Mr. Daly

Yes.

Did any of those investigations turn up people in the building, transport and hairdressing businesses or whatever, who were operating without any intention to register as a business? There is evidence for this in the form of complaints made by local businesses. Perhaps such complaints are not made to the Office of the Revenue Commissioners. Perhaps an appeal should be issued to the effect that such complaints should be made directly to that office. I refer to people who regularly conduct their businesses entirely on a cash basis.

Mr. Daly

I will provide the Deputy with an example from the beauty and hairdressing industry to which he referred. One of the results from that project was that in the Dublin region, a total of 481 unregistered cases were taken on board as a consequence of that approach. The 481 cases in question were engaged in the type of economy referred to by the Deputy in a single region of one sectoral project. I am sure similar figures were produced from some of the other projects on the motor industry, waste disposal or whatever.

When undertaking a sectoral project, the first thing to do is to build a profile of the entire sector. Such a profile will include whether people operate in the sector who are not on our books at all. I refer to those who are fly-by-nights, are operating from home or whatever. We are learning all the time and the sectoral approach is working very well for us.

For example, in the construction sector figures for the first ten months of 2006 show that during nearly 1,500 site visits, we found 513 people who were not on our records at all. They were definitely hidden or black economy cases. We learn more as we intrude into a sector. However, I assure the Deputy that we are alive to such hidden or black economy activity.

I raised this point out of concern for those who are tax compliant and who are obliged to compete with those whose costs are far lower because they are not registered.

Revenue went to court in respect of the life assurance products. The chartered accountants took issue with the type of form that was sent out. Can Mr. Daly explain the issue and how it was overcome?

Mr. Daly

In the course of the insurance investigation, we went to the High Court and obtained 11 High Court orders against the largest companies. A small number of High Court orders are still pending. The terms of each High Court order required the relevant insurance company to notify policyholders that it would pass the information to Revenue. We took advantage of this and asked the insurance companies to include a message from us to the policyholders, as well as a small declaration form. In essence, a policyholder who signed the declaration form was confirming that there were no tax issues in respect of the single premium policy.

Some professional bodies took issue with the scope of the declaration because it asked people to state they had no tax liabilities or in other words, their tax affairs were in order. This is a fairly normal thing for us to ask, because there is no point in Revenue asking people to state their tax affairs are in order with regard to A, but, by the way, it does not really care about B, C or D. Earlier, Deputy Deasy referred to people who might not have fully declared under the bogus non-resident investigation or under the subsequent offshore accounts investigation. The bodies took issue with this.

Despite this, to date we have received back 40,000 of those declarations from policyholders. It is a way for us to eliminate people from this inquiry with the minimum of fuss. I certainly encourage anyone who still has one of these declaration forms and who does not have a tax problem to send it back to us.

Has this issue stalled the investigation?

Mr. Daly

No.

Has Revenue encouraged the institute to tell people, as Mr. Daly has done today? Is there an ongoing issue in this regard?

Mr. Daly

We have discussed the matter at the tax administration liaison committee at which the various professional bodies are represented. However, their position is that it is too wide a declaration and that they could not advise their clients to sign it. Despite that, 40,000 people have signed it and sent it to us.

I have a final question that follows on from Deputy Deasy's reference to the 2005 legislation regarding aiding and abetting. Have clients come forward with information arising from Revenue's investigations? Mr. Daly stated that if Revenue received sound information, it would take legal action against banks or anyone who might have aided and abetted at that time. Does Revenue continue to collect information on these accounts from those clients and have any clients come forward with sound information that would give Revenue cause to take it forward legally?

Mr. Daly

We would still be caught by the fact that these offences in respect of offshore or bogus accounts took place prior to this legislation, so we cannot prosecute. In respect of the more general question, there are not that many clients who contact us with sound information and inform us that a certain bank or insurance official encouraged or aided them in tax evasion. I believe I previously told the committee that we have received a considerable amount of anecdotal evidence and information from people who are justifiably annoyed with the banks and other bodies. However, I am not aware of any case relating to something that one could bring before a court or of people's willingness to go beyond complaining to Revenue or some other body and support Revenue in a prosecution against an institution.

I apologise for the fact that I missed some of the other presentations. I have a question about the arrangement whereby property developers and landowners transfer shares in companies instead of transferring and conveyancing the land or property. Instead of buying land or property, they buy shares in the company. The rate of stamp duty on share transactions is 1%, while the rate of stamp duty on property and land at a significant valuation is 9%. For example, the recent reported deal in respect of the Irish Glass Bottle Company site in Dublin 4 was reported as being worth €412 million. I reckon that as this company mechanism was used, the parties involved in the deal probably saved approximately €30 million in stamp duty.

Is my understanding that Revenue has begun sending questionnaires to banks, finance houses and others in respect of the practices relating to this particular area correct? Is this not a case of closing the door after this particular horse, which is a real thoroughbred, has well and truly bolted? It appears that this method is tried and tested in respect of every office in town for solicitors and property dealers.

Mr. Daly spoke earlier about how compassionate he was, which I accept. It is very difficult for a couple trading up who exceed the €317,000 limit on a modest second-hand property possibly located on the south side of Dublin and who easily incur nowadays a stamp duty bill of between €30,000 to €70,000 on relatively modest properties to look at a situation where developers get away with this and some developments, for example, those in Ballsbridge, where sites worth in excess of €1 billion have changed. The people down the road who buy the properties will pay stamp duty but the people involved in the original deals will be able to skirt around it.

Mr. Daly

I think the Deputy is talking in general about the structure of stamp duty. Obviously, I cannot venture into this area because it is essentially a matter for the Houses of the Oireachtas. Deputy Burton mentioned a particular case. As members are aware, I do not discuss individual cases. Under the stamp duty legislation, liability to duty arises when there is a conveyancer transfer of legal title to property, including lands. In other words, to incur stamp duty, there must be a conveyance and if no conveyance is taken by the developer, there is no stamp duty.

Without commenting on the particular case mentioned by the Deputy, where what effectively happened was a share transfer, this is the way that business was structured. Short of discussing the case itself, I do not want to get into a discussion about whether it is correct. One obviously needs to look behind every case and take a view on this basis

Deputy Burton mentioned Revenue writing to banks and finance houses. I possibly misunderstood her but I am not aware that we are doing this.

I was told in the Dáil by the Minister that Revenue was undertaking a review in response to several parliamentary questions. I was informed that Revenue recently wrote to various banks and houses and I wondered whether this was part of this promised review.

Mr. Daly

It is part of the review into another issue that has been raised about people who build under licence agreements so it is a separate one. I misunderstood the Deputy.

I thought the two were the same.

Mr. Daly

They are not the same. The Minister is correct. We have written to people in respect of the second issue where the owner of the lands grants a licence to the developer so that the developer can enter on to the lands for the purposes of developing it. This again goes back to the point I made earlier. There is no conveyance and, therefore, under stamp duty legislation, no stamp duty is payable. It is true that the developer subsequently enters into a contract with the house purchaser and that on completion of this contract, the owner of the land will convey the site to the house purchaser and stamp duty is paid.

There is an issue in that which has been raised and the Minister asked us to conduct a review of it to see the extent of it. The problem is that, by definition, because a conveyance has not taken place, we do not have any record of it. We have written to a random sample of approximately 100 developers throughout the regions to get some information about lands developed in recent years and to see whether conveyance had been taken in respect of these lands. The covering letter requested a response by 10 November. As of today, we have received approximately 26 responses. We will examine the responses. I am sure we will have to undertake some detailed analysis and examine the quality of the responses. We will then produce a report for the Minister as he has requested.

I also raised the licensing issue with the Minister. I understand it was my queries in the House which brought it to his attention. I apologise for harking back to my constituency but there are situations, especially in Dublin West, where schools cannot be built because developers will not agree to pass on the land. This is because they insist on these licensing arrangements because they are so lucrative.

I am grateful for Mr. Daly's clarification because I did not realise that Revenue is treating the licensing arrangements and stamp duty avoidance arrangements separately. I understood that there was a menu of avoidance. On several occasions, Mr. Daly is on record as having criticised over-aggressive tax planning, for which I applaud him. Here we have a situation where there are two mechanisms for completely avoiding stamp duty. One relates to licensing and can continue indefinitely, while the second relates to the share transfer in companies.

Revenue is about to examine licensing, which is the first mechanism of tax avoidance, but will it examine the company structure and the transfer of shares? Given the transfers of property which have been subject to both licensing arrangements and the transfer of shares in companies, we are talking about a significant amount of tax avoidance by the development-construction industry on a par with some of the earlier investigations. Has there been an attempt to quantify the avoidance and have the Revenue Commissioners proposals to address the second part of this tax avoidance structure?

Mr. Daly

As yet, I have not labelled any of these procedures as tax avoidance. I would prefer to wait until I see the facts. As I do with every case, I would like to look beyond the case referred to by the Deputy before labelling it.

Our focus is on licensing. Just as with every area of actual or potential avoidance that comes to our attention, we will examine the matter. I deplore aggressive tax avoidance, but as the Deputy knows, it is difficult to define and deploring it is not the same as saying that I can do something about it. We will carry out any required research or examination. I cannot quantify tax avoidance until I know its extent.

Regarding outstanding relevant contracts taxes, which I raised previously, it would seem that because the cases have not been finalised, tax evasion and fraud in sectors of the construction industry are alive and well and, in particular, revolve around the use of the self-employed status as opposed to the employee status. The moneys involved are probably significant. I note that, on Table 5, a figure for outstanding RCT and PRSI is given for the first time. Many people in the construction industry have no PRSI coverage because they decided or their employers urged them to become self-employed contractors. They will have no coverage for when they get older and if they have accidents or fall ill.

Given that so much money is listed in terms of RCT, will Mr. Daly update the committee on whether the Revenue Commissioners have started to come to terms with what has been happening in the industry? I appreciate that it has been a difficult matter for Revenue due to the economic boom.

Have the Revenue Commissioners overcome the health and safety problems, that is, does Revenue have people with boots and hard hats on sites? What has Revenue started to do? It has only started to pick at the surface of non-compliance in the construction industry.

Mr. Daly

In the past year, we have done a great deal regarding the construction sector. Last year, we undertook to devote 25% of our audit or investigative resources to the construction industry, but the percentage turned out to be slightly higher. The Minister has made various legislative changes, we have improved our technology and we have made many administrative changes, such as central units to deal with non-resident contractors, the establishment of a full-time national RCT monitoring group and so on.

Ultimately, hard figures and facts count and our activity in this regard to the end of October 2006 has been significant. We have carried out 3,083 audits, 29% of our total audits this year, and we have collected approximately €102 million from the industry, approximately 21% of the total collected. I do not want to say that the whole construction industry is ripe with fraud. The outturn in terms of yielding audits is approximately the same as in other sectors of the economy. We audited 38 large property developers in the regions and 60 large property developers were audited by our large cases division, from which we collected €23 million.

There was more to our safety difficulties than boots and hard hats. To date in 2006, we have conducted 1,457 site visits and identified 490 self-employment cases not on our records. I have given Deputy McGuinness the figures for these hidden economy cases. Some 413 employees were not on our records. Reclassification is difficult because we can be challenged on our grounds for reclassification, but we reclassified 411 sub-contractors as employees. This is the nub of Deputy Burton's point. We conducted 37,000 assurance checks in respect of the construction industry and took in an additional yield of approximately €17 million. There is a great deal of activity and, while this is not everything, the results are positive.

Compliance levels in the RCT sector, which were referred to at previous committee meetings, have increased significantly. In the case of the RCT 30, the monthly return to Revenue, the average due-month compliance rate in the larger cases is 77%. This is not what we wanted, but it is a considerable improvement on last year. In the case of the RCT 35, the annual return, the compliance rate is 85%.

Do the Revenue Commissioners have a target?

Mr. Daly

We do, but I cannot find it now. Like last year, we have made a considerable effort in 2006 in respect of this sector and we will continue our work in 2007. Our construction industry project will not conclude before the middle of next year.

In Mr. Daly's opening statement, he gave the 1985 figure for taxes outstanding as €5.4 billion and the 2005 figure as €1 billion. The 1985 figure was 62% of gross receipts at the time. While I was not a Deputy at the time, some of us raised the matter of these extraordinarily high figures. The excuse from the highest political levels was that it was not possible to collect so many outstanding taxes. In light of Revenue's 2005 figures, it has been proved that if the political will had existed and systems had been in place, greater tax receipts could have been achieved in the 1980s.

When I saw the figure of €5.4 billion, I ascertained that in 1985, the State's total spending on health was €1.3 billion while its total spending on education was €1.1 billion. At that time the amount outstanding was twice the aggregate amount spent on health and education. It illustrates a comment made by Mr. Daly that I saw quoted a few days ago about tax fraud in the past. It is quite clear that 3,000 beds in hospitals did not need to be closed in the 1980s, the decade of the Ansbacher accounts and non-resident accounts, except for that tax criminality. An enormous number of services were critically run down, particularly for working class people, and they did not have to be. Would Mr. Daly agree?

Mr. Daly

I made a general comment regarding tax evasion over several decades. I stated it was deplorable and asked the people I was addressing to consider the hypothetical case of the money being available. Deputy Higgins is starting a political debate and it is not appropriate for me to engage in it.

Deputy Higgins asks if systems were in place to deal with this in the 1980s. When one considers the figures of €5.4 billion, 62.5% of gross receipts in 1985, one must consider the tax system at the time. This was the era before self-assessment, when assessments from the Revenue Commissioners were high. They were sent in an effort to encourage people to engage and pay some money. Inevitably, the vast majority of assessments were appealed to the appeals commissioner. It was a cat and mouse game. One must consider how the system has improved since then, with self-assessment, audits and the additional powers for the Revenue Commissioners, that were granted as a consequence of the DIRT inquiry conducted by this committee, and offshore evasion. The system has improved immeasurably. As a civil servant I cannot comment on the other areas raised by Deputy Higgins.

Nevertheless, there are points of fact. The sum of €5.4 billion in 1985 has not been corrected for inflation.

Mr. Daly

This is the actual figure. We must compare like with like and it is a figure from the era before self-assessment, an era of high estimates.

I understand that. Since 1985, after two tax amnesties, the Ansbacher scandal and all that has been forced from those defrauding Revenue, the point I make stands up.

The figures for outstanding moneys provided are €137 million for PAYE, €165 million for PRSI, and €276 million for non-PAYE income tax. I understand how the sum of €276 million might arise. It may be people who pay tax at the end of the year. Do the amounts for PAYE and PRSI refer to money collected by employers, in the possession of employers, and not forwarded to the Revenue Commissioners?

Mr. Daly

Generally speaking, yes. The egregious sector is the amount of money collected as VAT and tax, taken from someone but not remitted to the Revenue Commissioners. The table to which the Deputy refers is outstanding taxes and PRSI but this is not all deliberate default. It might also include companies in trouble that need time to catch up. Companies may have approached us in good faith and may be collaborating with us to reduce the debt. I do not wish to brand them all frauds. Some will have instalment arrangements but those in this group are at the enforcement process.

I am most concerned about the PRSI that has not been remitted and the degree of vulnerability it creates for thousands of workers whose PRSI was deducted but not passed on. There are potentially serious implications for them in respect of subsequent benefits.

Mr. Daly

I do not wish to intrude on the responsibilities of the Department of Social and Family Affairs but I understand that where PRSI has been deducted from the employee but not remitted to the Revenue Commissioners, the Department has a compassionate and understanding approach.

The comprehensive audit yielded €382.3 million. The total audit yielded €549 million. A comprehensive audit, of which there were thousands, is one where the Revenue Commissioners audit a firm.

Mr. Daly

In Table 7, all of the audits, including comprehensive audits, multi-tax, duty audits, single tax and single issue audits involve us going into the company. The comprehensive audit is primarily selected for an income tax or corporation tax audit. The audit will consider everything, making it the most intensive and resource-intensive audit. Multi-tax, duty audits and single tax audits are selected primarily for reasons other than income tax or corporation tax. With any audit one may begin with a particular focus but if something else needs to be examined we follow that route.

Some 5,077 cases yielded €382 million. This raises the question of what would be yielded if every company on the books was audited.

Mr. Daly

This is linked to the random nature of audits. One cannot extrapolate from a yield of €525 million from 14,000 audits conducted in 2005. These were targeted audits, identified as risky cases in the preliminary examination of cases. We expect a yield in most cases.

Nevertheless, it must mean that there are further substantial amounts that would have been yielded if the audit was broader.

Mr. Daly

In 14,000 audits we received a yield, validating the random programme and the effectiveness of our risk analysis. The risky cases are coming to the top. The challenge for us is to examine and audit these. These audits happen every year.

To a certain extent, the programme is overshadowed by the special investigations. However, it is a solid programme which yields approximately €500 million every year in tax revenue for the country. Validation is an essential part of self-assessment and we have improved at targeting the right cases and obtaining a higher yield.

The chapter contains information on prosecutions. A retired farmer, a disc jockey and one or two other people are detailed. According to the information we received more than €100 million has been recovered between National Irish Bank and Ansbacher. However, to my knowledge no senior banker ever darkened the doorway of a courthouse or heard a Garda boot on the carpet and a Garda demanding an explanation for that massive fraud for which the most senior levels in banking were responsible. How does Mr. Daly explain that?

Mr. Daly

I explain the reality that no bank official or manager was prosecuted by stating we were unable to come up with a case where we had a reasonable chance of going to court and proving aiding and abetting occurred.

It is extraordinary that we experienced the most institutionalised defrauding of the taxation system in a range of financial institutions. In many cases, it had to be centrally organised. Many PAYE workers feel these powerful institutions were able to buy their way out of trouble while a smaller person had the book thrown at him or her.

Mr. Daly

We have been over this ground several times during recent years. We could not sustain a prosecution. It is pointless to go to court or to the DPP without reasonable prospect of having a case and evidence within the time limitations.

It is over regarding banks and bogus non-resident accounts. They paid a substantial amount in DIRT and penalties. I make no secret of the fact it would have made life much easier for everybody, including the Revenue Commissioners, if we had been able to sustain prosecutions. However, we were unable to do so. This evasion took place 20 years ago. We cannot realistically sustain a prosecution against the banks or bank officials. I will again state to this committee if we come across anything like this in future, our first port of call will be prosecution and we will worry about the money afterwards.

Mr. Daly has often heard the economy described as low tax. The tax take in 2004 saw an increase of 11.1% over 2003. The increase in tax take in 2005 over 2004 was 10.4%. I presume the outturn in 2006 will be at least 10% up on what it was in 2005. Over a three year period, it increased by more than 30%. That is an astronomical increase compared with the increase in wages and salaries. The budgetary estimate was much lower than that. In 2005, the estimate on budget day was that tax from all sources would increase by approximately 5%. It increased by 10.4%. How are the estimates so wrong? I presume the Revenue Commissioners supply the figures to the Department of Finance. I do not want Mr. Daly to comment on policy or political issues.

Mr. Daly

We call it a team effort.

The other half of the team is also here. They may take part in the conversation.

Mr. Daly

The subject of forecasting is fraught with difficulty. As was stated by my former colleague in the Department of Finance, Mr. Considine, I wish there was a simple explanation. Our forecast is based on what our experts and outside experts state on economic activity. It is done in a rigorous and honest way. If that economic activity turns out not to happen or at a far greater extent than we anticipated, the forecasts are wrong. The forecasts are made on budget day and they are not revised a month or two later. The best example is 2001, when the foot and mouth disease outbreak and the attacks of 11 September skewed the forecast.

Almost all of the increase from 2004 to 2005 and from 2005 to now is due to taxes derived from the property sector. However, for years most eminent commentators forecasted the collapse of the property sector. It has not happened. As a consequence, the tax take has continued to increase.

I do not want to be impolite. Do Department of Finance officials deliberately low-ball tax estimates so the taxpayer will not realise the pain they will suffer as the year goes by? More than 30% extra was taken over three years but the estimate was for an increase of approximately 15%.

Mr. Barry

I have little to add to what Mr. Daly stated. Our former Secretary General, Mr. Considine, addressed this issue at a meeting of this committee on 11 May. He made most of the points Mr. Daly made. He also pointed out that in the most recent budget we published an independent assessment by the OECD of the forecast of the Department of Finance. It found we were no better or worse than any other mainstream forecasters. Mr. Considine stated he wished the OECD stated we were better. However, we are not any worse either. While we may not take comfort from it; it is what the OECD stated.

Does Mr. Barry agree it is a major increase in the tax take over a three-year period? An indication is not given that at the end of the year when the estimate turns out to be grossly inadequate the money will be given back to the taxpayer. The percentage increases year on year are way ahead of the increases awarded in wages and salaries under the wage agreement.

There must be a better way. I presume the estimated CPI figures are taken and put on top of net growth in the economy. I cannot see how even using a simple arithmetic formula one can arrive at an increase of 5% when growth rates are 6% or 6.5% and inflation for next year will be between 3.5% and 4.5%.

Mr. Barry

As Mr. Daly stated, the tax take is a function of economic activity. Economic activity in various sectors varies at different rates. The construction sector——

Yes, but the budgets also include estimates of economic activity. Projected growth and inflation rates are included. The sum of the two is close enough to the tax take if one examines it historically. I know ups and downs occur and it is not an exact science. Nobody is trying to pin Mr. Barry down to the last figure.

In 2005, the Revenue Commissioners estimated that an extra €1.8 billion in tax would be collected, yet the actual take, €3.7 billion, was more than double this estimate. There is a limit to the number of errors which can be explained away by claiming that, comparatively, Revenue's estimates are as good as those in other OECD countries. I think Revenue is very bad at making estimates. This is not a theoretical discussion because, at the end of the day, the money is taken from taxpayers' salaries, wages and profits. The additional amounts collected each year are enormous, although they are disguised on budget day because the estimates of the increases in the tax take are much lower than the actual take and any tax relief given is measured against the estimate rather than the outturn. This is becoming a highly taxed country and the situation has deteriorated rapidly in the past three years. I accept that I may be putting Mr. Daly in a difficult position by asking him to comment on policy but an issue has arisen with regard to estimates which should be considered.

Mr. Daly

We take the matter very seriously. At no stage do we deliberately low ball our estimates. In recent years the increased tax take did not come directly from wages and salaries but from property related activities by way of capital gains tax and stamp duty. This has caused the volatility which has impacted extensively on our forecasting. We try to get the matter right by listening to the best available advice, both internally and externally. It would be easier if our estimates were accurate.

Most of the stamp duty derives from savings, wages and salaries because people do not receive a quantum in a mortgage for stamp duty payments. It may not be a direct PAYE or PRSI payment but it comes from the same source.

With regard to special inquiries such as the Ansbacher investigations, apart from the single premium insurance inquiry, are all of the tribunals winding down?

Mr. Daly

They have largely been concluded, although there will be tails to several for some time to come. The investigation into bogus non-resident accounts is more or less complete, except for the odd case which remains to be investigated. The same applies to the NIB and CMI investigation, in respect of which €3 million has been paid on account in the 33 remaining cases. It is just a question of pursuing the money owed, although there are genuine difficulties on the part of some of the people concerned.

The Ansbacher inquiry will probably have a longer tail. While we have dealt with 219 of the 289 cases involved and recovered €57.4 million, 70 cases, in respect of which €7 million has been paid on account, are still under investigation. Some are very difficult because the people involved are fighting us every step of the way. If they had sense, they would deal with us because interest is clocking up.

Phase 1 of the offshore investigation realised a sum of €650 million. The current phase, in which we are chasing the people who did not make voluntary disclosures, is under way, with inquiries being made of people who did not come to us and whose names we received from the banks.

With regard to the insurance investigation, we have obtained 11 High Court orders covering the largest companies, with a small number of orders still pending. Information is starting to arrive from the companies concerned and we should have what we need by the end of the month, after which we will start matching the information from the insurance companies. We will remove the names of those who made voluntary disclosures and the 40,000 who sent us declarations and then make comparisons with our own records because we are anxious not to make inquiries of compliant taxpayers.

Will the yield be €2.5 billion or closer to €3 billion?

Mr. Daly

At present, it stands at €2.26 billion. Therefore, a sum of €2.5 billion would be a safe prediction. I would not go beyond that figure.

Has the next pot of gold been identified, in the parlance of Mr. Daly's predecessor?

Mr. Daly

In fairness to him, I do not think he ever said that.

Mr. Daly is correct; it was the then Minister of Finance.

Mr. Daly

There may not be another pot of gold. Perhaps this country has become more responsible. I would like to withdraw that remark, in case the Chairman decides to quote me in five years time.

It is unlikely I will be the person who will quote Mr. Daly. May we turn to the Vote?

Mr. Daly

As I was not put on notice, I do not have a brief on the Vote. It was on the agenda for my next meeting with the committee.

I will ask a couple of questions and, if a problem arises, Mr. Daly can address it when he returns on 7 December. My questions are not particularly difficult. On subhead A7, consulting services, there was an estimated figure of €16 million but the outturn was €18 million. How was the consultancy money spent and what was the reason for the overrun?

Mr. Daly

Almost all of what is described as consultancy services involved software development, for which we have contracts with several outside developers. Inevitably, the extraordinary programme we are implementing in developing our on-line and other services has required us to spend more money but we believe we are getting very good value for money in so far as the software enables us to deal with the huge increase experienced in our business. The money was not spent on what most would regard as consultancy services but on software development. Therefore, we will be left with a tangible asset at the end of the process.

Note 11 intriguingly mentions payments totalling €110,000 to six staff members, as well as a sum of €604,000 paid to 25 staff in 2004, as compensation for earnings lost through reorganisation and redeployment. Do these payments relate to decentralisation?

Mr. Daly

The payments pertain to a reorganisation of our former Customs and Excise mobile units, the staff of which had been in receipt of a particular set of allowances and overtime rates but when we moved them, their compensation claim was sanctioned following arbitration.

Mr. Daly was asked about the black economy. Has Revenue ever attempted to estimate the value of the proceeds of criminal activity, with particular reference to the drugs trade? What is the level of co-operation with the Criminal Assets Bureau in that regard?

Mr. Daly

We are part of the Criminal Assets Bureau. Many of that agency's successes have been in the area of tax collection. A considerable number of our staff work in it as tax inspectors and Customs and Excise officers. I am not sure whether estimates have been made of the yield or liabilities in that subset of the black economy.

How does the relationship with the CAB operate? Does its executives submit specific requests for information on individuals' activities? If so, are such requests prioritised?

Mr. Daly

We have 14 or 15 staff working full time in the CAB. As they are officers of Revenue and assigned and authorised by me to work there, they bring their full powers as Revenue officials with them into the CAB and have access to our systems and information. In addition, we have clearly defined and effective liaison with the CAB. Therefore, if it needs further information from our system or needs us to do anything, there is a streamlined, positive and effective working operation.

How senior is the senior person assigned to the CAB?

Mr. Daly

Our senior officer is at assistant principal officer level. We have a number of such staff, but they are operational officers.

It has been reported that Revenue is to make approximately €50 million in VAT rebates to opticians. How did this arise and why are the rebates not being passed on to the customers who, presumably, paid the VAT in the first instance?

Mr. Daly

This is a long-standing affair. For many years we treated the supply of spectacles and contact lenses by an optician as a single supply of goods. We treated the examination, prescription and supply as one activity but were challenged on this. Following a successful appeal to the appeal commissioners, the supply is now broken into three categories. The cost of the eye examination is exempt from VAT; the sale of the spectacles is at the standard rate of 21%, while the dispensing services associated with the sale of the spectacles are exempt. In the view of the appeal commissioners we had been overcharging opticians during the years. Many protective claims were made when this process started; we have to repay the VAT and are doing so. It is open to the individual customer who paid the VAT to go to his or her optician and seek a repayment. While Revenue has been clear that we would encourage people to do so, we have no power under the legislation to compel the opticians to pass on the refund.

Have the customers a legal right to the refund?

Mr. Daly

There is case law. I think they have. While it is not in Revenue legislation, I would have thought that right would be included in some other area of the law. The judgment in an ECJ case held that VAT repayments cannot be withheld because there is a probability that they will not be passed back to the customer. Our view is that they should be; we have said this publicly and encourage people to apply for it. Some opticians have indicated the situation to customers and encouraged them to become involved. I hope I am not being overly fair to them.

To clarify, if I had my eyes tested last year, I would have paid VAT on the eye testing component, on the prescription component for the lenses and the supply of the spectacles. The ruling is that VAT applies only to the supply of the spectacles.

Mr. Daly

Yes, it applies only to the sale of the spectacles. The other two are exempt from VAT.

Therefore, there would be a rebate in respect of the other two areas.

Mr. Daly

As to whether one would have overpaid last year, it probably depends on the optician one attended and the timing. I encourage people to check it out.

I thank Mr. Daly.

I want to return to the issue of prosecution and defaulters. A list of settlements was published in June and one settlement was for €22 million by property developers Bovale Developments. I understand this is the largest settlement ever made to the Revenue Commissioners. In most countries such a large settlement would result in a criminal prosecution. Is there any situation in which the maker of such a large default payment might be subject to criminal prosecution? Has that been explored in this case? Is the case ongoing or closed?

Mr. Daly

In general, it is our policy in a case of this scale to prosecute. Nobody should doubt this. We would collect the money after prosecution or at the same time if possible. While I cannot talk in detail about a particular case, cases of that scale, even in the past, would always have been examined with a view to prosecution. However, one would have regard to when the evasion took place, the timeframe, the length of time that has elapsed, the evidence available and the likelihood of getting people to co-operate in the prosecution process. I do not refer to any particular case. In any case involving that amount of money currently with the Revenue Commissioners the focus is on prosecution. The figures show that we have been upping our game in the prosecution area. Not many people go to jail, but there is not much we can do about that.

Is Mr. Daly saying a prosecution has been ruled out in this case?

Mr. Daly

This was a settlement. Therefore, a prosecution was not tenable in this case.

I wish to draw Mr. Daly's attention to the fact that last year the Department of Social and Family Affairs had 256 criminal prosecutions of people involved in welfare fraud. The amount involved in the 256 cases was €1.3 million. This is mentioned on page 134 of the Comptroller and Auditor General's report. Is there a chance that a message is still being sent that it is worth taking a risk with taxes? The majority of people and businesses are tax compliant. Many business people lie awake at night worrying that they have not dealt with their tax returns properly. Mr. Daly and I meet them. Is our system sending a message to some that it is worth taking the risk? The Department of Social and Family Affairs seems to have a more proactive record of taking prosecutions than the Revenue Commissioners.

Mr. Daly

I disagree with the last part of that proposition. The figures show that in recent years we have had an active approach to prosecution. As of today we have approximately 85 cases open at some stage in prosecution, whether in court, with the Director of Public Prosecutions or in our office. Our approach to prosecution has changed. We also take approximately 1,000 prosecutions every year for less serious offences such as non-filing. We take hundreds of prosecutions on the customs and excise side. Although comparisons are made between the records of the Revenue Commissioners and the Department of Social and Family Affairs, it is probably fairer to compare the cases in that Department with our 1,000 cases for non-filing in terms of where they go in the court system. Most end up as summary cases in the District Court. Almost all serious prosecution cases in Revenue are fought every step of the way and get to the Circuit Court. It is a different game. I do not say we should not do more. We are committed to doing more. However, the comparisons are not direct. The Deputy touched on the amount collected in the Department of Social and Family Affairs cases. When I look at the outcomes of the 12 or 14 prosecutions we took in 2005, I am not overly delighted with some of them in the courts after the effort we put in.

It is not for me to criticise the courts and I am sure the judges take account of all the circumstances, including usually, though perhaps not in the cases to which Deputy Burton referred, the fact that by the time the case goes to court all the tax and substantial interest and penalties have been paid, which probably influences them.

I acknowledge that the Revenue Commissioners have put in a huge amount of extra effort in recent times. I think it was the then Minister for Finance, Charlie McCreevy, who said there was no pot of gold and that significant non-compliance was a figment of the imagination of parties like the Labour Party. The recent efforts by staff of the Revenue Commissioners have proved the contrary.

One of the initiatives Revenue undertook, which I have raised on a number of occasions in the Dáil, related to very wealthy individuals of whom, following the property boom, there are significant numbers, which is great. There is still a feeling that different rules apply to them, even from the point of view of tax. It is a bit like the line in The Great Gatsby to the effect that the rich are different.

As we approach Christmas, what progress has there been on the Cinderella rule, whereby people who are in the State much of the time can leave the jurisdiction at 11.55 p.m. and qualify as non-residents? Mr. Daly indicated at previous meetings that Revenue was monitoring the cases of people who were in the country but technically non-resident for tax purposes.

How many cases are under the purview of large cases division, which Mr. Daly set up? Have there been any positive outcomes from its work?

We are told there is a significant waiting list in Ireland for private aeroplanes, jets, helicopters and expensive cars. When significant purchases of expensive items are made, do the Revenue Commissioners correlate the information or are most of these boats, aeroplanes and helicopters and cars, excluding those belonging to Mr. Daly, mostly bought by companies and people who own them through companies? Are they bought in the names of individuals? Do the Revenue Commissioners check that people who buy such luxury items are reasonably tax-compliant and actually pay tax?

Mr. Daly

The rule regarding non-residents, or tax exiles as they are called, is the rule. I do not make the rules, only implement them. Late last year, or perhaps earlier this year, we carried out a rigorous examination of some high profile cases to make sure they were complying with the rules. We found that they were and reported that fact. I think it was mentioned in the House towards the end of last year. We have methods of checking compliance in that area, which, for obvious reasons, I do not want to go into in detail. I do not have the number of cases under the purview of large cases division at the moment but I can send it to the committee after the meeting, unless any of my colleagues can remember the figure before the end of the session.

Purchases of cars, yachts, aeroplanes and helicopters, etc., are definitely our business and we are trying to obtain data on those at the moment to relate it to individuals' tax positions. I do not have figures as to how many are bought by companies but I suspect many are leased. I spoke earlier about our new approach to risk analysis, for which we have a new all-singing, all-dancing computer system into which we can feed everything we know about an individual or a business. Rules designed on the basis of the experience of our inspectors and what we learn from current audits throw up the risky cases. We want to incorporate into the system other indicators of wealth, such as purchases of cars, boats and aeroplanes. The information is correlated and will be into the future.

In 2005 an interesting exercise on the motor industry was carried out in the Dublin region. By December 2005, 160 expensive vehicles, such as Porsches, had been seized and €1.97 million paid to us in VRT and VAT, which was a good result. The most important result, however, was that information on all of the individuals from whom those vehicles were seized has been fed back into their files and the wider tax implications have been or are being reviewed. Two cases have emerged out of that exercise for consideration for prosecution.

We have had a very interrupted meeting and I am aware that the Revenue Commissioners will be back before us shortly. I will concentrate on chapter 2.1, concerning the basket of taxes collected and repayments relating to several of them. The order in which taxes have been collected in recent years has changed. VAT seems now to be the largest tax and the gap between it and income tax seems to be growing larger each year. Corporation tax is shown in the table for 2005 in third place but I believe that has since been exceeded by excise duties. Corporation tax seems to have been sluggish in recent years and the figures are static, despite continued economic growth. Can Mr. Daly explain some of the factors involved in that? A special one-off 5% rate in the US encouraged transfer payments from some corporations operating out of Ireland. What was the effect of that?

Stamp duties are listed at No. 5 in the basket of taxes collected in 2005. Figures for this year to date seem to indicate it is running €850 million ahead of what was anticipated and seems likely to be €1 billion by year end. Are the estimates of taxes received made by the Revenue Commissioners or the Department of Finance? Receipts from stamp duties exceeded estimates by close to €1 billion this year alone. There is anecdotal evidence that property might be a large part of that but we have been informed that property only accounts for 30% of the proceeds of stamp duties. If moneys are raised from other stamp duties, what are they?

Mr. Daly

The Deputy is correct to note that VAT has now become the largest tax and has overtaken income tax, and that excise duties are moving ahead of corporation tax. On a general level, VAT and excise are consumer taxes and are directly related to levels of consumer activity in the country. We discussed who forecasts tax and agreed that the Department of Finance and ourselves act as a team in that regard. We have gone through that in fair detail and I am not sure if the Deputy wants to go through it again.

I am happy with the record.

Mr. Daly

Corporation tax has probably been sluggish. In 2005 it was €257 million behind the Estimates, which was unusual. The only other tax in that year behind the Estimates was PAYE. The shortfall in corporation tax in that year was mainly due to higher than expected repayments in some areas. These are areas in which people may have claimed for research and development or something similar.

With regard to value added tax and excise in particular, the income taxes have generally been getting the benefit of reductions in budgets over several years, if I can term it as such. That probably explains why VAT is actually pulling ahead of income taxes. Consumer activity is also a factor.

There was a question about the American Jobs Creation Act, or the "Patriot Act" as it is colloquially known. It was enacted in 2004 and it included, among many other issues, a provision that US corporations could repatriate earnings attributable to foreign business operations at a greatly reduced tax rate. The rate was 5.25%, as opposed to the typical 35% rate in the US. This meant that US corporations which had a stake in foreign corporations, including Irish subsidiaries, could repatriate earnings to the US at that rate, instead of the normal 35%. It was therefore quite attractive. To qualify for this relief, the dividends repatriated then had to be reinvested in the US under an approved investment plan.

We have looked at the impact of this in so far as we can. The reality is that the repatriation of profits by multinationals has always been a feature of the financial decisions of Irish subsidiaries. Dividend flows back to the US parents have always been high in this country. It is very difficult to see if there was a big effect because of the Patriot Act last year. We have no great evidence there was.

Either way, it probably would not have a significant effect on tax take. Repatriation of profits by definition is a distribution out of after-tax profits. We get the tax regardless of where the profits end up. It could have an effect if it meant the moneys being repatriated to the United States meant there would be less investment or activity here in Ireland. I do not think there is any great evidence of it.

Although it is not a tax issue, I do not think there is necessarily a connection between how much money is sent back or accumulated in Irish subsidiaries and the investment decisions of the parent companies. In other words, people make decisions to expand in Ireland or come to Ireland based on many criteria, and not simply the reserves in Irish subsidiaries. That is a long way of stating I do not think there has been a significant effect. However, it is difficult to ascertain the effect precisely.

The Deputy asked about stamp duty and its make-up. In 2005, the total stamp duty was between €2.6 billion and €2.7 billion. That is made up primarily from property, as €2 billion of that comes from property. The next big yield would come from shares, which is €324 million. There is also duty on other items, such as cheques, insurance policies, credit cards, levies, ATMs, etc., none of which really realise more than approximately €100 million.

On the property side, is there a breakdown of residential and commercial property? Perhaps that is where the 30% figure was being mentioned, in terms of residential property.

Mr. Daly

Residential property provides 35% of all stamp duty. It would be 35% of €2.6 billion. Other property provides 40% of the figure, and the balance comes from the other factors I mentioned.

With the €1 billion overshoot, has Mr. Daly any idea yet how that is breaking down?

Mr. Daly

It is more than likely property. I have a note about it. Considering indications up to the end of August, we would say that property transactions of all types would be about 34% ahead of targets.

I have a small question relating to VAT. I would like to phrase it in a manner not linked to policy. There is the question of VAT on charities' expenditure. There is a claim that the Department of Finance and the Revenue Commissioners have made relating to the admissibility of doing this under EU rules on VAT. An argument has been put forward that in Denmark, the tax code legislation facilitated an ability to do this precisely. Is this possible under EU directives? It is being done in one member country and we are indicating we cannot do it here.

Mr. Daly

The legal position is that charities and non-profit groups engaged in non-commercial activities are exempt from VAT. They do not charge VAT on the services provided and they cannot recover VAT on the goods and services purchased. Our view is that it is not possible to do what the Deputy is talking about under EU law as it stands. In the past, ministerial refund orders have been used to effect something like this. There is a very strong view that these are not possible in this case under EU law. I do not really have any more information than that.

Is Mr. Daly familiar with the Danish case?

Mr. Daly

I am not that familiar with it. I should add that charities get many other exemptions, as the Deputy would know.

Mr. Purcell

A couple of points have come up. One relates to the performance of the Revenue Commissioners. It is generally acknowledged that the performance has improved immensely in recent years, and the figures are there to prove that. Sometimes the bare figures can be misleading.

Deputy Joe Higgins referred to the figure of €5.46 billion outstanding in 1985, which represented 62% of gross receipts, and we are now down to 2%. The chairman alluded to it but it should be pointed out that it was as much a factor of the inflated estimates made of tax liabilities in the pre-self assessment days. A significant amount of the reduction could be ascribed to discharging of estimates and replacing them with actual liabilities. Also, one must take into account the increased level of write-off activity. For example, in the past ten years a figure of the order of €1.7 billion was written off as well. That is not gainsaying at all the improvement in Revenue's collection performance over the years but perhaps it is not quite as stark as the headline figures indicate.

There is another point relating to the comprehensive audits. I agree with the chairman that these are a very important part of the system, and they underpin the system of self-assessment. Again, the figures are slightly inflated for 2005. Of the approximately 5,000 comprehensive audits, 2,800 related to the bogus non-resident account follow-up and the offshore assets follow-up. Some two thirds of the return from comprehensive audits came from those two sectors in the year. In a sense, we are not talking about a normal pattern of comprehensive audits, etc. The problems associated with tax forecasting were mentioned. We conducted an examination of this subject about three years ago and, as a result, both Revenue and the Department of Finance refined certain sets of data. They began to use more up to date data in trying to establish more accurate estimates.

One can carry out sensitivity analysis on rates of growth in different parts of the economy, inflation rates and so on but one must settle on something as an estimate and I sympathise with those trying to compile such data. We found no evidence that low-balling was occurring. One year they over estimated the tax take, which can have other repercussions in terms of borrowing to fund budgeted expenditure.

Regarding the Vote, consultancy services and the €17.9 million cost were mentioned. €17.36 million of that figure went to one firm that has assisted the Revenue Commissioners for many years on a very successful software development programme. In that sense, as the chairman said, the figure would not fall into the normal consultancy fee category. There is a range of other consultancies but each accounts for only a five figure sum.

Mr. Daly

May I give two pieces of information that Deputy Burton requested? The large cases division handles 350 large corporates but there would be many more subsidiaries. It also handles 330 wealthy individuals.

The target for relevant contracts tax, RCT, compliance is broken down by case level. For big cases, the ones I am excited about, the target for 2006 is 90% due date compliance.

What level did Mr. Daly say it was at currently?

Mr. Daly

I do not remember exactly what I said. I think I said it was at a level somewhere between 80% and 90%.

On 30 September 2006 compliance was at 77% and that is a more up-to-date figure than the one I gave the Deputy previously.

Mr. Daly might send me a note on this matter at his convenience.

Mr. Daly

Regarding the Comptroller and Auditor General's comment on audit numbers, it is stated in his report that it included bogus non-resident accounts and offshore cases. I assure the committee that, if they were not included there, we would have substituted them with the same number of other audits.

May we dispose of chapters 2.1 to 2.6, inclusive? Agreed.

The witnesses withdrew.

The agenda for Thursday, 16 November 2006 is as follows: 2005 annual report of the Comptroller and Auditor General and Appropriation Accounts, Vote 31 — Department of Agriculture and Food; chapter 10.1 — single payment system, and chapter 10.2 — staff savings.

The committee adjourned at 2.35 p.m. until 11 a.m. on Thursday, 16 November 2006.
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