COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 19 Feb 2009

Chapter 3.7 — Re-Audit Programme.

Ms Josephine Feehily (Chairperson, Revenue Commissioners) called and examined.

Chairman

Before we begin, I would like to welcome the delegation from the public accounts committee of the Northern Ireland Assembly and its secretariat. We had a very fruitful meeting last night, with a most enjoyable and informative social event afterwards. We look forward to continuing the exchange of information between our two committees in the months ahead.

This morning we will welcome the delegation from the Revenue Commissioners and will inform witnesses of the obligations they have under the Act governing this committee. The Comptroller and Auditor General will make an opening statement, and the Accounting Officer will make her opening statement. We will then go into a session of questions and answers.

We are looking at the 2007 annual report of the Comptroller and Auditor General and appropriation accounts dealing with the Office of the Revenue Commissioners, and we will examine chapters 3.1 to 3.7. Witnesses should be aware that they do not enjoy absolute privilege. 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 or send documents to the committee; the right to appear before the committee, either in person or through a representative; the right to make written and oral submissions; 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 persons identified in the course of proceedings who are not present may need to be made aware of these rights and provided with a transcript of the relevant part of the committee's proceedings, if the committee considers it appropriate in the interests of justice.

Notwithstanding this provision in the legislation, I remind members of the long-standing parliamentary practice to the effect that 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 within Standing Order 158 that the committee shall refrain from inquiring into the merits of a policy or policies of the Government or of a Minister, or the merits of the objectives of such policy or policies.

I welcome Ms Josephine Feehily, chairman of the Office of the Revenue Commissioners, and call on her to introduce her officials.

Ms Josephine Feehily

I thank the Chairman. With me are Mr. Norman Gillanders, assistant secretary with our planning division, Mr. Paddy O'Shaughnessy, principal officer with our planning division and also our main liaison with the Committee of Public Accounts and the Office of the Comptroller and Auditor General, and Mr. Paddy Molloy, principal officer with our planning division. Mr. David Coleman, our senior press officer, is in the Visitors Gallery.

Chairman

I invite the Mr. John Buckley to introduce chapter 3 of his report. The full text of the chapter can be found in the annual report of the Comptroller and Auditor General or on the website of the Comptroller and Auditor General at www.audgen.gov.ie.

Mr. John Buckley

There were 13 chapters in the annual report that dealt with Revenue. Apart from the audit of its accounts, a key role of my office is to examine the mechanisms Revenue has in place in order to ensure that tax is assessed, collected and brought to account effectively. The theme which runs through the 13 chapters is the need for Revenue, in assessing its performance, to use the information in its possession in order to distinguish between factors that relate to the economic environment, which is outside its control, and those which are capable of being addressed, including taxpayer behaviour and Revenue's own effectiveness.

With regard to the overall performance, in 2007 taxation of €47.3 billion was collected by the Revenue Commissioners. This figure was arrived at when account had been taken of repayments of taxes of €9 billion and the passing on of levies of €9.5 billion it had collected on behalf of other State authorities. The net collection figure of €47.3 billion is the amount available to finance the State budget before borrowing is taken into consideration. Overall, the revenue collection was, as detailed in Table 8 of the report, almost €2 billion short of forecast.

The amount outstanding fluctuates each month. However, in recent years, just over 2.5% of the charges raised — an amount over €1 billion — remains uncollected by the end of March each year. Some 57% of the debt at the end of the year in question was over one year old and a total of €396 million relates to cases that are more than five years old. A proportion of this outstanding debt is subsequently eliminated by the revision of Estimates, though it would be useful if, in future, Revenue generated more precise information on the discharge of recorded debts. Write-offs account for approximately 10% of the amount outstanding at year end — in the region of €118 million in 2007. Some 12 of these write-offs involved moneys in excess of €1 million in each instance.

We examined 20 of the largest write-offs during the audit. It was surprising to note that despite the fact that compliance problems had come to light soon after registration in approximately one third of cases, large write-offs still occurred. A recent follow-up by Revenue found that the majority of cases that register but fail to file are now being picked up. However, some gaps were identified in respect of smaller cases that persisted with a pattern of non-compliance and cases where registration was backdated. The Accounting Officer will be in a position to inform the committee on the measures taken to enhance Revenue's systems for identifying and intervening in cases of this type.

Commonality checks are made where non-compliance occurs in one of a family of tax paying entities or related parties. They are intended to involve a concerted case-working approach to all outstanding liabilities. In the cases examined, the focus of commonality checks was exclusively on ongoing compliance by the related entities rather than on recovering tax for the failed entity. It was also noted in the follow-up that pursuing debts from directors of failed companies must be done through liquidators. The latter is a costly process because it involves proving reckless or fraudulent trading. At the time of audit, no recoveries had been made in the cases examined. It was clear from the volume of cases in the top 20 write-offs that some industries carry extra risk. For example, the security industry accounted for six of the 20 cases. We concluded that a periodic, in-depth analysis of major write-off cases could play a role in informing Revenue about the effectiveness of its systems and how non-compliant behaviour might be tackled at an earlier stage.

With regard to Revenue checks, the overall effectiveness of the system is heavily influenced by the extent to which non-compliance is identified and tackled. We are dealing here with the year 2007, but 2008 will be the first year in respect of which all districts will be required to use a new computerised risk evaluation analysis and profiling, REAP, system. Revenue intends basing 60% of its audits on the top 20% of risky cases. In the future it will become important that Revenue examines not just the cases that are relatively risky. It will also be important that it be in a position to evaluate any overall increase in collection risk which should influence the type, timing and intensity of checks. In this regard, it may be possible to use its new computerised risk profiling system to gauge movements in the overall risk pattern over time.

The report sets out some detail in regard to the types of audits finalised by Revenue in 2007. Audits yielded €734 million in 2007, with almost half of this coming from comprehensive audits. The latter are audits conducted across a number of tax headings but with the main focus on income and corporation tax.

Within the audit programme, it is extremely important that Revenue carries out a meaningful programme of random audits. Unless objective information is fed back into the system, including into the new computerised risk profiling system, there is a risk that selection of cases for audit, whether picked by a computer or a tax official, will remain largely subjective. A random element in the audit programme also has the benefit of producing objective system level information on performance.

As indicated in the report, Revenue has been working for some time on establishing improved and more relevant outcome measures of taxpayer compliance. This is ongoing. However, I suggest that a random audit should be a cornerstone of the performance information. In this respect, it should be possible to use the results of random audits to estimate the level of compliance of taxpayers generally, the monetary effect of that non-compliance and the categories of risk that the results suggest. We will be following up on these matters in coming audits.

The question of re-audit also falls to be examined. While random audit can give important signals regarding overall compliance, it makes good sense to segment the taxpaying public based on previous payment performance and to apply resources to encourage greater compliance by those with a tendency to under-report or underpay. Revenue has not had a programme to re-audit previously non-compliant taxpayers since 2002. Short of reintroducing such a programme, in the future an analysis of the results of those current audits where a taxpayer was previously audited could perhaps yield valuable information on Revenue's success in achieving compliance for that sector of the population whose compliance was previously problematic. Alternatively, there may be scope to use the REAP system to track this type of information.

For the first time, we have appended the detailed account of the revenue collection to my report on the appropriation accounts. While an account of revenue collected in a more basic format was always produced, its publication in a more modern format enhances Revenue's accountability for the administration of the tax system and provides a focus for my office's audit of revenue collection.

Chairman

I thank Mr. Buckley and welcome Mr. Jim O'Farrell from the Department of Finance.

Ms Josephine Feehily

I thank the Chairman and members for the opportunity to make a statement in respect of chapters 3.1 to 3.7 of the Comptroller and Auditor General's report for 2007. The Comptroller and Auditor General already referred to some of the figures, so I will skip over them in the interests of expediency.

Chapter 3.1 shows the figure for net receipts. While, as the Comptroller and Auditor General stated, this shows an increase of almost €2 billion on 2006 figure, it was over €1.8 billion below the Exchequer target figure for the year. With the exception of income tax there was a shortfall in all the major taxes. However, in view of subsequent events, it can be seen as a comparatively successful year in terms of revenue collection. The single largest contribution to the shortfall was in stamp duty receipts. This came about as a result of the slowdown in the property market.

Paragraphs 3.2 and 3.3, as the Comptroller and Auditor General said, deal with the writing-off of taxes and analysis of major write-off cases. It is important to put the write-off in context. The amount written off in 2007 was approximately €118 million, which was slightly down on the previous year. Revenue, like every other tax administration or business, inevitably experiences some bad debts. Our objective is to minimise these in every way possible and we will only write off tax when we are satisfied it is genuinely uncollectible or uneconomic to pursue. Amounts written off should be viewed in the context of the amount of tax collected.

As a percentage of the gross tax, including PRSI, collected in 2007, the amount written off was less than 0.2% and was the lowest ratio of write-off in the past seven years. Tax is written off for administrative purposes only to prevent uncollectible tax from clogging up the system and distracting our focus. This is in accordance with best international practice, including recommendations from the IMF. With the exception of examinership, if information comes to light that the status of a taxpayer who has had tax written off changes, we can reinstate the tax and pursue it in the normal way.

Paragraph 3.4 deals with outstanding tax and shows the balance outstanding at €1.286 billion or 1.9% of gross collection. While this is marginally up from 2007, when it was at a historic low, it clearly illustrates our continued success in improving payments compliance in recent years. Ten years ago, outstanding debt stood at 7.4% and was as high as 62% in the 1980s.

The remaining paragraphs are mainly concerned with managing compliance and Revenue audits. Our approach to managing compliance is multifaceted and involves getting returns and payments on time, an area where we have made very good progress. The Revenue audit programme, to which the Comptroller and Auditor General referred, is an established and successful means of ensuring compliance with the self-assessment system, and from 14,300 audits in 2007 we collected €688 million. We have a much larger programme of assurance checks which give us coverage and presence across the tax base. In 2007, we carried out in excess of 237,000 such checks, yielding €46 million. We also collected €30 million in tax arrears in the course of audits, bringing the total recovered under all the interventions to more than €763 million. Another part of our compliance armoury, if one likes, is the publication of cases where there is default. We published 555 cases in 2007. The total amount of tax, interest and penalties in published cases was €144 million.

Increasingly, our compliance programmes are focused on a sectoral approach and so, for example, a large amount of our audit activity in 2007 was focused on the construction sector which yielded €130 million. A further €15.5 million of arrears and €22 million in assurance checks was collected from this sector but we had projects in many other sectors. As part of the sectoral approach the largest cases representing the greatest amount of tax are managed in a large cases division.

In accordance with our risk-based approach, cases are selected for intervention based on the presence of various risk indicators and other information with the aid of our computerised risk system to which the Comptroller and Auditor General referred. The use of REAP is helping to change the way we look at our compliance programmes. Taking account of the tools available to us, we are developing and planning to publish a new compliance strategy later this year which will reflect the impact of REAP and the changed economic environment.

The Chairman asked that I make a few specific comments on the internal audit function in Revenue. We have had a full internal audit function in place for more than 20 years. The internal audit branch remit extends over all areas of the organisation. It has unrestrained access to all systems, records, reports and personnel and operates in accordance with the internal audit standards published by the Department of Finance. The head of internal audit reports to the board and has direct access to me as Accounting Officer.

We also have an internal audit committee in place since 1999. The committee comprises five members, four of whom are external to Revenue, including its chairperson and vice chairperson. The purpose of the committee is to oversee the internal audit function and to advise the board on the operation and development of that function. Its terms of reference are set out in a charter agreed between the board and the committee. The committee also meets our external auditor, the Comptroller and Auditor General.

In the two-year period 2007 to 2008, a total of 26 audits were completed by our internal audit unit, comprising a mixture of original audits and follow-up audits. All original audits are followed up to ensure recommendations arising from the findings are implemented by management to the satisfaction of the internal audit branch, the internal audit committee and the board.

Some examples of the audits carried out in the period mentioned are as follows: the management and control of capital assets; the write off of uncollectible taxes, which it does every year; computer badge security; the control of non-EU imports by Customs and Excise; and the integrity of the tax register. Copies of all reports are sent to the Office of the Comptroller and Auditor General for its information.

Chairman

May we publish the statement?

Ms Josephine Feehily

Yes.

Deputy Róisín Shortall

I welcome Ms Feehily and her colleagues and thank her for the presentation. I will begin by asking about revenue collection. In the year in question, 2007, we know revenue came in approximately €1.8 billion below the target set. Will Ms Feehily tell the committee something about the setting of those targets? In recent years, it seems some of the forecasts have been substantially out. What is the process for setting those targets and who exactly is involved? Also in that regard, what is the target for revenue collection in the current year and how often is that target revised?

Ms Josephine Feehily

The targets are set and published by the Department of Finance. The process involves Revenue feeding in certain information based on our analysis. We have a lot of facts about numbers, sizes of businesses, the number of employments and so on, and we would feed these in. The Department of Finance applies its perspective on the economy, the macroeconomic indicators are developed by it and it sets the targets. It can be an iterative process. The Department asks us to clarify some of the data we send it and to explain why we are——

Deputy Róisín Shortall

Does Revenue just supply the data? Does it have any role in advising on the target?

Ms Josephine Feehily

If we did not agree with the target, we could certainly express that view. We do not apply the measures of the economy to the numbers. The Department of Finance does that. We do not have an expertise in that area and in that sense it is the Department's call. We provide our expertise, such as it is, which concerns the numbers, by and large. The Department sets the targets for us in that context.

It can be an iterative process. Certainly there would be conversations around the quarterly Exchequer figures that are published in terms of how targets are progressing and our read on whether the trends developing are what one would expect given the time of the year and the information we have about businesses, for example, which will have come to us to seek time to pay or payment by instalments and so on. There is a deep engagement but at the end of the day the Department determines what it expects from these kinds of numbers, having regard to its view of the economy in the year ahead.

The current targets for 2009 are based on figures that were published in the context of the revised stability pact. The total target is €36.995 billion.

Deputy Róisín Shortall

What is happening with regard to the frequency of the revision of that target? How regularly are those targets revised given the very rapidly changing economic situation?

Ms Josephine Feehily

As the committee will be aware, the figures have been changed twice in recent months and this is a lower figure than the target set for us following the October budget. There is no norm in this regard. In recent years, the figures would not have been revised very often. However, they were revised in October and then revised again more recently. The Department of Finance will in due course publish a monthly profile which may well contain revisions given the state of the economy, although I really do not know.

Deputy Róisín Shortall

Could we just——

Chairman

Would the Deputy like a reaction from Mr. O'Farrell given the figure is down from €47 billion to €37 billion?

Mr. Jim O’Farrell

As the Deputy observed, we are faced with a rapidly changing economic environment. There is only so much a forecaster can do and some are more accurate than others. Ultimately, however, forecasting will always be overtaken by events. As a layperson and statistician, I am of the view that people's expectations in regard to the accuracy of forecasting are not very realistic. In our experience, a far better measure is the 20:20 vision of hindsight. It used to be the case, when the economy was rising, that the Department was lambasted for setting its forecasts too low. Now we are told our forecasts are too high. For as long as I can remember, in both the public and private sectors, trends always seem to take people by surprise. That is the nature of forecasting.

Chairman

Mr. O'Farrell would never earn a living as a tipster on the sports pages.

Mr. Jim O’Farrell

I would not be here if I could do so.

Deputy Róisín Shortall

The Department's record in forecasting is very poor in both good and bad times.

Mr. Jim O’Farrell

With what is the Deputy comparing our record? I am not sure anybody else is doing better.

Deputy Róisín Shortall

Mr. O'Farrell's reply is funny on one level but this is a serious matter. What is the reason for the high level of inaccuracy in the Department's forecasts on almost all occasions?

Mr. Jim O’Farrell

The reason is rapidly changing circumstances, that is, economic volatility.

Deputy Róisín Shortall

That may apply in recent times, given the downturn in the economy. However, even when the economy was doing well, the Department was very inaccurate in its forecasts. I am not asking Mr. O'Farrell for a defence of the Department's position. I am merely asking whether it is a matter of concern to it that its forecasts have been so inaccurate. Are steps being taken to improve its performance in this regard?

Mr. Jim O’Farrell

I am not trying to defend our record. Inaccuracies in forecasting are a fact of life. As long as I have been in the Civil Service, I have never seen accurate forecasting in the State or elsewhere. There is too much of a slavish belief in the power of forecasters. People expect too much of them. I have never found forecasting to be an exact science.

Deputy Róisín Shortall

I am not suggesting any one agency has got it right. The economic climate changed for the better and subsequently for the worse very rapidly in recent years. However, there are agencies which have been far more accurate in their forecasting than the Department. For example, the Economic and Social Research Institute is generally much closer to the mark.

Mr. Jim O’Farrell

One would have to compare our respective records going back over the years.

Deputy Róisín Shortall

My question is whether the Department is doing anything about its poor record in forecasting.

Mr. Jim O’Farrell

We are doing the best we can.

Deputy Róisín Shortall

That is not an adequate response. Are steps being taken within the Department of Finance to improve its forecasting such as providing additional training for staff, availing of external expertise and so on? Is anything happening on that front?

Mr. Jim O’Farrell

There is not much recruitment within the Department. It is my understanding there is no great effort in seeking external expertise. I am strongly of the view that such measures make little difference. There will always be imponderables no matter who is crunching the numbers.

Deputy Róisín Shortall

I asked a specific question——

Chairman

For the Deputy's information, the Secretary General of the Department will appear before the committee in early April. Perhaps it is unfair to place all the responsibility on Mr. O'Farrell.

Mr. Jim O’Farrell

I do not mind. However, my answers are not what the Deputy would like. That is the nature of forecasting.

Chairman

Perhaps Mr. O'Farrell will convey to the Secretary General our intention to ask these probing questions when he appears before the committee in April.

Mr. Jim O’Farrell

I will do so.

Ms Josephine Feehily

I may be able to assist the committee in this matter. Mr. O'Farrell moved into this area recently and may not be aware of the work that has been done. The Comptroller and Auditor General looked closely at this issue some years ago and produced a report which the committee examined. As a result, a forecasting review took place in 2006 or 2007, as I recall, under the aegis of the Department of Finance, which made certain recommendations. I understand these recommendations were technical in nature.

Chairman

I apologise to the witnesses on behalf of those members who are obliged to leave the meeting. A division has been called in the House.

To clarify, I am advised that the forecasting methodology employed by the Department of Finance was examined in the report of the tax forecasting methodology review group of February 2008. This is dealt with on page 20 of the Comptroller and Auditor General's report.

Deputy Róisín Shortall

I will move on to tax write-offs. There has been a substantial increase in the number of write-offs for balances of less than €1,000. What is the reason for this?

Ms Josephine Feehily

In volume terms, some 75% of write-offs are for amounts of less than €1,000. In many cases, such amounts are simply uneconomic for us to pursue. However, we do not come to that view lightly in any instance. It is not the case that we simply take a snapshot and decide we will not bother with a particular number of cases. Before writing off any amount, we will have tried all the usual tools available to us, including following up the taxpayer concerned with letters, bringing in the sheriff and so on. In general, we come to the view that a balance should be written off when the next steps available to us, usually involving legal action, would be considerably more costly than the value of the tax outstanding. The vast majority of write-offs for amounts less than €1,000 are in that category. While a small proportion may relate to hardship and other personal circumstances, the vast majority are uneconomic to pursue. The increase in the number of such write-offs is probably simply a function of the growth in the tax base. I would have to check but assume the proportion of write-offs is not wildly different from what it was some years ago. It is simply the case that the number of taxpayers has increased in the recent past. The proportion of write-offs is not likely to have changed significantly.

Deputy Róisín Shortall

However, the value of those small write-offs increased from €1 million in 2006 to €2.5 million in 2007. That is a substantial increase.

Ms Josephine Feehily

The value of the write-offs increased because there were more of them. As I said, we have to make a judgment in terms of the deployment of resources with reference to such concerns as securing the best yield and what is best for the Exchequer and best for us in terms of return. Small amounts are uneconomic to pursue having regard to the costs involved. We will have already invested a substantial amount of resources and time before opting to write off the amount due. Before progressing to legal action, we would already probably do no more than break, even if we managed to secure a return at that point, given staffing and sheriff costs and so on. The next step would inevitably involve a significant cost. Part of the increase may also be accounted for by timing. I have not examined critically why there was a variation year-on-year at that level. However, I can certainly do so if the Deputy wishes.

Deputy Róisín Shortall

I accept that the amounts involved are small and that it may not have been economic to pursue them. However, it certainly says something about compliance.

Ms Josephine Feehily

My officials have drawn my attention to the fact that the numbers of write-offs of small amounts have fluctuated. They were higher in the past before decreasing and then increasing in 2007. As I said, it may simply be an issue of timing. I agree it also says something about compliance. However, in the context of the overall sums that we collect, the amount written off is very small. The figure is the lowest it has ever been, most of the balances in question are more than five years old and most of the sums involved are very small. We have opportunity cost issues having regard to all the other issues, some of which were referred to by the Comptroller and Auditor General, as well as actual financial cost issues in continuing to pursue very small amounts.

Deputy Róisín Shortall

I accept that. However, we have a right to expect improvement in Revenue's year-on-year performance. These figures indicate there has been no improvement in this area, notwithstanding the fact that the amounts involved are small. Nevertheless, there has been a 150% increase in the value of such small write-offs, which is a source of concern. It gives some indication of trends regarding compliance.

Ms Josephine Feehily

I take the Deputy's point.

Deputy Róisín Shortall

Having made that statement, I will leave it at that.

Ms Josephine Feehily

Overall, the level of performance has gone the other way and we actually have written off a lower figure.

Deputy Róisín Shortall

There also has been an increase in larger write-offs with a value of €1 million or more. There were 11 such write-offs in 2007 and I must express my concern about this increased number. It represents 11 people who had debts of more than €1 million written off. What was the largest amount written off? What was the age profile of the 11 cases Revenue decided to write off?

Ms Josephine Feehily

I am unsure whether I have the data presented to me in that fashion. The largest write-off was for €3.2 million and involved a limited company in receivership. The Comptroller and Auditor General's report of the time stated the sum was €2.9 million but the amount increased to €3.2 million subsequent to his examination of the case. All the large write-offs involve companies and tend to be liquidations. Liquidations, receiverships and so on comprised 75% by value of the write-offs and take place in a court process. As for the amount written off, once the liquidator is appointed, we write off the tax and then, in accordance with the rules of liquidation, when the amount to be paid to us is determined, we write it back in. That is the process in which we engage. Some of the amount written off initially can be written back in and collected in accordance with normal liquidation rules, where Revenue has certain preferences and so on. I would not wish to overstate it, as not much is written back in and this does not often happen. Consequently, the big write-offs tend to pertain to businesses. Of the major cases mentioned in the report, three were uncovered by Revenue audits and the effect of us finding them often was to cause a liquidation, which is a particular issue. Three others arose when the company involved underdeclared. In their normal monthly summary returns, they underdeclared and underpaid, in one case with a direct debit element. When the annual return was submitted at the end of the year, it emerged clearly that they had underdeclared. At that point, we go after them immediately. We have tools in place in the law to try to prevent this happening because interest is charged retrospectively in such cases and the effect is liquidation and the write-off of tax. That essentially is what happens. All of the major cases tend to involve businesses and usually take one or other of these formats. Either we find the amount by audit or an underdeclaration has taken place and by the time we receive the annual return, there is no money to pay us.

Deputy Róisín Shortall

How many of the aforementioned 11 cases involved liquidations?

Ms Josephine Feehily

While I know it was 75% by value, I am unsure whether I have that figure at my fingertips but I will get it for the Deputy. That will save me from turning pages.

Deputy Róisín Shortall

Did Ms Feehily state all 11 cases involved companies?

Ms Josephine Feehily

The majority of the big ones certainly were companies.

Chairman

Ms Feehily should forward a note to the committee as soon as possible.

Ms Josephine Feehily

I will.

Deputy Róisín Shortall

Do any of the companies continue to trade?

Ms Josephine Feehily

If they were liquidated, no.

Deputy Róisín Shortall

I referred to the 11 cases.

Ms Josephine Feehily

Without checking whether they all were company liquidations, I cannot answer that question. I am sure I have the information in my briefing documentation somewhere but I do not have it at my fingertips.

Deputy Róisín Shortall

I am curious to know whether a substantial amount of tax due could ever be written off in the context of a company which continues to trade.

Ms Josephine Feehily

No.

Deputy Róisín Shortall

That would never occur.

Ms Josephine Feehily

No. For completeness, something that can happen, to which we are very alive, is that a phoenix situation can emerge. A company can cease and then re-emerge. We have in place a very strong process to monitor phoenix situations at registration. This connects with the commonality checks to which the Comptroller and Auditor General referred. At registration, we check whether there are common directors in respect of companies which previously had been liquidated and if there are debts and so on. We monitor a phoenix company very closely from the outset to avoid a recurrence. Company law provides for businesses to fail and start again. We try to guard against being caught twice by the phoenix. However, I have never encountered a company which had not wound up continuing to trade with tax written off.

Deputy Róisín Shortall

In Ms Feehily's opening statement she stated that with the exception of examinerships, if information came to light to the effect that the status of a taxpayer who had had tax written off had changed, the write-off amount could be reinstated and the unpaid tax pursued in the normal way. Does the chairman know how many reinstatements took place in 2007?

Ms Josephine Feehily

One very significant case arose in 2007 from our own controls. As I mentioned, the internal audit function audits the write-off programme every year and reports its findings to the Comptroller and Auditor General and me. It has been doing so for years and this was the first time they had found a case in which a subsequent event showed that someone had sold a property for a very large amount of money. As a result, the tax debt is being followed up in the case. That is one of which I am aware that is live. The other is when, as I noted, once the preferences are determined in a liquidation scenario, the amount we will receive is actually written back in. This occasionally happens and I have a figure available which I can provide if the Deputy bears with me. Alternatively, I can include it in the note the Chairman asked for on liquidations.

Deputy Róisín Shortall

That is fine.

Ms Josephine Feehily

Generally, that is the process by which it would happen.

Deputy Róisín Shortall

In chapter 3.3, in respect of the analysis of the major write-offs, reference is made to the number of cases referred to the sheriff in which payment was received, totalling €249 million. How much did it cost to employ the sheriffs to perform the enforcement duties?

Ms Josephine Feehily

It cost approximately €450,000 per annum to pay the totality of sheriffs.

Deputy Róisín Shortall

That is good value for money, is it not?

Ms Josephine Feehily

Yes. It was examined from a value for money perspective in the reasonably recent past.

Deputy Róisín Shortall

It also states that when a case worker completes a write-off decision, he or she is required to identify the lessons learned. What system is in place to record these lessons and the identity of the individuals involved?

Ms Josephine Feehily

A number of steps are involved in checking before something is written off. The case worker makes a recommendation to his or her supervisor, which, depending on the amount, will be taken to principal officer level. As for the debt management unit, the reasons are identified and analysed. The Collector General personally takes 20 cases every month and examines them from the perspective of the lessons learned. He distils them into a management note which he sends to his or her managers outlining what he or she considers to be the systemic weaknesses in the aforementioned cases. They are then actioned in the business plan of the Collector General in the following months and years, depending on when it happened. There is a very strong checking process in terms of the arithmetic and whether the approved guidelines were followed. Something that arises from the Comptroller and Auditor General's remarks is that we take the learning process very seriously. If systemic weaknesses are identified, as occurred in a number of the major cases to which the Comptroller and Auditor General referred, they are reverted to a management group to determine what we did wrong and what lessons are to be learned. A couple of times every year, this process is followed in the Collector General's office. It leads into action items, such as the complete review of how we handle new registrations in small cases, which arose from one of the cases in question, and taking steps to prevent something similar from recurring. It is a strong, cyclical process of checking and learning lessons.

Deputy Róisín Shortall

I would like to move on to the issues of audit and re-audit. In our self-assessment system, the question of audit is critical. As the Comptroller and Auditor General stated, the random audit should be the cornerstone of our system if we are to have an acceptable level of compliance. Why did the number of comprehensive audits decrease in 2007?

Ms Josephine Feehily

An immediate factor is the substantial number of comprehensive audits in recent years stemming from the legacy investigations, namely, special investigations into offshore assets, bogus accounts and so on. They led to our carrying out a higher proportion of comprehensive audits than would have arisen normally. They were winding their way out of the system and, in 2007, there were fewer comprehensive audits under that heading.

In 2007, we were in the middle of developing the REAP system before rolling it out comprehensively within Revenue in 2008. We were focusing heavily on the top risk cases instead of approaching interventions in the traditional way, that is, deciding whether to carry out comprehensive or single tax head audits. We approached them from a risk point of view. Some of our best comprehensive auditors were involved in piloting REAP and developing its rules.

There were a number of factors, principally the first that I mentioned, as the source of many comprehensive audits was the legacy investigations. From now on, we will carry out a normal level of comprehensive audits. The 2007 figure is more normal.

Deputy Róisín Shortall

Is it not the case that Revenue took its foot off the pedal?

Ms Josephine Feehily

No, as is evident from the yield. In terms of putting our foot on the pedal in 2007, we carried out more than 250,000 assurance checks, a substantial increase. In 2008, we carried out more than 300,000 such checks. In our compliance programmes we need depth and coverage, the latter of which we can achieve by checking transactions, individual account items, cash registers and registrations, making our presence felt across the tax base and doing enough comprehensive audits to protect the yield.

In terms of comprehensive audits, Revenue re-organised itself and put in place a large cases division, 48% of the revenue from which belongs to businesses grouped therein. We encourage businesses to self-review and to tell us of transactions before they crystalise their view of their tax treatments. Often, they do not like the opinion that we then give them, but it can give us a yield where, for example, we do not believe that a transaction should be treated in a certain way, losses are restricted or so on. It provides us with yield that is not captured in comprehensive audits, but the process tends to be comprehensive. It is another kind of intervention in that we engage with a business before it does something, which is not easily reflected in statistics.

Deputy Róisín Shortall

I would like to know the status of the re-audit programme, the analysis of which we should examine. Previously, Revenue had conducted re-audits on a four-year basis. Our figures, which date back to the four years leading up to 2002, are worrying. When re-audits are conducted, 60% of the non-compliant taxpayers examined continued to be non-compliant four years later. It is an unacceptable state of affairs. Furthermore, 20% of those taxpayers were even less compliant four years after the year in which they were originally audited.

What is the status of the re-audit programme and has it been re-introduced? Does Ms Feehily accept that the figures from the last programme are worrying? Does she accept that Revenue's system of audit is not an adequate deterrent to those individuals and companies inclined to evade their taxes? What are the odds of any self-employed person or company being audited in a five-year period?

Ms Josephine Feehily

I am a bit like Mr. O'Farrell in that I am not good at working out odds, but we cover approximately 2% of the tax base per year, which is in line with the international norm. Rather than asking about the odds of auditing someone, we have been developing and using our risk analysis system so that when we audit the 2% and carry out assurance checks, which comprise a substantial coverage of the tax base, we are more likely to hit the risky cases and evaders than we were when we used the historical manual method. This is our approach.

Deputy Róisín Shortall

Will Ms Feehily explain?

Ms Josephine Feehily

Rather than using the historical manner, in which tax returns were screened by a person and selected for audit, we use risk analysis to select them. Rolled out in 2008, this system enables us to get the riskiest cases instead of relying on the odds of auditing them. We are evaluating a comparison between audits chosen without the assistance of the risk analysis tools and audits chosen with them. The data acquired in 2008 from a control group and a REAP group will be analysed and evaluated to tell us whether we have been right.

As the Comptroller and Auditor General stated, there is no point in pretending that the re-audit programme is anything other than important. I agree with his conclusion. The data from the programme that he reviewed were old. We had reached the point at which continuing with something so old would have been useless. In the context of developing our risk-based approach, we want to introduce a proper risk-based audit programme and, in conjunction with this, proper random audit and re-audit programmes based on the new model.

The risk analysis system is at the heart of what we are doing with all of our compliance interventions. It has 28 data sources, the most recent of which relates to the deposit interest from the financial institutions. It has 197 rules and 806,000 cases. The rules are run across the data sources and cases three times per year to give us lists from which we pick the riskiest cases. Last year was our first opportunity to do so in a proper, sophisticated fashion.

As a backdrop, we commenced a statistically valid random audit programme a few years ago. As the Comptroller and Auditor stated, that programme has not only given taxpayers a sense that they might be audited, even if they are not rich, but it has also given us a control group against which to validate our risky cases.

Regarding re-audit, we have decided to identify a number of cases from 2008, tag them, track them electronically and at the end of 2010 we will analyse which cases have become riskier. We will then re-audit a proportion of them. We want to do this on a statistical basis and we will be happy to speak to the Comptroller and Auditor General about this. Cases that were taken through human selection do not have the same validity as doing this on proper statistical basis.

I accept that the absence of a proper re-audit programme was a weakness. We first had to invest in modernising our audit programme before we could apply soundly based random procedures. We have done so.

Deputy Róisín Shortall

Does Ms Feehily accept that the findings of the re-audit programme to 2002 indicate exceptionally poor performance by Revenue in ensuring compliance given the figures that I have cited? Some 60% of those re-audited continue to be non-compliant and 20% are even more non-compliant than before. I know that Ms Feehily was not in her current position at the time but these figures indicate an exceptionally poor performance by Revenue. Given the findings of the re-audit programme, it strikes me as strange that Revenue does not continue to have a re-audit programme. I accept what Ms Feehily has said in respect of REAP and the different approach in respect of targeting high-risk people. Surely it is a good performance indicator to have re-audit programme, to see if Revenue is being effective or not. Until 2002 it seems that Revenue was not effective.

Ms Josephine Feehily

A re-audit programme is needed and we have already started to work on one using the 2008 audits as the base year. The previous re-audit programme is very old and it is important to consider the figures and note that in 39% of cases there was no return on the audit, in 46% of cases the amounts recovered were lower and in only 15% of cases were the amounts recovered higher. None of this takes from the fact that there was recovery. To have continued an old, manually based re-audit programme in parallel with a sophisticated system was not statistically sound. We want to do this properly from now on.

Deputy Róisín Shortall

Valuable lessons are to be learned from the re-audit programme in terms of measuring the performance of Revenue. Given the negative figures that emerged from the 2002 re-audit programme it is extraordinary that seven years were allowed to elapse before the re-audit programme was reinstated. That is a matter of concern, especially if we are serious about sending out a message to non-compliant taxpayers that they will be caught. During a period of boom in this country when there should have been even more substantial tax receipts, it is extraordinary that we were not doing re-audits. It is regrettable that decision was taken although I except that Ms Feehily was not in her current position when that decision was taken.

Ms Josephine Feehily

There is a related dimension of re-audit to which I should refer. This may show that we did not entirely ignore the category. In writing rules for the risk system, cases that had previously been audited and given yield were included. We have considered recidivism in building the rules for the risk analysis system. It is a slightly different way and is not a re-audit programme in the clinical sense of having a separate programme but rules in the risk analysis system are designed to pick up recidivism. We have data available on this. We have a rule about previous audit history and this rule was found to be true 6,686 times in the top 10% of cases. This amounts to 80,000 cases on a risk basis. In the 80,000 riskiest cases, 6,686 of them had a previous audit history. We have been picking up the riskiest previously audited cases but we cannot extract this and say it is a re-audit programme because it was not undertaken in a properly sophisticated fashion. Audit history is a factor and is taken into account in building risk scores. One part of an eye was kept on it but I agree that it is time for a proper re-audit programme. We have started work on this.

Deputy Róisín Shortall

It is extraordinary that over the past seven years of boom there was no re-audit programme in place. Having a re-audit programme in place does a service to the taxpayer but is also the most effective performance indicator for Revenue. I welcome the fact that it has been reinstated and I look forward to the findings on the programme next year. I must express serious disappointment that is has not taken place in recent years and bewilderment at the reasons given for that.

Chairman

With regard to tax collection, recently I had to sit through a lecture from a tax exile on how we do our business in this country and how we should be spending our hard-earned money. Can Ms Feehily tell us how this scheme operates and how people are monitored in respect of residency? This situation is a source of great annoyance to those who have no choice and whose taxes deducted from their salaries automatically. There are now levies and threats of higher taxation. People do not understand how the scheme operates and how Revenue monitors the scheme to ensure people are complying with the provisions.

Ms Josephine Feehily

The term "tax exile" is shorthand for many things. Those who are not resident for tax purposes are taxed on their Irish source income if they have earnings here. The model we have, whereby tax residence is judged on the number of days of residence, is a standard model across OECD countries and across the world. The law is clear.

Chairman

How can Revenue estimate how many days people reside in the country?

Ms Josephine Feehily

This refers to a particular category of non-resident taxpayers. We deal with this in our high worth individuals unit, which is in the large cases division. We monitor the movements of high worth individuals using various devices available to us, including media monitoring, and we ask a number of them to produce evidence of their absence or presence every year. They provide us with substantial documentary evidence for review. There are other operational tools that we tend to keep to ourselves for operational reasons but these include media monitoring and data to which we have access through the Customs and Excise. We monitor the movements and carry out assurance checks with individuals every year as part of our high worth individual programme. I reiterate that it is a policy matter because the law is clear and simple in this regard.

Chairman

How many people are in that special category?

Ms Josephine Feehily

I do not know the number off the top of my head. According to the 2007 tax returns, which came into our office at the end of 2008, 5,803 people have declared that they are non-resident for tax purposes

Deputy Róisín Shortall

How many people are in the high worth category?

Ms Josephine Feehily

The high worth individuals unit monitors 440 cases but I do not have figures on that subset.

Chairman

Can Revenue give us further details on the matter?

Ms Josephine Feehily

We will do so. I want to clarify that two separate numbers are at issue. The high worth unit has 400 cases under management.

Deputy Seán Fleming

Ms Feehily stated that 5,803 people declared themselves non-resident for 2007. How much tax did these individuals pay?

Ms Josephine Feehily

It appears that we do not have that figure, for which I apologise. I will get the information for the Deputy.

Deputy Seán Fleming

I am pleased to hear that because the issue of people who jet into and out of the country has become a major controversy. Ms Feehily has clarified that all those who declare non-residency in Ireland are taxed on the income they earn here.

Ms Josephine Feehily

That is why they make tax returns.

Deputy Seán Fleming

Has each of the 400 high worth people made a tax return?

Ms Josephine Feehily

Absolutely, yes.

Deputy Seán Fleming

Given the level of public confusion and understandable annoyance that has arisen, it would be useful to extract the figure from the returns for 2007. Section 1 of Form 12, which is used by ordinary PAYE workers, asks whether one is non-resident, ordinary non-resident or non-domiciled. How long will it take Revenue to get the relevant information?

Ms Josephine Feehily

As the Deputy will be aware, that is a new question. The 2007 returns have not yet been fully analysed. I may be able to provide figures for 2006 quickly but the more recent figures may take a month to analyse.

Deputy Seán Fleming

It is only a matter of weeks.

Ms Josephine Feehily

That is all.

Deputy Seán Fleming

Can Ms Feehily provide an indication of the figure for 2006?

Ms Josephine Feehily

I rooted through my notes while the Deputy was speaking but I do not have it to hand. I am unsure when the question was first asked.

Deputy Seán Fleming

It would be useful to know.

Ms Josephine Feehily

I can provide the 2006 figure by next week.

Deputy Seán Fleming

I ask Ms Feehily to try to supply us with the 2007 figures. We will not tie her to the last euro but she should be able to give an estimate given that returns were due by October 2008.

Ms Josephine Feehily

As we allow a period of grace for returns filed on-line, these come in around the middle of November.

Deputy Seán Fleming

If a person has not been in the country for six months, he or she is deemed non-resident. Is it possible for somebody who spends five months in Ireland, five months in Portugal and two months in Austria to be tax resident nowhere?

Ms Josephine Feehily

Yes.

Deputy Seán Fleming

I imagine these people would spend time in several countries and may not spend sufficient time in any one country to declare residency. How does double taxation work in that context? In regard to those who declare non-residency, does Revenue ask their country of residence to cross-check their incomes?

Chairman

Is the Deputy talking about the man from nowhere?

Deputy Seán Fleming

I am wondering what happens to people who spend less than 180 days in any one country. How are they picked up in terms of double taxation agreements?

Ms Josephine Feehily

It is possible, assuming that all the countries have similar residency requirements. The period of residency varies, although 183 days is standard.

Deputy Seán Fleming

Ms Feehily told us that 183 days is an OECD standard.

Ms Josephine Feehily

It is fairly standard.

Deputy Seán Fleming

Most jurisdictions provide that six months is the minimum period of residence. It is probable in many of the cases under discussion that a person did not spend longer than six months in any one country. How is double taxation co-ordinated in the case of those who are non-resident everywhere for tax purposes?

Ms Josephine Feehily

There are a couple of dimensions to the Deputy's question. The tax treaties do not really deal with double non-taxation. The Deputy is referring to a person who may have no tax liability anywhere.

Deputy Seán Fleming

Avoidance.

Ms Josephine Feehily

However, if the other countries involved have similar requirements to ours, they will have rules pertaining to income sourced locally. Irish sourced income is taxed in this country, for example. Double taxation treaties are designed to remove double taxes rather than apply them. If somebody is not taxed because he or she is not resident anywhere, the treaties are not the device to address that. The United States taxes its citizens on their incomes globally. The double tax treaties in that context would involve a person claiming relief in the United States for tax paid here or elsewhere.

Generally, the treaties are used as relieving rather than charging provisions. They are also used to support exchange of information. If any country has doubts about a particular taxpayer, there are formal legal provisions for exchange of information. We regularly engage in such exchanges. The focus in that regard tends to be investigative. There is certainly scope for the non-taxation to which the Deputy referred.

Deputy Seán Fleming

The public is enraged about that scope. I find it worrying that the chairman of the Revenue Commissioners is stating there is scope for an individual to avoid tax because he or she has not declared residence anywhere.

Ms Josephine Feehily

That is subject to the requirement that the individual must pay tax in Ireland on his or her Irish sourced income, which is my concern.

Deputy Seán Fleming

I understand that. I ask Ms Feehily to provide details on the numbers of non-residents, ordinary non-residents and non-domiciled and to explain the difference between the three categories. She estimated the cost of the sheriff service at €450,000. That has to be a mistake.

Ms Josephine Feehily

It is not a mistake but perhaps it is not complete. That is the amount we pay but the sheriff is also entitled to recover costs from the taxpayer.

Deputy Seán Fleming

It is only a partial estimate, therefore.

Ms Josephine Feehily

To be honest, when I was asked the question I looked for the cost.

Deputy Seán Fleming

Perhaps Deputy Shortall did not ask the right question.

Ms Josephine Feehily

I did not mean that. I simply reacted to the question.

Deputy Seán Fleming

The sheriff was involved in 43,000 cases last year. If Revenue was only paying €450,00 that was approximately €10 per case. I found that unreal.

Ms Josephine Feehily

It covers his costs from the taxpayer, which is normal.

Deputy Seán Fleming

When they arrive with four-wheel drive trucks and three or four big men, I cannot believe they are doing it for a tenner. Does Ms Feehily have the figure? She must know because there is a contractual relationship there. What are the total fees generated by the sheriffs in respect of these 43,000 cases? What is the average sheriff's cost?

Ms Josephine Feehily

I doubt that I know the answer but I can supply the Deputy with the schedule they are allowed to charge. I do not have it with me but there is a scale of fees which they are entitled to collect.

Deputy Seán Fleming

I understand that and I take it they return the money promptly. Previously, they could hold it for a time.

Ms Josephine Feehily

That is right. It was all changed a couple of years ago.

Deputy Seán Fleming

That is all gone. It has improved. If the Revenue Commissioners cannot answer that question, who can? Is it a matter for the Courts Service? The report indicates that sheriffs are officers of the court.

Ms Josephine Feehily

They are.

Deputy Seán Fleming

Who can answer the question of what sheriffs charge in respect of those 43,000 cases?

Ms Josephine Feehily

In money terms.

Deputy Seán Fleming

Yes. What is the average figure? Is it €1,000 or €2,000 per case? I would expect it is around that figure. Everybody complains about the cost of a sheriff.

Ms Josephine Feehily

We can certainly make a stab at it as we have the scale of fees which we can apply to the debt. They are also entitled to charge actual costs. We cannot make a stab at that.

Deputy Seán Fleming

The Revenue Commissioners cannot do it but can the Department of Justice, Equality and Law Reform provide the figure if the sheriffs are officers of the court? Who can provide the figure to this committee? It is an obvious question.

Ms Josephine Feehily

They are individual officers who are entitled to charge fees in accordance with a scale. I can get the figure to the extent that it is a percentage of the debt but as they are entitled to charge actual cost——

Deputy Seán Fleming

That is significant.

Ms Josephine Feehily

They are a business and charge actual costs. I do not know if they are obliged to tell anybody, apart from in the tax return to the Revenue Commissioners. The other side of my head is not entitled to look at that. I very much doubt if anybody would know the figure in terms of outlay. They are entitled to a percentage plus outlay.

Deputy Seán Fleming

How many sheriffs are there and in how many areas?

Ms Josephine Feehily

There is pretty much one for every county.

Deputy Seán Fleming

Not at all. The one in Clonmel covers several counties and my area.

Ms Josephine Feehily

There are approximately 20 of them.

Deputy Seán Fleming

I do not believe there is a national sheriff. Could the committee write to the Courts Service or the Department of Justice, Equality and Law Reform, if the sheriffs are officers of the court, and ask for the total amount charged by sheriffs during the course of last year?

Chairman

We will have representatives of the Department of Justice, Equality and Law Reform here in a few weeks.

Deputy Seán Fleming

I suggest we send a letter in the meantime. I am surprised we do not even seem to know who to ask. Perhaps we can send a letter to find out who can tell us. Maybe we need to question a different organisation. The figure surprised me.

I have questions on the 11,000 cases of write-off. I accept the figure of a fifth of 1%, which seems fairly good overall. Of the 11,000 cases that led to the write-off referred to in the report, how many would a sheriff have been involved in before the figure was written off?

Ms Josephine Feehily

In the vast majority either the sheriff or our debt collection solicitors would have been involved. I do not have a breakdown as to which was used in different cases but those are our two main enforcement tools. There is no point sending a sheriff to a case where there is no business or there is nothing to seize, such as a domestic scenario. In that case we use our solicitor enforcement.

Deputy Seán Fleming

What happens when a sheriff indicates a warrant cannot be executed as there is nobody or nothing there? There is a reference which indicated that in some of the cases of write-off, the taxpayers could not be located. What happens in those cases?

Ms Josephine Feehily

A case worker will review the case based on any other information we might have which suggests the sheriff might not be correct, or there may be other information known to us which would suggest another route might work. For example, an attachment order may be put into effect. If there are no physical assets, there may be financial assets or an income stream that could be attached. The case will be reviewed by the case worker to see if any of the other enforcement routes might give us yield.

Deputy Seán Fleming

Would the warrant be withdrawn from the sheriffs? Does that happen often?

Ms Josephine Feehily

The warrant is discharged if the sheriff sends it back with nulla bona written on it; in other words there is nothing there. In the cases where it is withdrawn — it is a small enough number — it would arise when the money comes in while it is still open.

Deputy Seán Fleming

Ms Feehily mentioned attachment orders. How much was collected through attachment orders and how many cases were there? There is no reference to this in the report. I would have thought this would be a much simpler, humane and less aggressive and costly way of collecting money. We do not know how much the other method costs the taxpayer as we do not know how much the sheriff charges. I have seen attachment orders from one taxpayer to be presented to another and it seems to be a good method.

Ms Josephine Feehily

I have the number but it might be for 2008.

Deputy Seán Fleming

That would be fine as it would give an indication of the total. Considering the figures provided, there was €249 million involved in the 43,000 cases, which is an average of €6,000 collected per case per sheriff. What is the average collection by an attachment order, where the taxpayer is owed money and the Revenue Commissioners gets the money from whoever is due to pay the taxpayer?

Ms Josephine Feehily

Attachment orders in 2007 amounted to 2,307.

Deputy Seán Fleming

Why were there so few?

Ms Josephine Feehily

That is about normal and I will indicate why the number is so low. The total value was €105 million and we got €28 million.

Deputy Seán Fleming

Some €28 million was collected, so on average much more is collected through an attachment order than a sheriff's warrant. The average is well over €10,000.

Ms Josephine Feehily

In the same year the value sent to the sheriff was €554 million, from which we got a yield of €249 million, which amounted to approximately half. An attachment order is thus less effective.

Deputy Seán Fleming

How is a case selected to go to the sheriff as against an attachment order?

Ms. Josephine Feehily

Case workers have guidelines and use their experience. Sheriffs will usually be chosen in cases where there is something to seize in a domestic scenario. In regard to the question of why there are so few attachment orders, such an order is an extraordinarily serious power, which we take very seriously.

Deputy Seán Fleming

Therefore, is a sheriff arriving at the door.

Ms Josephine Feehily

Business representative bodies complain to me regularly about the use of attachment orders. I have recently received a complaint——

Deputy Seán Fleming

I am delighted to hear it.

Ms Josephine Feehily

——that I use too few. They believe I am using it too often. It is the normal complaint, although there were only approximately 2,000, which is quite normal. There were approximately 2,000 in 2008 as well. It is one of the most frequent complaints I get from business representative bodies. Even the appearance of it does substantial damage to reputations with banks, or in whatever income stream we attach. That must be acknowledged, so we use it sparingly and carefully. That is about the right number, having regard to the size of our base.

Deputy Seán Fleming

The Revenue Commissioners prefer the sheriff method.

Ms Josephine Feehily

It is not that we prefer it.

Deputy Seán Fleming

There are 43,000 cases for sheriffs.

Ms Josephine Feehily

An attachment order is very cheap for us.

Deputy Seán Fleming

It is a bit more silent.

Ms Josephine Feehily

It is not always appropriate. If there is no income stream, there is nothing to be had. If a business is stopped from operating by causing its bank to take fright, it can do more damage in the longer run, especially if it is not soundly based. We are very careful about it.

Deputy Seán Fleming

We will move on but there are two points of view. The sheriff's arrival causes its own problem as he or she is very visible.

Ms Josephine Feehily

I do not get as many complaints in that respect, strangely enough.

Deputy Seán Fleming

People are probably more afraid of a sheriff than an attachment order.

Ms Josephine Feehily

I was referring to organisations and representative bodies.

Deputy Seán Fleming

An issue has come up with the Department of Social and Family Affairs, as well as other Departments. Has there ever been a call for the Data Protection Commissioner to inquire into the Revenue Commissioners about staff having inappropriate access to files?

Ms Josephine Feehily

The Data Protection Commissioner asked us about this and we gave an answer. I am working from memory as I do not have the figures with me. There were instances where staff had inappropriately accessed files. In the annual report last year the commissioner referred to one such case, which we advised him was in the disciplinary process. He indicated he would return to us to hear about it. The vast majority of staff in the Revenue Commissioners do not do such a thing.

Deputy Seán Fleming

Of course.

Ms Josephine Feehily

We have procedures in place to see that they do not. However, in the context of 6,500 staff, there have been an occasional couple of incidents.

The Data Protection Commissioner has expressed concern, and he writes to us regularly for progress reports on the one or two cases that arise. In the last number of months somebody has made a complaint to him and I am following that up also. I can assure the committee that in any case in which a citizen complains about inappropriate access — whether to the Data Protection Commissioner, directly to me or to any officer or senior manager in Revenue — we take it extraordinarily seriously and it is handled through the disciplinary process. Disciplinary action has been taken in one or two cases in the last year.

Deputy Seán Fleming

I am happy about the options for the citizen. However, is there not an internal mechanism for doing spot-checks?

Ms Josephine Feehily

Absolutely.

Deputy Seán Fleming

The citizen might not know that 20 people are looking at his affairs. He may not hear this.

Ms Josephine Feehily

Absolutely, we have.

Deputy Seán Fleming

Leaving the citizen out, I am talking about the Revenue Commissioners' internal controls in this regard.

Ms Josephine Feehily

We absolutely have such controls. It was because of the mention of the Data Protection Commissioner that I spoke about that aspect of it. That is where he is coming from. We also have systems in place. Transactions and access to systems are checked. We have recently had discussions on whether we can use technology to a greater extent to help us to monitor inappropriate access. We have rules in place in our IT division to block access to certain things. Sensitive cases are handled with very restricted access.

Deputy Seán Fleming

Large cases.

Ms Josephine Feehily

For large cases, access is restricted. A substantial proportion of our staff do not have access to our business intelligence system. There are a whole range of rules in place, but we would never be complacent about it. It is something we take very seriously.

Deputy Seán Fleming

How many businesses has Revenue put into receivership or liquidation? For how many has it been part of a call for receivership and liquidation?

Ms Josephine Feehily

I am trying to remember how many. In 2007, 19 companies were wound up following the issue of what we call section 214 notices by Revenue. I refer to section 214 of the Companies Act. It is a notice to the business to say that if it does not pay its debts we will get a liquidator. That number rose to 28 in 2008. It is important to put this in context, however. Those are the cases in which we formally initiate a liquidation. We would be reasonably confident that in cases of voluntary liquidation — with regard to both creditors and company members, particularly the members — it is often our intervention to seek to collect money which causes the liquidation. I cannot segregate these cases because one does not know what caused the liquidation, but we are fairly sure. In 2007 there were 936 members' voluntary liquidations. How many of those were caused by our being the last straw I cannot tell.

Deputy Seán Fleming

Therefore, the Revenue Commissioners would have been involved in quite a few.

Ms Josephine Feehily

We were involved in all of them. Added to that there were 304 creditors' liquidations, 18 receiverships and a couple of examinerships. That is a total of about 1,500 in 2007.

Deputy Seán Fleming

I hear what Ms Feehily is saying about 28 businesses Revenue forced into liquidation directly——

Ms Josephine Feehily

We actually issued the notices.

Deputy Seán Fleming

Does Ms Feehily know how many employees were in those businesses?

Ms Josephine Feehily

No.

Deputy Seán Fleming

It must be possible to find that out from the P60s.

Ms Josephine Feehily

Or P35s. I am sure we could find out.

Deputy Seán Fleming

Yes. We are curious about employment. We are all appealing to the banks to help in the credit crisis and it is a little hollow when we have people on the national airwaves saying Revenue is sending in sheriffs and putting businesses into liquidation. I just want to make sure we in the public arena are not being hypocrites by telling the banks to do one thing when businesses are in difficulties and then, through the Revenue Commissioners, making sure the opposite is happening.

Ms Josephine Feehily

If I may comment——

Deputy Seán Fleming

Yes.

Ms Josephine Feehily

In the last number of months we have had a significant increase in the number of businesses that have come to us looking for more time to pay or for instalment arrangements. They have been making exactly those arguments. It is a very fine balance for us because we are not bankers. In most cases they are claiming that it is simply a liquidity problem. We do not want to be the last person to be paid because then I would be back answering more questions about write-offs and liquidations — the levels of which could very well have gone up, if I am to be honest, when I come back here again. That is why I mentioned the increase in examinerships in my opening remarks. We have definitely seen that. They went from 27 in 2007 to 72 in 2008. There has been a significant increase in the number of businesses going into the protection of examinerships. That is probably an easier place for the kind of discussion the Deputy is talking about — the balance involving jobs and so on.

In deciding whether to give businesses more time to pay, we always consider their underlying viability. If a business with a large number of employees is not viable, there is little the Revenue Commissioners can do other than to try to make sure there is an orderly wind-up using company law and that we get whatever preferential tax we can get. It is a fine balance as to when to make that call.

Deputy Seán Fleming

Moving away from businesses, have any family homes had to be sold to pay Revenue debts?

Ms Josephine Feehily

We never go after the family home. I could not tell the Deputy whether individuals have chosen to make such a decision, but in terms of the powers available to us — judgment mortgages and so on — we never ever go after the family home.

Deputy Seán Fleming

It is good to hear that the Revenue Commissioners would never use that power, because some people would be afraid it does have that power. I am pleased to know it does not.

Mr. Jim O’Farrell

It is important to make the point that a business that is only operating because it is not paying its taxes is not a viable business. The main victim of that is the compliant business that is paying its taxes. If businesses were facilitated in operating without paying their taxes, they would be in unfair competition with the compliant taxpayer, which is what keeps the entire country going and which must be our first commitment.

Deputy Seán Fleming

I understand that they have to be viable businesses, but sometimes there can be viable businesses with cash flow difficulties, and that was the focus of what I was talking about. I accept that businesses can be unviable, and if so, they should not be withholding tax, but they can be viable.

Deputy Deirdre Clune

I wish to go back to the liquidation process we were talking about earlier. This is something we will probably be hearing about more and more. I note from the report of the Comptroller and Auditor General that among voluntary liquidations with write-offs the dividend received was approximately 12%, while in court liquidations it was about 24%. I know it is not done to pursue directors of companies that go into liquidation, but in some cases a director may have known what he or she was facing into and may have transferred assets and set up a new company. What can the Revenue Commissioners do in that situation? Do they ever pursue these phoenix companies, as they are called?

Ms Josephine Feehily

As I said, the one thing we can do, which is entirely within our control, is to apply commonality checks at the registration stage if a director reappears and registers a new business. We identify those cases and tag them for monitoring so that he or she cannot do the same thing again. Second, as a member of the committee of inspectors, which is a committee under the liquidation process, we can seek to influence the liquidator to take such action as is appropriate with regard to the directors. It is the liquidator who must decide whether to pursue the directors personally. We cannot decide that. We would certainly use that route where we have a certain view. Another avenue we have used on a small number of occasions, when we believe the case is serious enough, is to support the liquidator by paying him or her to take that course of action through the courts. That has only happened once or twice.

A charge of reckless trading against a director must be taken under the Companies Act and I understand it is a very difficult charge to make stick. There was a Supreme Court case in this regard in 1997, and in this and related cases it was decided that the extent of the liability imposed on the directors by the court be restricted to the value of the loss inflicted on the company or its creditors by the reckless continuation of trading — in other words, after they should have known they were trading recklessly rather than while they were trading recklessly. That is a very high bar and as a result, it is difficult to prove that a director knowingly traded recklessly after such time as he should have known he was behaving recklessly. I hope I have paraphrased the judgment correctly. We raise this issue with the committee of inspectors whenever we think it appropriate to do so. In one or two cases we have supported a liquidator to take such an action.

We have very close liaison with the Office of the Director of Corporate Enforcement. There are arrangements in place in law and also a memorandum of understanding between us and the ODCE for exchange of information. We bring to the attention of the director observations we might make about certain directors and suggest that the director might pursue them for the purposes of restricting them as directors. That is another avenue we use in dealing with directors.

Some years ago there was a discussion at this committee about whether we could pursue directors for personal liabilities in respect of fiduciary taxes. Such action would require a substantial change to company law which we sought at the time but without success. We tried various avenues.

Deputy Deirdre Clune

Is it extremely difficult to do this such that it does not happen in practice?

Ms Josephine Feehily

It does not generally happen. We use the tools available to us whenever we can. We stop the phoenix companies and report them to the Director of Consumer Affairs.

Deputy Deirdre Clune

The Director of Corporate Enforcement.

Ms Josephine Feehily

Yes; it is the same Department. I apologise. It is the liquidator who must decide whether a charge can be sustained in respect of reckless trading. As I understand it, an extremely high bar is in place and the issue is not pursued very often. We are supporting the liquidator in one or two cases in the courts. That is to say we are paying the liquidator because there is nothing in the assets with which to pay him or her.

Deputy Deirdre Clune

Audit is entirely different. Ms Feehily has mentioned that 14,308 audits were completed in 2007. How does this figure compare with those for 2006 and 2008? Is the number increasing?

Ms Josephine Feehily

Deputy Shortall referred to this matter. The total number of audits in 2007 was higher than in 2006 when the figure was 13,626. In 2007 it was 14,308. In 2008 the figure came back down to approximately 13,500. The figure for 2007 was higher than for the years immediately preceding or subsequent to it.

Deputy Deirdre Clune

Does Revenue focus on any particular area? Ms Feehily mentioned the construction industry.

Ms Josephine Feehily

I mentioned the construction sector. I also mentioned that we were doing a lot of work in different sectors. We are focusing heavily on cash businesses which can range from tradespeople to barristers. Anywhere there is cash we perceive a risk. Projects have been put in place which cover a number of sectors. We also have a cash register project which began in the south-east region. We bought electronic cash registers and found an expert to show us how they worked and how information could be extracted from them using technology. The pilot project achieved substantial success in the south east and it is now to be adopted in other regions. If a pilot project proves fruitful in one region, it will be taken up the following year in other sectors. For example, by knowing how to interrogate one can discover underdeclarations. That seemed to cause shock and horror among businesses when they discovered we had that ability. We have trained people in how to use the system. We have another project that we call the whole-of-street or whole-of-town compliance programme which involves small towns or, in larger towns, a street. Our officers visit every business, ask questions about the books and records and the cash registers. We see if staff are registered for PAYE purposes and so on. We ask for specific print-outs.

Deputy Deirdre Clune

Is this in the southeast region?

Ms Josephine Feehily

The pilot project took place in the south east in 2007 and but this is now the practice everywhere. It is proving fruitful in two respects. First, it is giving us money, or a yield. It also gives us visibility and a presence on the ground, which is very important. The point has been made that business people should feel it is likely they will be visited and audited by Revenue. I refer to cash businesses in general, if I can anticipate the Deputy's question about focusing on particular sectors. In the future we intend to try to make the process a little more scientific by taking sectoral projects in a more structured way. This is something we learned from Revenue in Sweden. We invited a Swedish expert to talk to us last year. A Revenue region will be asked to undertake a small but intensive audit programme in a particular high risk sector. Cases will be chosen very carefully and there will be a control group of cases which will not be so carefully chosen. The audit results will be compared and we will learn from the process. Our risk analysis system will be improved and we will learn also about new avenues of inquiry and specific risks that may be common to taxpayers in that sector. We started this process some years ago. We encouraged Revenue regions to explore local risks and test sectors in an unscientific way and subsequently share the knowledge gained. We found this to be so fruitful that it merited being done in a more scientific way. That is what we are beginning to do this year. We will have a control group and a selected group in a sector and will extend the project if it works.

Deputy Deirdre Clune

My last question concerns the introduction of REAP which was supposed to be in place in all areas by 2008. Is that the case?

Ms Josephine Feehily

Yes; we set a target for our auditors to use REAP in 60% of their audits in all regions in 2008. We achieved a figure of about 54% and the programme is in use everywhere. More than half the audits in 2008 were carried out using REAP as the selection tool. We have an evaluation programme in place to measure the results from the two groups. We expect to have a report in the latter half of this year. The idea is to learn and keep improving risk scores by discovering more about what works and what does not. The matter is in hand.

Chairman

I will take supplementary questions.

Deputy Róisín Shortall

I have a few brief questions. Ms Feehily has mentioned Revenue looked for a change to company law in respect of fiduciary taxes. Will she tell us more about this? When was the request made?

Ms Josephine Feehily

It was made a couple of years ago. The issue arose at this committee and was discussed here. It might have occurred in 2005 or 2006. I am working from memory. It arose in the context of a project audit of pubs done by the Comptroller and Auditor General. It had become clear that there was a phoenix dimension, if I might describe it as such. Certain recommendations were made.

Deputy Róisín Shortall

What specific change to company law was sought?

Ms Josephine Feehily

A recommendation emerged from that discussion in respect of so-called fiduciary taxes, generally PAYE, PRSI and VAT. The view was that directors might be made personally liable for these taxes.

Deputy Róisín Shortall

I understand.

Ms Josephine Feehily

My colleague, Mr. O'Shaughnessy, reminds be that abuse of limited liability was the title of the recommendation.

Deputy Róisín Shortall

It is likely we will see a good deal of abuse of limited liability emerging in the coming months in respect of the banks. Is it correct to say a request was made by Revenue to the Minister and the Department to change the law, which was refused?

Ms Josephine Feehily

It did not happen. The Deputy might be interested on that point.

Deputy Róisín Shortall

I wish to clarify the matter. Was a request made by Revenue?

Ms Josephine Feehily

I am pretty sure there was. There is no doubt we would have made our view known. The Department of Enterprise, Trade and Employment would, obviously, have a different view. The Company Law Review Group has a different view, but certainly we would have made our view known. I refer to the Deputy's remark about fiduciary taxes. In the course of 2008 a taxpayer was found guilty and jailed and the judge commented on that very point about fiduciary taxes.

Deputy Róisín Shortall

Chairman, is it appropriate to request Ms Feehily to bring documentation supporting that report to the committee next week? I would be very interested to determine what, if any, correspondence took place between Revenue and the Department of Finance.

Chairman

We will also check our own records.

Deputy Róisín Shortall

I thank the Chairman. I have two more questions. I have received some complaints from people running small businesses with liquidity problems who have experienced delays in the refund of VAT. Does Revenue have a target date for repayment of VAT from last year? Some small operators are really struggling at present.

Ms Josephine Feehily

We make repayments in a matter of days if they are filed electronically. Some 85% are paid within a number of days. I am unsure if I have the numbers to hand. If the Deputy knows of specific cases, that is a concern because it is something we have prided ourselves on, provided the businesses are compliant. Sometimes a business will make a repayment claim, but there is also a debt on another side of the file.

Deputy Róisín Shortall

I will pursue that issue separately afterwards.

Ms Josephine Feehily

We have a high standard which we meet and we make repayments in a matter of days. Throughout the years we have operated by risk rating the cases and we carry out the checking afterwards. We get the money out within a matter of days. If there is an issue I would be concerned and I would like to know more about it.

Deputy Róisín Shortall

I shall pursue that issue separately.

Data collection is a bit of a hobby horse of mine. There are areas in which Revenue collects data and areas in which it does not. I have sought information in the past on the cost to the Exchequer of self-administered pension schemes. A figure of 6,500 self-administered schemes has been provided by Revenue. An individual may put in excess of €5 million away in a fund and there is very generous tax relief on that. In fact, a tax-free lump sum of 25% of the total is allowed. Presumably, that represents a very substantial cost to the Exchequer. I have tried to gather data on the matter for several years and Revenue does not seem to be in a position to provide me with a figure. That is strange; surely the committee is entitled to know the value of the substantial tax breaks given to very high net worth individuals. Can Revenue do anything concerning that data?

Ms Josephine Feehily

The Deputy is right that we do not capture that data and I can give her the reasons for this. It is important to firstly consider the rules concerning these schemes and the role of Revenue in managing the schemes. Our role is to approve the scheme, to apply the limits and to check that the limits, set out in law, are not being abused and exceeded. The legal position is that there is a limit on the amount of reckonable earnings an employee can put into one of the schemes. There is also a limit on the total size of the pension pot or fund. As the Deputy indicated, it is in excess of €500,000.

Deputy Róisín Shortall

I understood it was in excess of €5 million.

Ms Josephine Feehily

It is in excess of €5 million. I apologise, I was looking at my papers and I saw the figure "5". The limit is actually €5.4 million now, although it started as €5 million. Until the most recent Finance Act in December, the rule was that the earnings cap was €275,000 and it is now €150,000. These are the two rules which concern us and we check if too much relief is claimed having regard to those two rules. The other rule which concerns us is that the funds are properly invested at arm's length. The rule is that the proper level of benefit is paid out, no more and no less, but certainly no more.

We approve every scheme at the outset and then every year we receive 6,500 paper returns complete with annual accounts. Every three years we receive an actuarial review of each scheme. That system enables us to do our job. The returns are screened manually and every year and in addition to approving them at the beginning we audit approximately 100 of them. There is no need for us to capture the data that would enable us to supply the committee with the cost of that subset of pensions. The resources necessary to capture all of that data and carry out such analysis would be significantly disproportionate given the overall work Revenue must do. It is not of relevance to me. I accept that it is of relevance, but I am explaining the matter from Revenue's point of view.

The cost of reliefs is of relevance. In 2004 when the Department of Finance reviewed all of the reliefs in the tax code, pensions costs were reviewed in that context. Various approaches were taken to try to evaluate the cost of reliefs, including surveys and research. Much of the work was done by consultants. The difficulty in costing the relief on pensions was recognised in that review. A new box was put on the P35 form the following year which captures the global cost, including that of employer and employee together, of the totality of pension schemes. The box on the P35 has been commented on negatively by business as being an additional piece of bureaucracy. I say that as an aside.

The route chosen for the subset in which the Deputy has an interest as part of that review of reliefs was an analysis based on a sample of 50 cases registered with the Pensions Board. That review was conducted. We were a part of it, but it was done under the auspices of the review of reliefs generally. Conclusions were drawn from that sample which were published and certain policy directions evolved from there. In summary, the only mechanism used in the past to find out about such schemes primarily involved the Pensions Board. From a Revenue point of view given that there is nothing for me to check or audit, the idea of devoting resources to capture a very substantial amount of data would be entirely disproportionate to any Revenue risk or yield. We audit them from the point of view of the two rules that are relevant, but not from the point of view, suggested by the Deputy, of how much is put in by an employer, because there is no limit. It is a policy issue, there is no limit.

Deputy Róisín Shortall

I accept the extent to which it is a policy issue and that a decision is taken by the Minister. However, surely the committee and every taxpayer are entitled to know how much tax may be forgone due to any policy decision taken. From a quick calculation, the figures involved are very substantial. If each of those 6,500 individuals are entitled to put away funds of €5.4 million each, that is potentially a figure of €32.5 billion. It is a massive amount of money. There is also tax relief at the upper rate for those contributions and a tax-free lump sum of 25%. They are very significant amounts of money and a massive cost to the taxpayer and Exchequer to the benefit of a very small number of people. I do not accept we cannot have clearer figures on this. We are entitled to know how much it is costing us. If the Minister introduces or presides over a situation where there can be such a facility for stashing away major amounts of money tax-free, we are entitled to know how much it costs us.

Ms Josephine Feehily

I am aware from the people who run this unit that, in their view, many of these schemes are modest. That view emerged in the sample. Probably half of the schemes are less than €500,000. However, that is simply an opinion. The data on the total cost of pension provision to the Exchequer is available and is €2.9 billion.

Deputy Róisín Shortall

I understand that is a 2006 figure and was in the Green Paper.

Ms Josephine Feehily

Yes, because the 2007 data is still being analysed.We know the total cost and the numbers. From our audit programmes, we know that within this small group the rules are not being broken. From my point of view, that is what is relevant. It would be unreasonable to extrapolate that they are all at the upper end. The view of the auditors involved is that half of the payments amount to less than €500,000.

We can work out the theoretical tax cost for a case involving amounts up to those limits. For the new cases I can work out a theoretical tax cost for a scheme that is funded up to €5.4 million; I can do so because it is a piece of analysis but we cannot do actuals. When reliefs were being reviewed, generally it was accepted that the way to do it was by way of a sample involving the Pensions Board, the Department of Finance and ourselves. Perhaps the committee has a view that something like that needs to be done again.

However, I could not justify capturing masses of information that I do not need when there is no revenue risk because the law is very clear. There is no limit on what can be put into those funds by an employer. I need to know the Department of Finance knows what the total cost is because of the P35 information which is captured. It has the total cost so the Exchequer exposure is captured but it is not desegregated.

Deputy Róisín Shortall

In the current situation, where people earning €200 per week are expected to make a contribution by way of a pension levy, it seems outrageous that we do not know what the richest people in this country are costing us in terms of tax relief on their pension schemes. It is an area one would expect the Commission on Taxation to be examining. Tackling this area should be a number one priority in terms of everybody playing their part in the recovery of the country and paying according to their means. How can the Commission on Taxation examine this issue if the delegation cannot provide it with the data?

Ms Josephine Feehily

We are not its only source of data. It has its own budgets and data sources. In 2006 a review was conducted using a sample, conclusions were drawn and the review was published. That data is available to it and the review reached certain conclusions about those schemes. I understand those conclusions influenced the policy choices made thereafter.

Deputy Róisín Shortall

Would Ms Feehily be able to come back and tell us how many schemes have the maximum amount, €5.4 million, in their funds?

Ms Josephine Feehily

No.

Deputy Róisín Shortall

Is there any way of doing that——

Ms Josephine Feehily

No, not without taking people away from doing productive work, sitting them down and having them examine 19,000 sets of paper. I am in an environment where there have been staff cuts and there are probably more to come. I have to focus my resources on doing the work I need to be done and this involves risky cases where tax is at risk. Tax at risk is audited using the two rules in the law, the earning cap and the size of the pot. We audit approximately 100 such cases each year. We work with pensioner trustees who are involved in these cases and kinds of scheme to make sure compliance is at the top of their list. Those are my concerns.

Deputy Róisín Shortall

Did Ms Feehily say she audited approximately 100 of the self-administered schemes?

Ms Josephine Feehily

Yes.

Deputy Róisín Shortall

There are data on their value. From that sample, can Ms Feehily provide us with data?

Ms Josephine Feehily

I suspect that is where my auditor told me 50% of the schemes amount to less than €500,000 because it was a statistic he was able to give me, from his experience.

Chairman

Was that from the audit?

Ms Josephine Feehily

Yes.

Chairman

Can we get feedback on it?

Ms Josephine Feehily

A random selection of the 6,500 cases would be audited.

Chairman

Can we get information on them?

Ms Josephine Feehily

Yes. There is very little to say. The compliance rate was very high and we got a negligible yield. The reason is the limits are clear and relatively simple. In addition, we approve the schemes and have a gatekeeping role at the start. When a scheme is beginning, it meets us, states what it will do and we approve it in accordance with the law. A gatekeeping role is different from self-assessment. One can get quite a high standard of compliance by having an approval role at the start of a scheme, which one can do with modest numbers such as 6,500.

If we examine a new scheme and we find it is not suitable it will not get an approval. One deals with a great deal of non-compliance issues at the start of a scheme. We then follow up and randomly audit approximately 100 schemes each year, which is a reasonable sample. We get a negligible yield.

I keep returning to the fact that my concern is the rules that are in the law. From that point of view, I am satisfied that 6,500 cases are adequately monitored with the two tools available, the pre-clearance and the audit. In terms of the work facing the Revenue Commissioners and the number of pieces of data I would like to be able to capture and electronically analyse, this would be very low down the scale.

Deputy Róisín Shortall

I fully accept the issue is not compliance and is self-policing because there are regular checks on adherence to the rules. This is probably an issue for the Department and is straying into the area of policy. How can an assessment be made of the value of various tax relief schemes if we do not know what they are costing the Exchequer? I accept a political decision was made to introduce this extraordinarily generous scheme for rich people. How can the Revenue Commissioners monitor the situation? When decisions have to be taken on schemes that need to be cut in the current climate, how can it take those decisions unless the data is available to it? Has it any other way of collecting that data?

Mr. Jim O’Farrell

The point just made by Ms Feehily on the finite resources available is very real. There has been a strong Government policy to reduce public service numbers. It goes back quite a while.

Deputy Róisín Shortall

Do not give me that spiel. Can Mr. O'Farrell answer the question I have asked?

Mr. Jim O’Farrell

It is not a spiel. The Revenue Commissioners are subject to Government policy on resources.

Deputy Róisín Shortall

Mr. O'Farrell should stop making these generalised commentaries on what is happening. I asked what it is costing the Exchequer to continue with these self-administered pension schemes for the rich.

Mr. Jim O’Farrell

It costs no more than what is available to the Revenue Commissioners. If massive resources are to be devoted to data capture——

Deputy Róisín Shortall

I thank Mr. O'Farrell. He has answered my question.

Mr. Jim O’Farrell

For the benefit of the other members——

Chairman

We will pursue that issue with the Secretary General.

Mr. Jim O’Farrell

If massive resources are to be devoted to data capture something else will suffer, such as audits and so on. Resources are limited.

Chairman

Will Mr. O'Farrell give the Secretary General at the Department of Finance our notice that we will raise this issue when he is before us?

Mr. Jim O’Farrell

Is that the issue of resources?

Chairman

No, the cost of the self-administered pension schemes.

Mr. Jim O’Farrell

Certainly.

Deputy Jim O’Keeffe

I want to raise the issue of how Revenue deals with contracts for difference, CFDs. They arise when somebody, instead of buying a share, enters into a contract at a certain price but does not complete the contract in the hope or expectation, like anyone buying shares, that the price will go up. I am interested in this from the point of view of stamp duty and capital gains. In 2006 Revenue took a view that such contracts for difference should be liable to stamp duty. Had that been put into operation it would have had considerable implications for the Exchequer. I am not sure what its view was in respect of capital gains tax. At the time Revenue wanted to implement this view — I will not go into the policy area — the then Minister for Finance, Deputy Cowen, apparently decided not to proceed. What was Revenue's estimate of the amount that would have accrued to the Exchequer had its view prevailed and stamp duty was found to be payable? Can Ms Feehily give us an idea of the rates, the estimated amounts as far as she is aware and the possible annual yield to the Exchequer?

Ms Josephine Feehily

The standard rate for stamp duty on shares is 1%. Contracts for difference never were and are not stampable. The underlying share is stampable. I am not a stockbroker, so I apologise if I cannot explain this in detail. Apparently when brokers and dealers deal with contracts for difference they often buy the underlying share to hedge their risk. The issue is the stamping of the underlying share which would in our view have been subject to stamp duty.

I need to put this in context before going further. Stamp duty law is very old and would have been written before contracts for difference were being used in any significant way. The clearance and collection system for stamp duty on shares is called CREST. It is an electronic system that operates here and in the UK. Many of the businesses, the dealers and brokers registered in CREST operate in the UK and the Irish markets. There were a couple of reliefs in the stamp duty code at the time, one called a broker-dealer relief, which meant that duty did not have to be applied to shares. In other words, they were not to be stamped if they were dealt within the business. There was another relief——

Deputy Jim O’Keeffe

If they were dealt with——

Ms Josephine Feehily

Within the business, between a broker and a dealer. Another relief, the market maker relief had a similar impact. If there was a market maker operating he or she did not have to charge, to pay stamp duty on the transactions while they were effectively operating within that business. Those two reliefs were on the Statute Book. Some time before 2006 the United Kingdom changed its stamp duty law and brought in a more broadly based intermediaries relief. We did not. I am not sure we had been asked to do so. In 2006, for the first time, to my knowledge, we were asked for a formal interpretation of the law in respect of the share that underlies a CFD.

Deputy Jim O’Keeffe

By whom?

Ms Josephine Feehily

By a practitioner in that business, a company that deals in CFDs.

Deputy Jim O’Keeffe

Cantor Fitzgerald or some such company.

Ms Josephine Feehily

I will not comment on individual cases. It is a business that operates in share dealings and CFDs.

We expressed our view that the underlying share was stampable unless it met the two reliefs I have explained. We do this periodically when asked for interpretations.

Deputy Jim O’Keeffe

Was the query only in respect of stamp duty or did the issue of capital gains tax arise?

Ms Josephine Feehily

It was just about stamp duty.

Deputy Jim O’Keeffe

The issue of capital gains tax was never addressed.

Ms Josephine Feehily

It was never raised, to my knowledge. Subsequently, when we gave our opinion the CREST company sent out an electronic bulletin saying that the Revenue Commissioners had interpreted the law in this particular way.

Deputy Jim O’Keeffe

That they were in fact taxable.

Ms Josephine Feehily

Yes. By an unfortunate quirk of timing, because CREST is a UK company, it issued the bulletin on St. Patrick's Day. This caused serious chaos and confusion and accusations that we were trying to do things while everybody was on holiday and so on. Once the holiday passed there was a significant reaction to that decision from the Stock Exchange and from its members in their individual capacities, the various directors of stockbroking companies and so on and from the London Investment Banking Association, I think.

The Deputy knows what ensued. This has been in the public domain. Meetings took place between the Department of Finance and the Stock Exchange, to which we were invited. My officials went to those meetings. The Minister then announced that he intended to review this area and to bring forward a proposal to amend the law in the following budget. In light of that announcement we decided that it would be inappropriate for us to insist on the application of our interpretation while that review was going on. Effectively, the Minister announced that he would legislate retrospectively, as happens from time to time. This is not unique. It would be unusual for us to impose a charge which would most likely not apply retrospectively. Under the care and management provisions of the tax Acts, the commissioners make sensible decisions about the management of those situations. We decided that we would allow the practice that existed of the brokers and dealers using the two reliefs I mentioned to continue while the review was going on. I apologise for being so long-winded, but I am trying to outline the chronology correctly.

Deputy Jim O’Keeffe

It is helpful. I appreciate the care with which Ms Feehily has presented the situation because it is an issue in which many are interested. St. Patrick banished the snakes from Ireland and the Minister for Finance banished stamp duty from CFDs.

What happened then? Revenue's interpretation was not accepted on the basis of the Minister's announcement and a clear indication was given that this was to be legislated for subsequently and that such legislation would be retrospective. Is that what happened?

Ms Josephine Feehily

Yes, in the following Finance Bill.

Deputy Jim O’Keeffe

Eight or nine months later.

Ms Josephine Feehily

In the Finance Act 2007. It was not so much that our interpretation was not accepted, we had never expressed that interpretation in such direct terms because we had not been asked. That being the case, the stamp duty code needed to be reviewed, having regard to the fact that CFDs had become a significant part of the market, that the situation had changed significantly in Britain a number of years previously and that businesses operated in both jurisdictions.

I am sorry for being long-winded but the opening question about money has just come back to me. We had not been getting any money because our interpretation had just been made in March and the strong view was that because these businesses operated in both jurisdictions and because of the relief available in Britain, the trades would be made somewhere else, so there was no stamp duty at risk. If the business moved, there was no duty to collect. I am not sure there was a yield issue.

Deputy Jim O’Keeffe

Can Ms Feehily give a rough idea of the revenue from stamp duty on shares as opposed to stamp duty on land transfers?

Ms Josephine Feehily

In 2008 it was €419 million. In 2007 it was €609 million.

Deputy Jim O’Keeffe

An average of about €500 million. My understanding of CFDs is that at one stage, at the height of excess spending, more than 50% of dealings were in CFDs. Is there an estimate for that?

Ms Josephine Feehily

No.

Deputy Jim O’Keeffe

At any stage in the context of Revenue's decision or the discussions on the subsequent legislation, did anyone consider how revenue could be raised? Many of the CFDs were organised by Irish brokers and then executed in London via companies such as Cantor Fitzgerald. Did Ms Feehily look at the possibility of revenue gains on stamp duty or capital gains tax arising from such transactions that could benefit the Exchequer?

Ms Josephine Feehily

I did not review all the files on this issue overnight, although I did my best. I would be surprised if there had not been some consideration of yield issues in the context of the review announced by the Minister at the time. That was the sequence — there was a review and it led to a change in the law. I would imagine analysis was done at that point and I would be happy to review the files to see if analysis was carried out as part of that review that might help the committee. I did not review it from that angle last night.

Deputy Jim O’Keeffe

Surely, irrespective of where the documentation was completed — I will come back to that because the arrangements would have been made largely through Irish brokers — in some instances very large gains were made. Were they liable to capital gains tax?

Ms Josephine Feehily

The gain on the underlying share would be liable to capital gains tax. That is separate entirely from the stamp duty.

Deputy Jim O’Keeffe

Is Ms Feehily satisfied Revenue got its pound of flesh from such gains?

Ms Josephine Feehily

Capital gains is a risk we audit in our audit programmes in the context of a self-assessment system.

Deputy Jim O’Keeffe

Ms Feehily is not troubled too much by it.

Ms Josephine Feehily

No. I cannot track individual gains but I am satisfied that we have an audit programme in place for capital gains tax.

Deputy Jim O’Keeffe

Was Revenue keeping an eye out for the gains from CFDs?

Ms Josephine Feehily

It was not a specific trail we were following. Capital gains tax yield became substantial.

Deputy Jim O’Keeffe

There is evidence that over three or four years, CFDs had developed to an enormous extent in share dealing and that substantial gains were made before the collapse.

Ms Josephine Feehily

I understand that, but it would be the gain in the underlying share that would form part of a person's normal capital gains tax liabilities that would arise in terms of dealings in all shares, whether they were CFD shares or any other type of share.

Deputy Jim O’Keeffe

When Ms Feehily talks about the gain in the underlying share, if a person is talking about 1,000 AIB shares at a certain price when the contract is made and then if they are sold and the contract ended on the basis of the share being disposed of at twice the price, it is the same as him buying the share and selling it at twice the price.

Ms Josephine Feehily

It has been described in some commentary as being like a bet. I am sure that bet, however, is not taxable. That is why I am focusing on the underlying share. Not being a stockbroker, I may not be using the correct language. The CFD transaction itself was never stampable before, during or after. Brokers and dealers purchased an underlying share to hedge their risk. It was that share we felt was stampable and is not now. It would have been the dealing in that share that would have given a profit or loss in the context of capital gains.

Deputy Jim O’Keeffe

Would they not have been hedging at the price of the share at the time the contract was entered?

Ms Josephine Feehily

I am sure they were hedging but the outcome of their business at the end of a year would give a gain or a loss and that is where capital gains tax would come in rather than at the point of the individual transaction. CGT is not charged on a transaction but on a gain over the year.

Deputy Jim O’Keeffe

Stamp duty is very old, going back to the Stamp Acts from hundreds of years ago, involving at one stage a formal stamping.

Ms Josephine Feehily

The Deputy will be pleased to know we are bringing in electronic stamping at the end of this year. The stamp will be gone.

Deputy Jim O’Keeffe

As long as the money is not gone, as far as the Exchequer is concerned, it is not an issue. My concern is that there was possibly a substantial loss to the Exchequer because the issue was not pursued at the time.

Ms Josephine Feehily

As I said, on stamp duty, the evidence presented to us was that dealers and brokers were availing of the two reliefs I mentioned and mixing the two because the systems were so similar; the electronic system is the same and the businesses operate on both sides of the water, so stamp duty was not being paid. Our interpretation would have caused some to be paid. There was a view, in terms of the review that took place during those months between March and the following budget, that had that charge been imposed the business would have gone to the UK Stock Exchange. That was the strong view put forward by the Irish Stock Exchange at the time and it is on the public record. Therefore, if the business went, stamp duty would have gone so there would not have been any yield according to the analysis done during those months as regards stamp duty.

Deputy Jim O’Keeffe

That was the analysis of the broker, but what was Revenue's analysis?

Ms Josephine Feehily

We can only tax it if it happens here. Our view would have been that if the transactions continued to happen here there possibly could have been money but if there is no transaction here there is no money. It is a zero sum game if one goes that route, if there is nothing to tax — that was their proposition. The Minister indicated that he would review it. We then decided that we would stand off further if he went on and the law was subsequently changed and debated fully in the Oireachtas at that time.

Deputy Jim O’Keeffe

It would be helpful if the Accounting Officer would let us have an analysis or papers in regard to that whole business.

Ms Josephine Feehily

I will see what papers were prepared in the context of that review that might be available.

Deputy Jim O’Keeffe

Will the Accounting Officer please forward them to the committee?

Ms Josephine Feehily

Yes.

Deputy Jim O’Keeffe

I thank the Accounting Officer.

Mr. John Buckley

We are at the halfway stage in a marathon session. I would like to pick up on two or three assurances that the Accounting Officer has given us. Some 53% of audits in 2008 were based on REAP. The Accounting Officer will evaluate whether REAP or the traditional sample selection basis will give the best results. That will be something for us to follow up on in future. She has signalled an intention to track a sample of 2008 cases through to 2010 and follow up on those where compliance risk has increased. Again, we will be able to make a judgment on some of the concerns raised in the chapters at that stage. She has also assured us that the random audit programme is continuing to be viewed as a very important element in getting intelligence and information for purposes of feeding objective data into REAP and into its decision making. She has signalled that it will be a more structured sectoral programme which will again use a control group mechanism to compare the outcome with a selected group within the sectoral programme. There are many other notes but I think they can be deferred until we have heard the rest of the evidence next week when we can pick up on them. I wanted to signal those four issues where the Accounting Officer has given us assurances on which we can follow up later.

Chairman

I thank Mr. Buckley. Is it agreed that we dispose of chapters 3.1 to 3.7? Agreed. Next week we shall deal with chapters 3.8 to 3.13 of the 2007 report of the Comptroller and Auditor General.

I thank the delegation for the very comprehensive answers to the questions posed.

The witnesses withdrew.

The committee adjourned at 12.45 p.m. until 10 a.m. on Thursday, 26 February 2009.