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COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 11 Mar 2010

Chapter 13 — Risk Evaluation, Analysis and Profiling

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

I welcome everyone here this morning. We are considering the annual report of 2008 for the Comptroller and Auditor General and Appropriation Accounts, dealing with Vote 9, the Office of the Revenue Commissioners, chapters 10 to 13 inclusive. I draw attention to the fact that while members of the committee have absolute privilege this privilege does not apply to witnesses appearing before the committee. The committee cannot guarantee any level of privilege to witnesses appearing before it. Members should be mindful of the obligations regarding policy, Ministers and political statements. I welcome Ms Josephine Feehily, Chairman of the Office of the Revenue Commissioners.

Ms Josephine Feehily

I am joined by the following: Mr. Gerry Harrahill, Collector General; Mr. Paddy Molloy, planning division; Mr. Paddy O'Shaughnessy, the principal officer who liaises with the Committee of Public Accounts; and Mr. Ken Monaghan, assistant principal, who looks after the Vote and the administration budget.

Mr. Paul Ryan

I am from the taxation division in the Department of Finance.

Chairman: The full text of chapters 10, 11, 12 and 13 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

The main feature of Revenue's performance in 2008 was a reduction of 14% in the net revenue collected in the year. This came in at €40.9 billion and the decline continued into 2009. The cause of the reduction is primarily related to the economic downturn and Revenue has pointed out that it operated in 2008 in a setting where sales and profits were declining in most sectors. The Accounting Officer has stated that Revenue's debt management function has been restructured to ensure there is close monitoring of cases that pose the greatest risk in financial terms.

The sectors where the reduction was most marked include agriculture, construction, real estate and financial intermediation. I intend to report on trends in collection for each sector in my forthcoming annual report.

Some €129 million was written off in 2008 with the vast bulk of this relating to business cessation or business difficulties. Taxes outstanding increased by €575 million and stood at €1.9 billion by March 2009. Of this, collection action was frozen on €628 million, which was subject to appeal.

Notwithstanding the increase in taxes outstanding, Revenue reported no drop in compliance rates. Revenue's compliance measure is a composite one that gauges whether a return or a payment is submitted on time. The results suggest return timeliness remained high.

There was a reduction of just over €100 million in the yield from audit and assurance checks in 2008. The number of audits completed in most audit categories decreased and even though the number of comprehensive audits increased, the associated yield fell. Revenue has said that this was due to a large yield in a number of cases in 2007 which was not repeated in 2008 as well as a continuing fall in the yield from special investigation cases.

Revenue informed us during the audit that the current economic situation has resulted in an increase in the number of cases that have difficulty in paying the additional liabilities identified by compliance checks. It is therefore exploring deferring finalisation of audits so that a claim of inability to pay does not result in a situation where evasion is perceived to have paid off. In the past decade, €2.6 billion has been collected as a result of nine special investigations. Of this, 54% was voluntarily disclosed by taxpayers in contemplation of, but in advance of, the formal investigatory stage. Most of the extra €76 million that came to account in 2008 related to a new investigation into undisclosed funds in Irish bank accounts.

I suggested that, given the large number of these investigations completed and the sizeable yield from them, it could be worthwhile to attempt to extract the lessons learned. In particular, it would be worth exploring the interrelationship between taxpayer behaviour and Revenue systems effectiveness in the areas subject to special investigations and to attempt to uncover any lessons for future revenue administration.

Random audits by Revenue have been finding that almost one third of taxpayers end up paying additional tax after audit. The average yield for finalised random audits is about €2,900. If this were extrapolated over the taxpayer population subject to audit it would suggest a considerable level of under-payment in each year with a corresponding challenge to Revenue to identify the trends behind the random audit results and target compliance programmes accordingly.

Our audit also explored possible ways that Revenue could use the results of its random audit programmes to inform its compliance work. As well as isolating risk factors to inform its general audit and assurance work a further option would be to use the results to isolate sectoral risks and, in this respect, we set out some indicative results based on an analysis of the results of the 2009 random audit programme.

While the percentage of audits that yield some extra tax is a useful indicator, it would be useful to go a step further and identify the extra tax collected relative to original declared liabilities. For example, in two sectors reviewed as part of our audit we found that random audits in the professional services sector yielded an additional 4% in 2007 while those in the wholesale trade sector yielded 0.6%. A preliminary conclusion is that the financial impact of non-compliance can vary considerably between sectors and that isolating the financial effect could be useful as an input into the identification of areas for nationwide sectoral compliance projects.

All State bodies should have appropriate measures to evaluate their effectiveness. A key measure of Revenue's effectiveness is the extent to which its efforts reduce the level of non-compliance. As well as identifying risk factors and sectors with potentially large exposure in financial terms I have suggested that a well-designed and executed random audit programme could also provide a realistic indication of the level of what is known as the audit gap, which is the difference between what taxpayers would pay if they were all audited and the amount paid under self-assessment.

Revenue uses a computerised risk evaluation and profiling system, REAP, to help target cases for audit. The risk score for each case is an amalgam of a large number of factors analysed on the basis of predetermined weightings. Some 58% of audits completed in 2008 were assessed before audit as being in the top 20% of risk. While it is early days yet and the system is subject to refinement, there are indications that it is improving Revenue's targeting capacity with the percentage of yielding audits increasing in most categories. Another indication of its predictive capacity is the fact that when random audits were reviewed and the results related to the risk deciles in the REAP system, 66% of the yield came from audits that had been rated in the top 20% of risk. There is a tendency for audits in all risk categories to yield extra taxes, the volume of money collectable from taxpayers in most of the remaining risk categories was around3%-5% of the total random audit yield. We suggested that because almost all risk categories contributed at least 3% of random audit yield, it would be appropriate to examine these outliers in depth to see whether certain factors were at play that were not factored into the profiling system. The Vote records the cost of Revenue's activities were €436 million in 2008.

Ms Josephine Feehily

Since time is limited I will provide a brief overview of the main issues facing Revenue in the current economic environment, some of which are referred to in the Comptroller and Auditor General's report before the committee today. The economic and financial environment within which Revenue's customers, and therefore Revenue, operate has changed dramatically over the past year or so. Two statistics in particular give a real flavour of some of the more unwelcome changes. The first is that the amount of taxes we collected has dropped by more than €14 billion since 2007. In 2007 net receipts were €47.3 billion and in 2009 net receipts they were €33 billion.

The second statistic is that the outstanding tax debt, which is a reasonable substitute measure for the financial distress that many businesses and individuals are experiencing, has increased over two years by €750 million or 68%, from €1.1 billion to €1.86 billion. We expect this to climb further in 2010. The scale of the tax challenge arising from this is very significant; we would need to increase the tax yield by more than 43% just to get back to where we were in 2007.

I mention all of this not to add further gloom to the public discourse on the economy but to emphasise that Revenue is fully aware of the difficulties faced by taxpayers and at the same time is deeply conscious of its overriding duty to protect and enhance the efficacy of the tax system. In this context, a positive trend in our collection programme, as the Comptroller and Auditor General pointed out, is that the rate of timely returns compliance held up well in 2009, that is to say the regular monthly and bimonthly PAYE and VAT returns, especially among the large cases. This is a very important indicator for Revenue, because it provides us with the basis for debt management.

If I were to pick just one word to encapsulate our approach in the current economic circumstances it would be "balance". We have to balance our concern for taxpayers in genuine temporary difficulties with the requirement not to give them an unfair advantage over those taxpayers who are meeting their obligations and of course, as I have just indicated, with our absolute priority to safeguard the integrity of the tax system.

To give operational effect to this balance we have developed a framework. This framework enables consideration to be given to taxpayers and businesses that previously had satisfactory compliance records but due to the economic downturn have experienced severe difficulty in meeting their obligations. Revenue has no desire to use the full weight of its enforcement powers against innocent victims of the recession or to drag them through the courts, but to avoid that businesses must engage with us honestly, wholeheartedly and early.

Revenue needs taxpayers and businesses to meet their tax obligations on time. While viable businesses can and do encounter cashflow problems, these problems need to be addressed so that timely tax compliance is assured. Addressing those problems in consultation with Revenue at the earliest opportunity is essential so as to avoid a situation where debt problems become insurmountable or where avoidable interest or enforcement costs are incurred. As I have said before to this committee, Revenue cannot act as a banker or lender to businesses in difficulty.

On the positive side, and there is more than one, Revenue has great staff and a culture of openness which includes an internal staff partnership structure. We have fostered and developed relationships with many external stakeholders. We listen with great attention to what these and State stakeholders such as the Comptroller and Auditor General and this committee have to say. All of this will stand us in good stead in these more difficult times.

In summary, our priority this year is to protect our tax base by continuing to make it as easy as we can for businesses and taxpayers to comply, and in this regard we were rated by a recent survey as No. 1 in Europe for the third year running, by giving otherwise viable businesses a fair hearing if they get into temporary difficulties, and finally by ensuring a level playing field for those who do comply by taking resolute action against those who do not.

I will take this opportunity to bring the committee up to date on the special investigations mentioned in paragraph 11.24 of the Comptroller and Auditor General's report. Last year, I mentioned to the committee that these investigations were close to conclusion. However, we launched an investigation into trusts and offshore structures during 2009, which as of 1 March 2010 has yielded approximately €19 million from 98 cases. The running total since we began these investigations now exceeds €2.6 billion.

We have also decided to broaden the scope of the offshore assets inquiry. In December 2009 Revenue obtained new orders against the clearing banks in the State requiring them to provide information to Revenue on details of transfers to and from this State involving the jurisdictions of the Isle of Man, Jersey, Guernsey, Switzerland and Liechtenstein. In the initial phases of its investigation, Revenue had sought details of transfers to and from the Isle of Man, Jersey and Guernsey where the transfers were made to or from the offshore entities of Irish banks. The current probe requires the institutions to provide information on all transfers, over a de minimis threshold of €5,000, and irrespective of whether the financial institution receiving or initiating the transfer had an Irish connection. The orders are comprehensive and cover the 12 years to 31 December 2008 and include electronic transfers as well as cheques and drafts either drawn in the State and sent offshore or drawn offshore and sent to the State.

I thank Ms Feehily. May we publish the statement?

Ms Josephine Feehily

Yes.

I thank Ms Feehily for her presentation. The decision to expand the scope of the offshore assets inquiry was made in December 2009 so it is at its early stages and it will cover the 12 years to December 2008. Does Ms Feehily believe it is warranted? Is there unpaid revenue to such an extent? Revenue has new powers since the introduction of the Finance Act. Are there any indications on the amount we could be talking about? I know Ms Feehily is not looking for headlines but it seems quite significant. I am sure it involves much time and staff commitment.

Ms Josephine Feehily

We would not be doing it unless we felt it was worthwhile, and I will put it like that. We would not have got the orders if we could not satisfy the courts. They are John Doe orders and to get them we had to satisfy the courts that we had reason to believe there are risks to tax collection. We did so by bringing forward evidence from our previous inquiries and international experience from other inquiries and OECD experience. Certainly, we believe it is worth doing and that is as much as I can say for now. It will be a very slow process because the potential volume of transactions that the financial institutions will have to go through to comply with the orders is fairly significant. They were given a long time, up to several months, to respond.

The final date for delivery of the final material under this order is 31 July 2011, in accordance with the court orders, but we will begin to get information in the first half of this year. It will come in phases and tranches, which is manageable for us and the institutions. We expect to have material in the first half of the year and some view of where we are going with it afterwards. It is a slow burner and will be a while before we have significant results from it. It is also important to do it. Once we have evidence from our other investigations that supports doing this it is important that we do it. One of the things that Revenue has rightly tried to show in recent years in terms of public confidence is that we follow through; when we find something in one place we follow through and see whether there is more. It is very important, particularly when international evidence is available to us, that we should do this. Where it will take us in terms of money I do not know.

I was reading the briefing material and the provision in the Finance Act 2008 whereby third parties are required to make returns on non-resident trusts. Has Ms Feehily seen any noticeable returns or activity in this area?

Ms Josephine Feehily

We certainly got the material in accordance with the provision. As is our want, prior to getting new third party information we give people who are likely to be the subject of it an opportunity to voluntarily disclose. As I stated in my opening remarks, we received almost €19 million from the voluntary disclosure phase. The information is required from intermediaries, financial institutions and lawyers. That information has started to come in to us; I do not have the precise details at my fingertips. Some of that material would have been helpful to us in framing the application for the court orders. We are receiving the information that we need.

That has been noticed in the past 12 months. The provision was in the Finance Act 2008.

Ms Josephine Feehily

The reporting date was September and I know it is starting to come in to us.

We have received 59 returns, which comprise 1,133 settlers of trusts. We also have 135 nil returns, which would cover accounts of financial institutions, legal firms, stockbrokers and so on. We had a closing date for the information and from memory it was last September. I am pretty sure of that. It is now annual so it will come to us now as new offshore trusts and structures are put in place that have an Irish resident trustee. The intermediary setting it up will be required to tell us so we will get the information on an ongoing basis and it will go into our risk analysis system like all other information. It is a permanent flow of information now, whereas the initial tranche was due by September.

I have a simple question. How many of those previously availed of the amnesty? I do not know if the Deputy was going to ask that.

Ms Josephine Feehily

Is the question how many availed of the offshore amnesty? I do not know. I am pretty sure we do not have that information with us but I can get it for the committee.

Would cases have existed?

Ms Josephine Feehily

I will speak in terms of the information we received or the people who made disclosures. Anybody who made a disclosure in the 98 cases worth €19 million who had previously availed of a disclosure scheme would not get the benefits this time. They will all be examined to see if they availed of a scheme before and if they did, the benefits will be withdrawn. They will be considered but I do not have a figure indicating that we have finished working the cases or how many — if any — had previously availed of a scheme.

The witness indicated that special investigations have yielded €2.6 billion. Does Ms Feehily believe it worthwhile to continue in that vein as the return from the audits was €3 billion? Has the witness considered the matter and is it intended to continue with special investigations?

Ms Josephine Feehily

I said last year that they were coming to a close so I had to slightly correct myself. There is not a massive yield in the widescale special investigations regarding the bogus accounts, the original offshore assets and the single premium policies. The big ones are all done and the representation of the special investigations in our audit programme has declined year on year. Approximately 3% of our audits now come from these investigations.

There are special niches and part of the reason we got an opportunity to go the route of broadening the offshore structures investigation concerns much bigger events in the world. The G20 caused banking secrecy issues to be raised to the point where we will be able to get information much more easily than we would have this time last year when I was before the committee. We now have tax information exchange agreements with approximately 14 jurisdictions, whereas 18 months ago we had such an agreement with one jurisdiction. The whole world has changed with regard to banking secrecy and that may give us new avenues for inquiry in that niche group.

With special investigations that affect the population on a wide scale, I am not sure there is much more we can do. I would never say there will not be niche areas where special investigations will give benefit and yield. The process I outlined changed our environment for the offshore inquiries fundamentally.

Ms Feehily mentioned 14 jurisdictions so can she give us an idea of them?

Ms Josephine Feehily

They include Jersey, the Isle of Man, Guernsey, Cayman,Liechtenstein, Bermuda and those kinds of areas. That is on top of more than 50 tax treaties that we also have, all of which have an exchange of information aspect.

They are all areas treated as offshore tax locations.

Ms Josephine Feehily

They include countries in the past that had a banking secrecy clause so it was difficult to get information even if we had prima facie evidence. There was no mechanism via the tax administration in that country to get at bank accounts. Under tax information exchange agreements, if we have prima facie evidence we can go to the tax authority in a country and say that we require information on a person’s bank account. We will get it as a result and would give information as well. That is a big change that is bedding down right across the world.

Are the famous offshore tax locations still operating as they have done?

Ms Josephine Feehily

Some of them had to make choices in the context of the G20 action and the regulatory environment. Even Switzerland made certain choices.

Is Switzerland included?

Ms Josephine Feehily

Not yet but the matter is under discussion.

Is the country reluctant to co-operate?

Ms Josephine Feehily

I do not think so. The whole world is looking to have an exchange agreement with Switzerland and there is perhaps a question of a queue. There is work involved in the process. The Cayman Islands initiated a unilateral process and we did not have to negotiate with its representatives. This was in order for it to get into this OECD space where it would not be regarded as a tax haven. In order not to be a tax haven for the purposes of G20, a country must have at least 12 tax information exchange agreements in place. The Cayman Islands decided to do this unilaterally through a law listing 12 countries, one of which was us. We got that easily. There has been much activity in negotiating these agreements since the G20 announcements.

Does that mean Cayman believes us to be a tax haven?

Ms Josephine Feehily

We were included because we had been asking for an agreement as we should shore up our arsenal wherever it needs it.

May I move on to audits, dealt with in chapter 11 of the accounts? The number of audits in the report is down by 894 and there is also a yield reduction. Is there a reason for that?

Ms Josephine Feehily

There are a couple of reasons. Although there was a yield reduction, the average yield is holding, which I am pleased about. As the Comptroller and Auditor General stated, in earlier years we had very substantial yields which were not repeated in terms of the total yield. We have moved many of our resources into assurance checks in order to get coverage of the tax base. There is a higher volume of interventions. Audits are expensive for us and business. We are very anxious to ensure that we get coverage of the tax base without necessarily imposing a full audit on business or ourselves.

I will be honest about another reason. In the past year and half or so, I have lost a fair proportion of my senior auditing resource and I must rebuild it. There are a number of reasons.

Why has that been lost?

Ms Josephine Feehily

There are two reasons. We had a demographic bubble as there were people coming to retirement age. There was a plan in place but the Government policy on Civil Service numbers made the replacement issue difficult and the early retirement scheme was also a difficulty. That will have an impact on our audit capability this year but we will rebuild it.

The number of audits and the yield are down. Is the witness conscious of that as it is not a message we want to send out?

Ms Josephine Feehily

I do not think it is down to the point where I would be worried about a message going out that we do not perform audits. That is why I made the point about the volume of our assurance checks. Any tax administration doing 350,000 assurance checks is providing a fair amount of coverage. The tax practitioners and business, based on what they say to me, feel we are doing enough if not too many.

The level of audit is also a function of the numbers of taxpayers and businesses, which are declining slightly. I am not worried about the issue and am more worried about having the capability to keep doing a good number of quality audits and the right audits based on risk and REAP. Obviously we must do enough audits, but international experience also suggests that secondary benefits accrue from doing the right ones. By doing the right audits in certain sectors, one can get a high level of compliance across the sector without necessarily having to audit every business in a comprehensive way. The answer is that I am not worried yet.

Is that the reason some audits were not completed over the year, as shown in Table 42? Was it because the Revenue Commissioners did not have the staff to complete them?

Ms Josephine Feehily

Audits will not always be completed in a year; they run until they are finished. Audits start every month, so the ones that start late in the year will not be completed in the same year. Is the Deputy referring to the random audits?

Ms Josephine Feehily

I have some up-to-date figures that show a degree of improvement. I am pleased the programme is going in the right direction. This will be the fifth year of the new random audit programme. In the first year we had a bit of a wobble because, although we really wanted it to be statistically valid, we had to drop some cases, which made the sample slightly on the shy side of being representative. One hundred percent of audits from the first year have been completed, along with 97% of 2007 audits. The figure from 2008 is now up to 94%, while the 2009 figure is 61%. Members must bear in mind that audits are begun every month and move through the year. By the end of February, those were the numbers we had. The completion by the end of February 2010 of 61% of the 2009 programme is a considerable improvement on the equivalent figure from this time last year. I am pleased about that.

In addition, we selected the cases for the random audit programme much earlier, so that the auditors were out to the districts in February; last year they did not get out until April. It is certainly a work in progress, but the quality of what we are doing in the random programme is improving and the rate at which the programme is finished each year is improving and will continue to improve. I am satisfied they will all be completed. We have made a fair degree of progress.

Are there difficulties with staff in that area, or resources?

Ms Josephine Feehily

No, they will be done. In the audit programme as a whole, 12,000 or 13,000 audits will be done, of which these will amount to 400. Thus, even if the total number goes down, these 400 will be done.

The issue with getting the random programme finished is a slightly different one. I find this when I meet my colleagues from other Administrations. We train our staff, and have been doing so for the last several years, to focus on risk and not to be bothering compliant businesses. Then we come along and say "By the way, we would like you also to bother these random businesses which may or may not be compliant". We are giving them mixed messages and it requires a fair degree of management to ensure that we deliver the message properly to the staff. It is reassuring to me to find that my fellow commissioners in other Administrations have the same difficulty. Auditors, by their nature, wish to focus on cases that represent a risk. As I said, however, the cases will be finished, and the completion rate is improving all the time.

Could Ms Feehily also comment on the table showing the yields from cases in 2006, 2007 and 2008, which were around 30% or 28%? Mr. Buckley referred to this in his opening statement. The message I get from this is that there is under-declaration in 30% of cases, which seems to be consistent. Thus, are the random audits having any effect, if we are getting the same figures for under-declaration or non-compliance every year?

Ms Josephine Feehily

There are two dimensions to this. The proportion of cases in which there is a yield looks high, but the yields are very low; in most cases, less than €2,000. Within that one will find innocent error and technical points. I do not think one can infer that there is an under-declaration or evasion rate of 30%. One may strip out the technical and innocent errors — which will happen, because the tax system is complicated — and consider the proportions when moving up the range. For example, last year, an extra 10% of cases had a settlement of less than €2,000, which brings the total to more than 80%. Less than €2,000 could mean €100 or €200. We have not stratified it into very small bands. We would regard those——

There will always be such figures, which are relatively small.

Ms Josephine Feehily

If we are having an effect, as the Comptroller and Auditor General said, in our other programmes, the yield should be going down. I would be happier if all yields were less than €2,000. That would show we were having an effect. This is preferable to focusing on the figure of 30% and saying that means there is a problem. If we were getting down into small yields from the random programme, I would regard that as a reasonable measure of our effectiveness across the tax base, because of technical issues, innocent error and other things that just happen because the system is complicated.

Have the random audits and the REAP programme facilitated the Revenue Commissioners in identifying sectors that should be targeted? Has there been risk profiling and risk analysis?

Ms Josephine Feehily

I do not believe the random programme is big enough to enable us to break it down into sectors in a valid way. In order to do that, we would have to do a massive random audit programme, which would take too many people away from our risk-based programme. What we are trying to do, in terms of dealing with sectors, is to consider the sectors that are emerging at the top of the REAP programme. We are also doing sectoral projects in the revenue districts and regions across the country to see what we can learn. Our approach to sectors makes heavy use of the ability of our staff on the ground to pick and work on sectors and learn lessons from this. If they are productive, they share that experience with their colleagues across the organisation. We might find that if a particular sector is examined in one part of the country this year and the examination turns out to be fruitful, other districts will learn from this for the following year. Our sectoral approach comes from experience rather than from the random programme.

I thank Ms Feehily. If I could ask about one other area——

Before the Deputy moves away from that area, I have a few questions. Are the Revenue Commissioners prevented by the embargo from recruiting audit staff?

Ms Josephine Feehily

No; actually, I am one of the lucky ones. The Minister has agreed that we can increase our staff numbers by 200, and we are in the process of making arrangements to do that. That is what I meant when I said we had plans for rebuilding skills. We will recruit the staff through a combination of internal appointment and open recruitment. There will be activity in that regard in the next couple of months. We will be rebuilding in that area.

My other question arises from Deputy Clune's questions about the yields in certain sectors. In the area of financial or professional services, there was a 35% yield. Are the Revenue Commissioners concentrating on professionals such as barristers, medical consultants and so on in the REAP programme?

Ms Josephine Feehily

There are a couple of answers to that. The particular sector selected by the Comptroller and Auditor General from the random programme is just too small to extrapolate from and say that the entire population has this problem. That is just a comment. At this hearing last year, I mentioned that we were focusing on professionals as well as other sectors. We did a good deal of work with barristers last year. From memory, I believe we carried out 33 audits in 2008 from which we got approximately €930,000, a yield of almost €1 million. As one might expect given the environment, the banking unit in our large cases division is running a project in respect of executives in the financial sector and so on. This project is ongoing and we are keeping a very close eye on that end of the market.

I refer to the fact that some 1,500 medical consultants operate in private practice in our public hospitals and the HSE. Has the Revenue been interacting with the HSE in respect of fees being charged in private practice and so on?

Ms Josephine Feehily

The HSE would not necessarily be able to help us with private practice fees but we have set up liaison arrangements with the HSE in respect of its business with us and our business with it, if I can put it that way. We have centralised our engagement with the HSE in the Kildare district, where its national head office is established, and we are developing close relationships with the HSE in this regard. We have had some exchange of information with the HSE in respect of the medical card scheme and so on, but the Chairman can take it that this is something to which we are paying attention. Anyone who read yesterday's newspaper will have seen an interesting case in this regard and that did not happen by accident, if I can put it that way without commenting on individual cases.

My last question arises from Deputy Clune's comments. Has the Revenue carried out an audit of Anglo Irish Bank senior management?

Ms Josephine Feehily

As the committee is aware, I do not comment on cases. However, we are monitoring the environment and running a special project in respect of executives and directors throughout the financial institutions. That is as far as I would be prepared to——

What about the institution itself?

Ms Josephine Feehily

We have carried out ongoing audits throughout the banking sector last year and this year.

I refer to revenue collection. Ms Feehily referred to collection in her opening statement. In the figures for 2008, approximately €60 billion was collected and some €9.2 billion of that amount was paid back. In 2009 some €33 billion was collected. How much of that will be paid back or does the Revenue have a figure?

Ms Josephine Feehily

I will ask the Collector General to answer that while I am turning pages, because he has the figure at his fingertips.

Mr. Gerry Harrahill

Generally, we look at the position as regards gross and net yield. One could have a situation where, for example, a employer signs up at the start of the year to pay us by ongoing direct debit. At the beginning of the year, the firm will make its best estimate of what the end of year overall liability is likely to be. Then the firm may prepare the end of year return and find itself in a situation where it has overpaid revenue. In that context, the firm has established a legitimate entitlement to repayment of the amount due. We would have taken in that amount on a month by month basis in terms of receipts. However, at the end of the year the firm is entitled to get back some of the money which it has overpaid. A similar situation could arise in respect of VAT where a firm could be on a direct debit payment system and at to the end of the year it could prepare an annual return and be in a position in which it is entitled to some money back.

Of the €33 billion collected in 2009 does the Collector General have any idea how much must be paid back? I am aware from speaking to people in business that people whose estimates at the beginning of the year were some way down. Is it proportionally more this year?

Mr. Gerry Harrahill

The other element relates to repayments that arise where someone has losses which they are legitimately entitled to offset against a corporation tax or income tax liability. That would not arise until we get the return in nine months after the end of the tax year.

Based on 2008 figures it would appear some 18% or so will be paid back. Will the same trend continue for 2009?

Mr. Gerry Harrahill

In the context of the economic environment in which we are operating one would expect a greater level of losses to legitimately offset against a liability.

Is Mr. Harrahill expecting of the order of 20%?

I welcome Ms Feehily and her colleagues and I compliment the Revenue on the way it goes about its business. From previous appearances before the committee I have noticed everything is presented very well by the Revenue. If everyone came before the committee and presented their figures as well as the Revenue, life would be a great deal easier for us.

I will begin by referring to a topic that seems to excite a good deal of interest. Can the Revenue give some idea of how the of €6.4 million for travel and subsistence was arrived at?

Ms Josephine Feehily

I ask the Deputy to bear with me. Our travel and subsistence is heavily down to outdoor work done by our officers. I am unsure of the percentage. We have auditors out on the road. Last year, we carried out 10,000 site visits as part of which staff visit businesses. We have staff who work in the joint investigation units. Our home travel for 2009 was €3,254,000.

What was the figure for foreign travel?

Ms Josephine Feehily

Travel costs for the EU amounted to €221,000 and for outside the EU the figure was €131,000. The foreign travel as a percentage of the overall figure was a little in excess of 9% or 10%.

The figure for travel and subsistence is only €3.5 million for 2009. Is that correct?

Ms Josephine Feehily

We have cut our budgets fairly tightly.

That must be the case because the Revenue has almost halved the budget.

Ms Josephine Feehily

We did so the previous year. We did some interesting things to try to manage it down without reducing the coverage because, as the committee can see, our assurance checks and outdoor work grew in 2009. We have optimised wherever we can and there are EU refundable arrangements. The Commission will pay for people to attend certain meetings. We have optimised those where we can do so in respect of foreign travel. In respect of home travel, the rates were reduced by the Minister at the start of the year by approximately 20%. That would take care of a fair amount of it and we manage it very tightly.

Okay. I refer to page 89 of the report and the reasons for a write off, something I would not often associate with the Revenue. One such reason is compassionate grounds. What compassionate grounds would prompt a write off of debt?

Ms Josephine Feehily

It is funny because that is included every year. It is something we have always done.

I have never come across it.

Ms Josephine Feehily

Compassionate grounds would usually involve ill health. Often it can be the case that one partner in a family dies and the other is left with the debt. It could involve the chronic ill health of the taxpayer. It could be some awful event that took place. It tends to be in that space in terms of personal impact. It also includes welfare cases involving those who have nothing left and are on social welfare.

On that area, the delegation briefly touched on the issue in its opening statement. As a result of the current constraints on bank lending, in particular to small businesses, I am sure a number of firms are using PAYE, PRSI and VAT as working capital. As long as such companies are making some effort to pay, is the Revenue Commissioners giving them some sort of leeway? It might be better off allowing them to do that rather than being heavy-handed with them. If it was more patient it would get the tax, but if it moves against them too soon it might get nothing or only a small percentage of it.

Ms Josephine Feehily

There are two parts to that question. I will return to the question of working capital in a moment. We are giving time to pay to businesses which have had a good track record with us, who come in and talk to us and can show us that they are viable and their underlying fundamentals are sound. We currently have some 900 cases in a special regime, which covers approximately €86 million in tax. In addition, another 10,000 or 11,000 cases are in what we call ordinary instalment arrangements, that is, instalment arrangements which have a 12-month time limit.

On working capital, it is important for us to understand that the tax system assumes, in some ways, that PAYE, PRSI and VAT will be used for a period as working capital because businesses do not have to remit it for two months in some cases, or three or four months in the case of small businesses. That is how the system is designed. It is not always wrong that VAT, PAYE and so on is used as working capital, as long as it can be paid when the due date comes, because there is always a time lag between collection and payment. The returns dates provide for that. It cannot always be the case that it is wrong to use it. We designed that delay into the system. Businesses have to manage their cash flow for the purposes of their business. As long as they pay it when it is due or come to talk to us, get permission and sign up to a regime, it is fine.

On this area, the delegation's submission says where there is a write-off and the circumstances change, the write-off marker is removed and the collection efforts can re-commence. When the collections re-commence, how much is collected in a year? Is it a significant sum? I suspect not.

Ms Josephine Feehily

It would not be a great deal. I will ask the Collector General to elaborate on my answer. It is important that we have that rule. It would be used occasionally where, on liquidation, we write off the tax. If there is a yield to us it is written back in. We also had an interesting situation in the course of the past year or so whereby somebody who had tax written off won the lotto, so we wrote that back. It can happen and it can be useful.

The Revenue Commissioners even check the media.

Ms Josephine Feehily

We check the media all the time. It is important——

The moral of the story is if one wins the lotto one should keep it quiet.

Ms Josephine Feehily

It can be difficult to keep quiet in small towns. The Collector General will be able to tell the Deputy how much we have added back. It is important to have that regime.

Mr. Gerry Harrahill

The first issue to stress is that the decision to write off tax is not one we take lightly. We satisfy ourselves to the extent that we can that there is a genuine inability or incapacity to pay. In the vast majority of cases, when a company goes into liquidation our normal approach is to write off all of the tax at that stage and in the process of the liquidator realising any assets in the company some dividend may come back to Revenue. They are the main circumstances in which we would write back tax. Our normal scenario would be that we would write back 3% to 5% of tax which has been written off in any year. Some 85% to 90% of that arises from dividends which come to Revenue arising from liquidation.

As the Chairman has explained, there are cases where an individual's circumstances will change. For example, we have very little alternative if somebody has left the jurisdiction. We cannot lay our hands on assets he or she may have to write off the tax on the basis that he or she had left the jurisdiction. In some instances, people return to the State and we re-enact the collection and recovery process. Sometimes we will collect tax in such circumstances.

I note from the report that, in regard to tax and PRSI which is outstanding, while an appeal process is ongoing Revenue is prevented from seeking to collect the tax. On working capital, do many appeals turn out to be frivolous? Are people using them as a way to put off the evil day when they have to meet their commitments?

Ms Josephine Feehily

I would be worried if they were. One cannot make an appeal on the quantum of the tax. There has to be a basis for the appeal. That does not mean that people would not drag their heels in progressing an appeal, something which sometimes bothers me. The legal position is that one has to have an argument and it cannot simply be that the sums are wrong or that the person concerned does not agree with the amount. There has to be reasons for the appeal and they have to be grounded in tax law. One has to be able to say we were wrong because of certain facts or the taxpayer's view of the transaction is such that tax liability for technical legal reasons is a particular amount. There has to be a legal basis for it. From that point of view, I do not think so. The appeals system is designed to minimise that.

Before self-assessment, the appeal system was drowned with quantum appeals. People sent in appeals for any reason. In 1988, in the context of self-assessment, a great deal of work went into removing the incentive to submit an appeal without good reasons. Some appeals take a long time, however, because they go through the appeals system and there is then a right to a full re-hearing of the appeal in the Circuit Court. The case can then go to the High Court on a point of law. It is not unusual. One will see it in the age analysis of the debt. Some debt under appeal concerns cases which can go on for a very long time, if they progress to the Supreme Court. The appropriate thing to do is to raise the assessment, put it to one side, say it is under the appeals process and out of our hands in that regard. We will do what we can to move it along. It is not easy for taxpayers to abuse the system.

That is fair enough. I have a question on Customs and Excise. There were 455 successful prosecutions in 2008, resulting in fines of €655,000. How many of those fines concerned cigarette smuggling?

Ms Josephine Feehily

I will come at it in another way and tell the committee how many fines we had. In 2008 there were 80 convictions for cigarette smuggling and €34,500 in fines. There were six custodial sentences, of which two were suspended. There were two community service orders. Am I answering the question the wrong way around?

It is something I will come to in a moment. My question specifically concerned cigarette smuggling.

Ms Josephine Feehily

Yes, the figures I provided relate to tobacco smuggling.

Ms Josephine Feehily

I was working from a different table which I have on tobacco.

I apologise. From Ms Feehily's experience——

Ms Josephine Feehily

To help the Deputy, in 2009 there were 146 convictions, an increase from 80 in 2008. There was €60,000 in fines and 31 custodial sentences, of which 17 were suspended. In 2009, the number of convictions and the sentencing rate was considerably higher.

Obviously it is becoming more of a problem. How are the cigarettes getting in?

Ms Josephine Feehily

By every method known to man and woman. There are three main ways in which untaxed tobacco gets into the country. The first is often missed in the discussion. In the context of our membership of the European Union, people can bring duty paid tobacco from other member states for their personal use. While we have an indicative guideline of 800 cigarettes, it is only indicative and the law states a person can bring in tobacco for personal use. There is significant case law in the European and domestic courts that suggests that the burden of proof for us to establish cigarettes are not for personal use is very high. People can legally bring many thousands of cigarettes into the country for their own use.

The second source, which we have seen increase significantly in the last few years, is "ant smuggling". This involves large numbers of people each bringing a suitcase aboard a plane.

The really major volumes come via container into the ports. Our largest seizures in the last few months have seen 120 million cigarettes seized in Greenore at the end of October, 32 million cigarettes in Dublin Airport last year, 8 million cigarettes seized on New Year's Day in Dublin Port, with a further 31 million in Dundalk in the last couple of weeks. The major volumes are coming to the ports. There were a further 4.2 million cigarettes seized in Cork Port in February.

The big volumes are coming through the ports but if there are enough small volumes getting through, there is still a problem.

Those are the three main sources of untaxed cigarettes. The second two sources are illegal while the first is not, and that is an important point.

Moving on to the conviction area, figure 39 on page 102 lists fines and custodial sentences. Of all the convictions in 2008 for serious tax evasion, only one person was imprisoned for tax evasion. Does the law need to be strengthened in this area? What is the position in other countries?

Ms Josephine Feehily

The strengthening of the law is not a question for me. We take this very seriously and our job is to get cases before the courts where we can. We have a good success rate with convictions when we get them there. At the end of December, we had 32 cases under investigation, 21 with our solicitors, 24 with the DPP and another 12 before the courts. We are moving them along all of the time, there were about 107 cases in our prosecution programme at the end of the year for serious tax evasion. Our job is to get them there and our conviction rate is good. It is for someone else to decide if the law should be strengthened.

You have the right to make recommendations to the Government.

Ms Josephine Feehily

We made recommendations for increases in the fines for tobacco smuggling in the excise area this year that were accepted. The experience in other countries is not hugely different. The threshold of proof for criminal tax evasion, fraud, neglect and so on is extremely high. There will never be more than a small number of cases that will meet the threshold and get through the system. As well as jail sentences, there have been community service orders handed down in recent years, an interesting development.

You were able to make recommendations in the areas of customs and excise. Can you make a recommendation for what you would like to see on the law on tax evasion? If you can make recommendations in one area, can it not be done in another area?

Ms Josephine Feehily

We can, of course. We advise the Department on many tax and customs matters and we can make recommendations. For criminal tax prosecution, the issue is not the fines, the issue is our powers where we have made many recommendations over the years and they have been heeded and our powers have been increased enormously, particularly our access to third party information, like the information at the beginning of the hearing on bank accounts. That is hugely helpful in terms of providing evidence. This is about evidence and being able to establish there was deliberate tax evasion. The bar is set high. I am not looking for increased sentences or penalties in the legislation at the moment, we have successfully sought additional powers and that is the route to follow.

Could you explain how risk evaluation analysis profiling operates and how long it has been in operation?

Ms Josephine Feehily

At its simplest, it is a very large database. We have been building it for a number of years and at this stage it has 43 data sources, including all of our data, from tax returns and collection, and third party data, which since last year has included deposit interest data and from later this year, will include credit union deposit interest data, rent data from the Department of Social and Family Affairs, landlords and the Private Residential Tenancies Board. There are 43 data sources and 200 rules that have been worked out by looking at the behaviour that would cause suspicion. Is someone late with their return? Is there a mismatch between third party information and what is on the tax return? There were 800,000 cases in REAP, the entire self-assessed taxpayer base. The 200 rules are run across the entire tax payer base at least twice a year and it produces cases in a risk order based on how many times those rules were broken.

We concentrate our audit resources on top 20 cases that come out of that, which, by definition, if we have the rules right, are the riskiest. Those cases are screened by our auditors. It could be that in a REAP run, at a simple level, a case might emerge as risky but when it reaches the tax district, the auditor knows the person died lately or had just audited for them under another heading. They are screened so we do not waste our time. They work the riskiest cases and if those cases proved not to be risky, they will adjust the rule. The rules are always being adjusted. If a case looked as if it should have risk, and therefore money, if it turns out not to be risky at all, we must look at what rule caused us to go out in the first place. The rules are constantly being refined with the objective of making sure when we run the programme, we always get the riskiest cases. Does that make sense?

Yes, it does. I find it extraordinary how successful Revenue has been with its IT programmes. A common theme for almost everybody who appears before the committee is the huge problems experienced with IT. Revenue does not seem to have those problems. I read somewhere that the system cost €3.5 million. Has the Revenue been able to recoup some of that cost by selling it or licensing it to other areas as it did with ROS?

Ms Josephine Feehily

No. ROS was a unique product which we developed in a partnership way with the consultancy company. REAP, at the heart of it, has a risk analysis software that we had to buy, so it was not our own. What is our own is the development of the rules which is about human power, brain power, and figuring out of the rules. We bought risk analysis software following a tendering process which we customised to suit our needs. It is not a new system. Risk analysis software is available across the world. What is special about the REAP system is the application of the software and the intelligence from our own officers to devise the right rules, therefore, it is not marketable in that sense.

Given that the Deputy mentioned IT, may I engage in a little plug for the moment? We launched our e-stamping programme at the end of the year, which is the latest in our suite of on-line services. In the first two months, 83% of stamp duty transactions were transacted on-line, which is about twice what we expected in terms of a target take-up. We are very pleased with that.

Very good. That is the commercial. In regard to ROS, is Revenue still getting an income stream from it?

Ms Josephine Feehily

We are. I do not know how much it is but it is a modest amount.

Does Revenue plan to incorporate the risk assessment of PAYE taxpayers into the REAP system?

Ms Josephine Feehily

We do. We have a strip down set of rules which we are piloting at present in two parts of the country. We are calling it REAP for PAYE. I am sure we will come up with a more elegant title when we have finished piloting it but it is on our list. We will evaluate the results of those pilots later this year to see what is the best way to go forward. Like everything we do now, whether it is REAP as a title, it is risk based and we need a risk analysis tool for the PAYE sector as well. For the moment we are experimenting with a cut-down set of rules in two parts of the country and we will see where that takes us. I would expect, following evaluation, that we will be doing considerable work on that probably next year.

On the IT services, I got an e-mail from the Revenue Commissioners recently stating that I was getting a tax refund. I was asked to provide details of my credit card and accounts and, if I returned same, that I would get a refund of €734. Many people would have succumbed to the temptation. Has the Accounting Officer the ability to track these scams that people are being subjected to? Can Revenue trace the people who are using its name? It looks official. Has the Garda or the fraud squad been asked to track the people who are using the Revenue name to impose scams on people?

Ms Josephine Feehily

No more than lots of financial institutions we are subject to those phishing scams periodically. We always alert people. We post it on our website. We have very clear instructions not to give any personal information. Revenue never writes to people asking them for personal information in that fashion. It is very important that I should say that. My IT people tell me that we certainly would make our concerns known to the Garda. There is no question about that. The experience suggests to us, no more than other large financial institutions, there are so many cut-outs in the way these scams are put together that it is almost impossible to find where they originated. Even the very big IT companies have to admit that the sophisticated and maybe even unsophisticated people, who design these scams, design them in such a way that one ends up in a cul-de-sac, at a blank wall. Our main focus, when we become aware of one, is to immediately put out an alert through the website and reinforce our message that we would never send such a mail. We have put in place a secure e-mail channel for practitioners because that is the area where there would be a lot of business going and coming between us which might have personal information in it. That secure e-mail channel is something we are promoting very heavily. We have said to practitioners that it is our preferred way of communicating with them and we would like them all to sign up for secure e-mail with us. Between 60% and 70% of them have done so.

Something we had been working on for a while came to a head in the past couple of weeks. We have been awarded the international standard for security in regard to our data centres and our websites. It is ISO 2001. Only 29 businesses in Ireland have achieved that standard. It was awarded to us by the Accreditation Body in the past couple of weeks. We take it very seriously. It is not an easy standard to achieve. It runs across everything from technical security to physical security. We are very pleased with that.

As I say, I got this scam mail on 10 March and I said it was timely to raise the issue.

Ms Josephine Feehily

We will get another alert out.

Thank you.

I have one final question on the REAP system. In the risk analysis that is conducted is there any particular sector of business that is showing up regularly in the high risk deciles?

Ms Josephine Feehily

One of the sectors that is always with us is construction, construction in the widest sense from construction sites to developers. We certainly get a fair amount of hits in the sector all the time. Last year we devoted approximately 20% of our audit resource again to the construction sector. The other professional services which the Deputy mentioned earlier are risky for a whole range of reasons mainly to do with cash, the potential for cash under-declaration. These are the two sectors that stand out for me from memory.

Construction and——

Ms Josephine Feehily

Professional services is a very wide range.

Ms Josephine Feehily

I would have to be very careful about that. It is a very wide range and is just a classification that we have. In the regions we are getting them to pilot four sectors to see if they can learn about risks in those sectors. One of those sectors is security. Another is haulage. We have picked those because of the risk indicators that have already shown up to us from REAP. If the Deputy bears with me I will find the other two. There is also freight transport by road, letting of property, mixed farming and the security sector. We are testing those sectors by auditing a number of cases. This started in 2009 and is continuing this year. Different regions are taking a sector each and they will audit a number of cases and we will see what lessons can be learned, not just from the results of the audit but we are asking them to document the behaviours they observed that led to the yield, if there is a yield. Those sectors would have been considered by our regions to be risky, based on their experience of conducting sectoral projects.

Did Ms Feehily say mixed farming?

Ms Josephine Feehily

Yes. Please do not ask me why that sector was picked. I do not know the answer to that but it was. I can get that information for the Deputy.

I am curious as to the reason mixed farming was chosen as against other types of farming.

Ms Josephine Feehily

I do not know.

It seems to be a strange one——

Ms Josephine Feehily

I will find that out for the Deputy.

Ms Josephine Feehily

My colleague suggested that perhaps we mean people who are farming and have another occupation as well. Perhaps it has just been badly drafted for me. That might make more sense.

Arising from that and before I call Deputy Fleming, one of the concerns this committee had in the past was the link the Office of the Revenue Commissioners has with State agencies in terms of payments being made to landlords through the Department of Social and Family Affairs and payments being made by the Department of Agriculture, Fisheries and Food through grants and other payments to farmers. What has the office done to improve those links and the exchange of information between the office and State agencies and Departments in the past two years, for example?

Ms Josephine Feehily

As the Chairman is aware, we had been receiving information from the Department of Social and Family Affairs on the landlords side but it did not have the PPSNs. That information has now started to come with PPSNs included. The Department has started to collect them. That has moved on very well.

We also got legislation changed so that we could receive information automatically from the Residential Tenancies Board. That information is coming to us.

Regarding this year's Finance Bill, which is still before the Oireachtas, and referring to my earlier comment, we have asked for, and the Minister agreed to, information from the Taxi Regulator. If that legislation is passed, that information will come to us later in the year.

The short answer to the Chairman's question is that anywhere we perceive there is a source of information that will be helpful to us we first talk to the agency concerned to see if it is readily available or if it could be made readily available. We then seek, either in its legislation or ours, the legal basis for getting that information because we must get it on a legal basis to ensure we can use it safely.

In regard to the Department of Social and Family Affairs, we have so much in common with that Department that we decided to put our relationship on a more structured footing this year. At very senior management level we set up a senior management group that has met twice in recent months to review the range of issues in the relationship between our office and the Department of Social and Family Affairs. Exchange of information is always on that agenda and therefore if there is a new data source that we need or that it can help us with, we would identify that quickly through that method.

As I said in my remarks to Deputy Kenneally about the REAP system, we now have 43 data sources in REAP, which is three or four more than we had when I appeared here last year, and most of those would come from State agencies.

There is a sum of €2.361 billion being paid by the Department of Agriculture, Fisheries and Food each year by way of grants and payments. Is there a fairly good exchange of information with that Department?

Ms Josephine Feehily

We get information on subsidies and grants. Our relationship with the Department of Agriculture, Fisheries and Food across all our programmes is very good. In fact, one of my colleagues is on its audit committee. That is how good the relationship is and I have no reason to think it would not be otherwise.

Ms Feehily mentioned the Taxi Regulator. Does the office intend to get information on hackney licences also, many of which have been issued throughout the country? The office may have to go through local authorities to get the information on the hackney licences. It is getting information on the hackneys as well?

Ms Josephine Feehily

We will, as soon as the legislation is passed.

Yes. It is currently before the Oireachtas.

On the exchange of information, which Ms Feehily touched on in her final comments, we have had representatives of the Department of Social and Family Affairs before the committee and we often hear about people having to pay back social welfare payments. I refer, for example, to people on lone parent payments whose income may have exceeded the level applicable to that payment. Until recently a long time gap has occurred before that is discovered. It could be when P35s are issued at the end of the year and it is 18 months later before the Department of Social and Family Affairs realises, from information received from the Revenue Commissioners, that the person had a higher income and he or she should not have been getting the social welfare payment. I accept the person has a duty to make that known, but not everybody is expert on the weekly figures that arise. That delay was discussed here recently with representatives from the Department of Social and Family Affairs. When a person takes up employment, the P45 or whatever they give to the new employer must be sent in to the tax office. Does Revenue inform the Department of Social and Family Affairs about that immediately? What is the level of exchange of information? Does it happen at the end of a year, which can be 18 months after the event? What happens this year? How soon does Revenue notify the Department of Social and Family Affairs when somebody takes up employment? Does the office do that or is it just done at the end of the year?

Ms Josephine Feehily

It is just done at the end of the year, when the P35 information comes in.

As a Committee of Public Accounts we find that unsatisfactory. We have discussed this issue previously. It is leading to unnecessary overpayments by the Department of Social and Family Affairs and hardship for those who try to repay the payments. I am aware the office has an outstanding system but it is not satisfactory to wait until the P35 comes in at the end of the year before information is transferred. I do not understand the reason that cannot be done on a monthly basis. There has to be notification when one starts employment. Why can the office not give that information to the Department of Social and Family Affairs on a daily, weekly or even monthly basis? It represents a lack of joined up Government and the individual citizen is often the person who is caught in the trap, so to speak, which is sometimes of their own making. I do not dispute that. However, a person is entitled to believe that once they take up regular employment the State has been notified of that through the Revenue but yet the other Department is still not aware of that until a minimum of a year later.

Ms Josephine Feehily

I assure the Deputy that the Department of Social and Family Affairs heard the committee's concerns in that regard and it had already approached us to start talking about it. It is on the agenda of the high level group I just mentioned to the Chairman. The most recent meeting was in February. I do not know where we will go with it but we are talking about it and I completely understand the point.

Ms Feehily might update the committee on that system if any changes are made during the course of the year rather than having to wait until next year.

Ms Josephine Feehily

I will.

It is an issue that has arisen once or twice, primarily at the Department of Social and Family Affairs end.

On the seizures Ms Feehily mentioned and about which Deputy Kenneally spoke, if I read the figures correctly 218 million cigarettes with a value of €92 million were seized. A total of 96,000 litres of alcohol — 200,000 pints of beer — were seized also. What happens to all of that stuff including cocaine and so on? Can Ms Feehily tell me what happens to the items seized, aside from the fines? What physically happens to them.

Ms Josephine Feehily

They are destroyed.

Where, when, how and under what licence is it done?

Ms Josephine Feehily

If it is required for court it is kept under guard for quite a long time and then it is destroyed. We have been through stages where they used to be put into furnaces. Efforts have been made at shredding, and they have not been successful. I suspect that most of it is burned.

From an environmental point of view, and I am chairman of the Joint Committee on the Environment, Heritage and Local Government, I find it unsatisfactory that the chairman or any of the representatives of the Revenue Commissioners cannot tell me under what waste licence this is done. Some of this material — cannabis and cocaine — would come under the category of hazardous waste and we do not want the smoke from burning it going up chimney stacks. Obviously, somebody has an arrangement in place but from an environmental point of view a major Department should know where its waste product ends up. Perhaps it is being exported but I would like a detailed note on what is done with the diesel seized, for example. Is that burned?

Ms Josephine Feehily

No. It is not burned.

What happens to it?

Ms Josephine Feehily

The diesel is disposed of by licensed waste management companies which dispose of it properly and environmentally. I am aware of that. I am sorry but I do not know precisely what happens to——

Ms Feehily will accept it is reasonable to know what happens to the cigarettes seized.

Ms Josephine Feehily

I am satisfied we do it properly. I just do not have the information in the bundle with me.

I do not suggest it is not done properly but I would like to get a detailed note on that and the environmental treatment of those issues. Ms Feehily in her opening statement gave dramatic figures in terms of the reduction in tax take of €14 billion during the past two years. I note that corporation tax take has dropped from €6.4 billion to €2.5 billion during the 2007 to 2009 period and the capital gains tax take has dropped from €3.1 billion to €0.5 billion, a drop of approximately 85%. Would those tax headings account for the largest tax take reductions during that two-year period or under what other tax headings would there have been such reductions? The figures in Ms Feehily's opening statement relate to 2009.

Ms Josephine Feehily

The VAT take would have dropped substantially. If one considers this in percentages, the tax take in terms of stamp duty has dropped by a phenomenal amount.

No, I am talking in money terms.

Ms Josephine Feehily

In money terms, the VAT take has dropped substantially.

The VAT take would account for the biggest figure in that respect. By how many billion would the tax take in VAT have dropped during the two-year period?

Ms Josephine Feehily

By 10% in 2008 and in 2009——

VAT accounted for €13 billion in 2007 and approximately €10.5 billion 2009. Is that correct?

Ms Josephine Feehily

Yes.

By approximately what amount has the tax take from VAT dropped?

Ms Josephine Feehily

It is down €4 billion.

From what period to what period?

Ms Josephine Feehily

The drop was 9% over 2008. The outturn for VAT in 2009 was €10,669,000.

What was the VAT take in 2007?

Ms Josephine Feehily

In 2007, it was €14.5 billion.

Therefore there has been a significant drop in that tax take. That relates to the tax headings.

Deputy Deirdre Clune took the Chair.

I want to deal with the sectors of the economy where there have been big reductions in terms of tax take. I note a schedule that has been produced covering the sectoral heading of agriculture, fishing, mining and manufacturing. I presume we got those charts from Revenue. There was a drop in tax take in the construction sector of almost €2 billion. In which sector was the biggest drop in tax take recorded? Obviously, there was a drop in tax returns from the construction, real estate and the financial sectors.

Ms Josephine Feehily

Construction, real estate and hospitality are the three big ones.

Those are the three big ones. What were the gross receipts versus the net receipts for the construction and property sector for 2008 and 2009? In other words, how much preliminary tax did people pay in advance or how much preliminary tax was reclaimed? Does Ms Feehily have a figure for the gross receipts versus the net yield in the construction sector for those years?

Ms Josephine Feehily

No. We do not have the gross receipts by sector.

Revenue does not have the gross receipts by sector.

Ms Josephine Feehily

The sectoral analysis is done after the event, after the various transactions have taken place during the course of the year. I do not know if we can get that figure. It is not something we produce as a matter of course. We produce the net receipts by sector after the end of the year as a matter of routine analysis. I do not believe we ever produced gross figures.

Therefore, analysis is based on net figures only. It would be useful for everybody concerned, including Revenue and even the Department of Finance, to have that information. They do not know the gross tax yield from the construction sector in a year — that figure is not available. We only know the net figure after repayment. I would have thought that a key economic statistic should be the gross tax yield from the construction sector on an annual basis. I will ask the representative from the Department of Finance about this. Does the Department have that figure?

Mr. Paul Ryan

I am aware of that. We could check if we have that information and if we do, we could forward it to the clerk.

From where would the Department get it other than from Revenue?

Mr. Paul Ryan

It would come from Revenue. We would probably get it from the CSO as well. I do not work on the economics side. We can check this. There could be a number of sources for it.

Ms Josephine Feehily

It is important to understand what value or lack of value it would represent. The gross yield can cover VAT and by the time input credits and so on are claimed and VAT repayments are removed, it is a measure of work for us. That is why we count it, but it is not a measure of activity in any meaningful sense nor does it provide money for the Exchequer. Historically, we were worried that people overpaid preliminary tax and we ended up paying money back. Therefore, the gross yield does not tell one an awful lot about economic activity. That is the only point I would make about it. Therefore, I am not sure what significant inference one could draw from it. I would be worried that inferences could be drawn from it, which, by the time a year's transactions had washed through, might turn out to be the opposite way around. Many businesses in start-up situations get VAT repayments before they have any liabilities.

Is it not possible to establish the gross corporation tax, the gross PAYE, the gross PRSI received from the construction industry and other industries? I am focusing on the construction industry because it has been the most prominent issue in public debate in recent times. I am surprised we cannot get gross tax receipts under such phenomenally big headings. Such figures may not be of particular relevance in helping Ms Feehily in her job, but from the perspective of the Department of Finance, I am amazed that such major public debates on these key economic sectors are taking place if we do not have basic information such as the gross PAYE and PRSI tax receipts, even aside from the complications of VAT returns given that there are refunds and reclaims. I am surprised that information on gross tax receipts for PAYE, PRSI, capital gains tax, corporation tax and for the self-employed from a sector are not available. Such information may not be of particular relevance to Revenue in its daily job of collecting tax, but from the point of view of the Department of Finance, such basic information is not available and Revenue is probably its best option of obtaining such information. Such information may not be of particular use to Revenue, but it is extraordinary that debates on these issues are taking place and we do not even know the gross receipts involved in these areas. The CSO might have some information and estimates.

Mr. Paul Ryan

I did not say that we did not have this, I said I did not have it with me. We can check that. I have seen the figures previously for gross receipts for, say, CT or CGT from the construction sector. I simply do not have those with me.

Would they come from Revenue or from the CSO?

Mr. Paul Ryan

From a variety of sources, mainly from Revenue. We would certainly have the figure for the net corporation tax. We have the figures for——

Yes, those are net figures, but I am asking about the gross figures.

Mr. Paul Ryan

I am just saying that we have net figures and the losses. I would have seen in various parliamentary questions or whatever the gross figures.

The gross figures for corporation tax.

Mr. Paul Ryan

For corporation tax and for CGT. In terms of PAYE or PRSI, I would not have seen the gross figures, but that does not mean they do not exist. We can check the figures we have and report that to the clerk.

Capital allowances feature prominently in the construction sector. How has this issue been dealt with in the construction sector in recent years? I am sure many capital allowances have been claimed by companies that planned to construct warehouses, offices, hotels or whatever but those buildings may not now be used for that purpose, they may not have been completed or they may have been completed and not let, or they may not be operating as offices but capital allowances were claimed for them. In terms of premises that are not being used for the purposes for which they were intended, does Revenue claw back those capital allowances? What happens in that situation?

Ms Josephine Feehily

If capital allowances are no longer due, there are two ways that would come about. One is if someone told us in his or her tax returns and the other would be from our audit and assurance checks programmes. If they are no longer due, they are clawed back.

What does Ms Feehily mean in terms of "due", if people have claimed capital allowances?

Ms Josephine Feehily

If they claimed them for a period in which the property was being used appropriately and so on, then that is that.

A building project might have been under construction over a two or three-year period. Surely the person concerned would have claimed capital allowances during the course of that period, perhaps before the office was completed and let or it may not have been let, but it was the intention at the commencement of the process that it would be let. The capital allowances would have been claimed in good faith during those early stages. However, the property never came to fruition in terms of generating rental income. What is the general situation there?

Ms Josephine Feehily

If they were properly due in the years they claimed them, quite often in these situations it is not one set of capital allowances. It is not the construction that has the allowances, it is somebody else such as professionals and so on. If they were not properly due because the rental income against which they were offset did not arise, clearly it would be clawed back. This is something that would emerge from their tax returns and from our audits. They could have been properly due during the construction phase if they had rental income from other properties. It depends on the various sections. Some of the capital allowance reliefs can be offset against different kinds of income. It is not a static, stand-alone situation. Most people who are in that space have capital allowances of various kinds and they have properties of various kinds. If they are no longer properly due, they are clawed back. That would arise from their tax return or from our audit and assurance programmes.

Let us take the situation of a taxpayer — it does not matter whether it is a professional, a developer or a financial institution — who is getting the benefit during the course of construction of an office block. Is there not a requirement that it should act as an office block somewhere along the line to claim those allowances? Or is it just for pouring the concrete that one gets them, whether the building was ever used for any purpose?

Ms Josephine Feehily

I do not know.

Mr. Paul Ryan

On some of the particular tax breaks, such as hospitals, health centres or hotels, they have to be used for the purpose set out in the schemes. It would have been seven years initially and it is now 15 years in some cases. If it is not used for that purpose it is clawed back.

I am conscious of the health ones, in that they must continue to be used as a nursing home. How much in capital allowances that were claimed under that category has been successfully clawed back by the Revenue to date — let us say in some of the ones such as nursing homes or hospitals? There are not many hospitals, they are mainly nursing homes.

Mr. Paul Ryan

I would say very little, but I do not know offhand. We can certainly check that for the Deputy.

To go back to the first question — because we do not necessarily have the gross figures, the refunds and the net figures because they do not seem to be captured — is it possible that we will be able to get that information? That is my concern.

Mr. Paul Ryan

The Deputy certainly will.

Where from? The Revenue does not seem to have the gross figures because it only deals in net figures. They have washed through the system before one gets to the net figures. Where could this figure be obtained? I do not mind who answers the question.

Ms Josephine Feehily

We are perhaps mixing up apples and oranges here. A gross and net tax collection in a self assessment system will not necessarily provide those figures anyway because they are claimed as reliefs in the tax returns. There is a difference between reliefs which never get into the gross, and repayments which do and are then repaid.

How about capital allowances?

Ms Josephine Feehily

Capital allowances will not always be reflected in the gross figures, even if we did have them because they are claimed as reliefs on people's tax returns as deductions.

Yes, but that is on their tax return forms, surely — the P11 or P12. It is a 28-page document with 168 questions, so that figure is on the form. Obviously at the bottom line they only give the net check, but that capital allowance figure is on the forms.

Ms Josephine Feehily

I am sorry. I thought earlier when the Deputy was talking about the gross yield, we were talking about all the tax heads from a repayments point of view. Certainly, if Finance wanted the information on capital allowances refunded it would have to get it from us. We would have to examine and analyse returns to do that. On the health sector that Mr. Ryan mentioned, the returns we are processing now are for 2008 activity. The allowances that had those kind of purpose tests in them are fairly recent allowances. I suspect therefore that the answer, as Mr. Ryan said, is very little because the requirement to have that purpose test is so recent that we probably have not yet got the returns for the tax years where a claw-back might be required.

I understand the health situation, but let us bring it back to the office blocks we see in every town and city in Ireland. There are completed ones that were never let or ones that have not been completed. They may be shells, or half-way or three-quarters completed. I am trying to establish whether there is a requirement when a person is claiming a capital allowance in respect of an office-block project — and there are many of them in every town — that the building should operate as an office block? Does somebody have to go in and work in it as an office, or does the person get the capital allowances just for pouring the concrete, even if it is never operated for its original stated purpose? There are different capital allowance rates based on whether the construction is for offices, warehouses or hotels. Is there a requirement that capital allowances claimed must relate to buildings that ultimately fulfil their original purpose for which the capital allowances were granted? Ms Feehily knows where I am leading; are many capital allowances claimed by the Exchequer out there relating to incomplete offices? I will lead her on to where that takes us with NAMA in a minute. There is no mystery about where I am coming from and she can see what I am getting at. Has the taxpayer helped to fund by way of capital allowances many of the empty, unoccupied or incomplete office blocks we see in every town?

Deputy Bernard Allen resumed the Chair.

Ms Josephine Feehily

Many of the capital allowances did not have those purpose tests in them, so the capital allowance was for building, and not necessarily for the operation.

Will Ms Feehily give us a detailed note on that?

Ms Josephine Feehily

I will, certainly. I am reasonably sure that it is only the recent health ones that have the purpose test. There was a purpose test some time ago in some hotels also. Where there was a purpose test, then the claw-back can arise, but quite an amount of the capital allowances were simply for the building of an office.

What if it never became an office? That is my point.

Ms Josephine Feehily

Whatever the legislation provided for, if I might put it like that. The latest year for which I have figures for capital allowances claimed — from an analysis of the returns to which the Deputy referred — was 2006. The tax cost of cost allowances for companies was €1,240 million. For self-employed and farmers it was €797 million.

So more than €2 billion was claimed by way of capital allowances in 2006 in respect of construction projects. Obviously, we want to know the purpose for which that €2 billion was paid out and not allowed to be collected by the Revenue Commissioners. Did those buildings ever end up being used for the purpose for which they were originally intended? That is really what I am getting at.

Ms Josephine Feehily

We will certainly send the Deputy that data.

There is no doubt that some of them were, but some of them were not. Has the taxpayer been giving capital allowances for half-completed offices and other buildings all over Ireland? That is my question. Ms Feehily should see what information she can find on the rules and conditions. Ms Feehily mentioned earlier that she reads the newspapers, so I take it from her 400 high-wealth, individual cases she would have a good idea — even if from only reading the papers — how many of those people might have loans going into NAMA. If companies go into NAMA and have financial difficulties, how does the Revenue deal with them? She said the amount of arrears has risen by 60%. She quoted that figure in her opening statement — from €1.1 billion to €1.6 billion or €1.8 billion. Can she take me through the exposure from a taxation viewpoint as regards the property sector, concerning protecting the Irish taxpayer in these matters? Can she talk to me about her dealings so far with NAMA from a taxation viewpoint on these issues? Many reliefs and allowances that were granted may require to be claimed back.

Ms Josephine Feehily

We have two kinds of engagement with NAMA. One of them has been about the tax treatment of the entity itself and the transactions in and out of it. The other part of it — this is in the current Finance Bill — is our ability to get information from NAMA on the transactions, on the properties and on the loans. Those are the two main pieces.

When the legislation is passed, we hope to be in a position to get any information we need from NAMA that would help us to understand the tax liabilities of those persons, businesses and companies who own those loans arising from their operation of their businesses in the past — whether the transactions were part of avoidance schemes or how the transactions were funded. Our intention, if the legislation comes through, is to be in a position to get any information we need from NAMA about the properties and the loans that it holds.

That is information. I am more interested in whether the Revenue can get any taxation out of the process for the taxpayer.

Ms Josephine Feehily

I suppose the first step is to get the information and then see was the proper tax liability identified and paid.

I would ask Revenue to check the capital allowances claim, depending on the purpose, following on from the previous discussion.

Ms Josephine Feehily

No doubt if there was a purpose test, a capital allowance was claimed and we get information from NAMA which helps us to disallow capital allowances, then that is what we will do.

Or reclaim ones that were already claimed.

Ms Josephine Feehily

Yes.

Does Ms Feehily have information on any clawing back of capital allowances in this sector to date?

Ms Josephine Feehily

Not to date. Our analysis from the returns is simply too out of date. When we get the 2008 returns processed in our IT systems we will have a better sense of what the shape of that sector was in 2008, and that will be later this year.

The second area of cost to the taxpayer is where much of the property and construction companies would have incurred much losses in the writing down process. Those losses would have come into their reckoning to reduce liability and in many cases, would result in claims for refunds of tax paid based on previous years on the basis of their losses incurred now. Can Ms Feehily give the committee any information Revenue possesses on that area of refunds Revenue might have had to pay to property companies which are making claims for losses now? It is obviously a big issue. Everyone would know that.

Ms Josephine Feehily

Certainly, the large cases division of Revenue which deals with the very big businesses, and the high worth unit which deals with the very wealthy people who own those businesses in many cases, is dealing with substantial claims for losses. I do not have data with me on how much has been refunded but I can get it for the committee.

Our bigger concern is to make sure that they would not be artificially claiming losses and creating losses to which they were not entitled. There has been a very strong focus in that unit on monitoring loss claims to make sure that they all stand up.

While I do not have the data with me, I know that they are monitoring it very closely and they certainly can——

Are their loss claims related to the valuation of their assets then?

Ms Josephine Feehily

In some cases their loss claims have to do with transactions, not necessarily to do with——

Valuations are what I am talking about. A reduction in valuation can lead to a loss.

Ms Josephine Feehily

It can.

Will Revenue have a separate valuation system or will it take the NAMA valuation system? Is Revenue using the one from the European Central Bank, long-term economic value, or current economic value? This has immediate cashflow implications for the taxpayer, if Revenue is using a different definition. I can understand the definition of value of assets that Revenue will use.

We have come up with a unique definition for NAMA purposes but I would not have thought that would have worked its way into the taxation legislation, and I do not believe it has. Will Revenue be operating a parallel different valuation system of assets for the requirements of the Revenue compared to how they will be valued for NAMA purposes, and how does Ms Feehily propose to reconcile the two?

Ms Josephine Feehily

I do not know how we will reconcile them. However, we must get actual valuations in the same way as the courts use actual valuations. Otherwise, the transaction or any challenge we make would not stand up. What we have done is hire specialist valuers to value assets for us.

What I am hearing here now is Revenue will not be accepting the NAMA valuation because that is on a new type of concept, long-term economic value, whereas Ms Feehily is saying Revenue must go on what she would call the actual current valuation, which, by definition, is different.

Ms Josephine Feehily

I am not commenting on the NAMA one. I am not familiar enough with it and I do not know enough about it. I just know if we want to make a transaction stand up in the same way as when the Commercial Court has to deal with situations, it will have to be based on evidence, otherwise we will not be able to make it stand up. That is what I have to do.

There could be a situation where a property developer would be in court with Revenue getting one valuation in the Commercial Court and in court with NAMA over the same property but getting a different valuation from the same judge because it was valued under the NAMA style of valuation.

Ms Josephine Feehily

I do not know, perhaps.

Revenue has priority in terms of recovering its debts from companies where there are arrears if they are going into administration or receivership, and that can happen. Effectively, Revenue's priority, which is only for a two-year period, will not apply in NAMA because the time it will take most of the debts to be dealt with by NAMA may be longer than the period for which Revenue's priority extends.

Ms Josephine Feehily

Our preference is for one year.

That will not cut any ice with NAMA because all of the debts will be older than that in the first place.

Ms Josephine Feehily

Whatever about ice, certainly they will be older.

How is Revenue finding the new recent budget provision for those persons who are domiciled but not resident here? How simple is it to implement and how successful is Revenue in implementing it?

Ms Josephine Feehily

The legislation is not yet in place. It comes in from this year. Effectively, it will apply to this year's tax returns, which will be coming to us in October 2011, where the domiciliary levy will arise. As soon as the legislation is passed, we will have to put arrangements in place, get our guidance notes ready, etc.

The trickiest bit will be — I mean this in a legal sense because it is not tricky and for us, it is just something we will have to do — that domicile is a complex legal concept. That bit might be a little tricky, but we have some time to work out our guidance on that.

It will apply to this year's tax returns in October 2011. It will be the beginning of 2012 before we will have any real data out of that.

Does Ms Feehily have any estimate of how much Revenue expects to draw down from that new provision?

Ms Josephine Feehily

No. I do not know whether Mr. Paul Ryan has.

Does the Department of Finance possess such an estimate?

Mr. Paul Ryan

We have an overall figure of approximately 7,000 non-residents but we cannot simply state that all of these persons will pay it. That would be the basic count.

How many residents?

Mr. Paul Ryan

Some 7,228 non-resident individuals filed Irish tax returns in respect of the 2007 tax year. If one goes back to 2007, that would be the absolute ceiling of those involved. All of these persons could be abroad for various reasons. They could have just moved abroad or could just have an Irish passport. As the chairman of the Revenue Commissioners stated, it will only be when we start looking at the returns in 2012 that we will have a view on how many persons will pay this.

In terms of how it is working so far, I deal with this in the Department. We have had a number of queries already from tax practitioners, but there will not be a significant flow until the Finance Bill is passed on 9 April and then, as Ms Feehily stated, as the guidance is done, etc. There have not been many difficulties signalled at this stage on the matter.

Arising from some of the questions put by Deputy Fleming — I apologise I had to leave for ten minutes or so — does Ms Feehily possess a breakdown on the total tax lost due to tax breaks to the hotel sector? There have been tax breaks for the hotel sector in recent years and there is a range of hotels empty at present. Does Ms Feehily possess an estimate of the tax lost in that category? Is she in a position to provide a breakdown of the figures relating to the tax breaks available in different categories?

Ms Josephine Feehily

What we can provide is the cost of individual reliefs rather than a sectoral breakdown. They are not broken down in that fashion. The tax cost of the capital allowance scheme for hotels in 2007 was €118 million. There were some 1,893 claimants. That is the most recent year for which I have data.

Is Ms Feehily referring to the hotel sector?

Ms Josephine Feehily

It is the hotel capital allowance scheme. The point I was making to Deputy Fleming is that the capital allowance might be claimed by somebody who is classified as being in a different sector. Such allowances could, for example, be claimed by lawyers or other professionals. We deal with them on the basis of the relief sought rather than by who claimed it. Therefore, the specific provision in the legislation for capital allowances in respect of hotels cost the Exchequer €118 million in 2007. The number of people among whom that money was divided was 1,893. However, these individuals were not all necessarily hoteliers.

What is the position with regard to other categories?

Ms Josephine Feehily

In the same year, the cost of the urban renewal scheme was €109 million, that relating to the town renewal scheme was €34.6 million, that for the seaside renewal scheme was €8 million, for multistorey car parks it was €9.6 million and that relating to holiday cottages — which might be in the sector to which the Chairman refers — was €12.4 million.

Are those schemes still in place?

Ms Josephine Feehily

The most recent year for which we have costs is 2007. The 2008 returns are only just in.

So the schemes have been closed off but allowances relating to them will still be paid for several years.

Ms Josephine Feehily

In some cases the schemes have been closed. The data, by definition, is historical in any event. Those reliefs relate to the Exchequer cost in 2007 when most of the schemes were still open. Sunset dates had been established in respect of the schemes at that point but they were still valid.

Mr. Paul Ryan

There is also the legacy cost. When a scheme is closed, people still have the right to avail of it.

They can do so for perhaps five or six years.

Mr. Paul Ryan

That is correct.

So these schemes will run for several years to come.

Mr. Paul Ryan

Yes.

Ms Josephine Feehily

In the same sector, we also had costs in respect of schemes relating to hostels and guest houses. The cost for guest houses was modest, at €200,000, and that for hostels was €720,000. The cost for the student accommodation scheme was €42 million. There is a range of these reliefs.

So tax relief is still being offered to individuals despite the fact that in rural areas such as Leitrim and elsewhere hotels and holiday villages are lying empty and unused.

Ms Josephine Feehily

Mr. Ryan is in a much better position to comment on this matter than I am but closure dates have been provided in respect of all of the schemes listed the legislation. If a scheme is closed, one cannot enter it after a certain date. Once businesses have entered a scheme, the relief continues until the termination date. That is the way it is designed in the legislation.

Even though facilities may be idle, unused or half-completed, people who have claimed these reliefs are still enjoying the benefit of them.

Ms Josephine Feehily

Yes.

That is incredible.

Ms Josephine Feehily

That is the legislative position.

Mr. Paul Ryan

All the property-related reliefs have been closed down at this stage. All we have left is the mid-Shannon tourism investment scheme and another scheme relating to palliative care, which has not yet obtained EU approval. Everything else has been closed down.

The Chairman referred to hotels being empty. Hotels are subject to the clawback provisions. Those which are empty but which remain open are called "zombie hotels" and if they close down, the capital allowances relating to them will be clawed back. As Ms Feehily stated, investors from different sectors, not hoteliers, per se, are in receipt of those allowances.

How much, in total, has been provided by way of relief under these schemes? How much has been clawed back in respect of unfinished projects? Even though the schemes may have been closed off, what will be the liabilities relating to them for the next four to five years? As Mr. Ryan stated, payments are still being made to certain individuals.

Mr. Paul Ryan

The cost of the tax allowances in 2007 was €435 million. We do not have a figure for the amount that has been clawed back. As Ms Feehily stated, the clawback provision was only recently introduced. I would imagine that the amount involved is quite small — it could be close to zero — because if hotels are closed down, the people who have invested will lose their money because it will be clawed back. It is in the interests of such investors for these hotels to remain open. As I informed Deputy Fleming earlier, we will obtain a figure for the committee on this.

I apologise if our guests dealt with the point I wish to raise when I was absent from the meeting. How many people are registered as being non-resident for tax purposes and what amount of tax was obtained from them? Have any of these persons been found to be in breach of the time constraints placed on them vis-à-vis the number of days they are allowed to spend in the jurisdiction? Will our guests provide an overview of the level of monitoring they carry out in respect of these people and their movements into and out of the State?

Ms Josephine Feehily

For 2007, the most recent year for which figures are available, 7,228 people filed Irish tax returns and indicated that they were non-resident. It is extremely important to clarify what this means. There is a much larger population that is non-resident for tax purposes. Due to the fact, however, that these people are non-resident, we have no dealings with them and they have none with us. Those with whom we deal are non-residents who have Irish-source incomes on which they pay tax. By no means do these individuals represent the total population of those who are non-resident. For example, large numbers of people work abroad and maintain family homes here. They return here for a couple of weeks holidays. These individuals are non-resident but their are Irish citizens. It is important to make that distinction. Their economic activity takes place in other jurisdictions. They are taxed in the jurisdictions in which they work and under the rules that apply in said jurisdictions. The 7,228 people to whom I refer and who filed returns as non-residents paid us €43 million in 2007.

The level of monitoring varies according to the risk. Some 42 of the 7,228 people registered as non-resident are designated as high-wealth individuals and their activities are monitored closely by the relevant unit. For operational reasons, we never discuss precise details in this regard. However, I can reveal that we carried out 21 assurance checks in respect of the 2007 returns of these 42 individuals. Some 19 of these were concluded with no liability. The other two have not yet been concluded. This does not mean that the people involved have a liability, it just means the checks have not yet been concluded. We also carried out three audits. One of these has been concluded, with no liability attaching. The other two are ongoing. The degree of monitoring of high-wealth individuals in that category is quite significant. We use media sources to monitor their movements, and so on, and we have access to sources of information from our presence at airports, ports, and so on. I would not like to say much more than that in respect of this matter.

Mr. Ryan referred to the hotel sector. Will he indicate the total cost of the capital reliefs for hotels to date? What is the projection for the remaining years?

Mr. Paul Ryan

The latest available data are from 2004, 2005, 2006 and 2007. I can read them out for each of the years if the Deputy wishes.

No, the totals will do.

Mr. Paul Ryan

In 2004, it was €37.7 million. It then increased to €67 million in 2005, to €106.6 million in 2006 and to €118 million in 2007. As the Chairman has said, those are the latest data we have.

What are the projections for the remaining years?

Mr. Paul Ryan

We do not have any projections available.

Mr. Paul Ryan

It depends on how many people make claims. As the Chairman has already said, when those who have invested in these schemes make their tax claims at the end of the year, they claim the capital allowance for that. It depends on the making of claims.

I know. Given that the schemes are closed now, can the Department not do a projection for the remaining years?

Mr. Paul Ryan

No, it is not possible to do that.

Mr. Paul Ryan

It is driven by people making claims in their tax returns.

Okay. Mr. Ryan has used the term "zombie hotel". The country is littered with such hotels. When one listens to hoteliers who have been in business for a long time, one hears that they are really struggling. This policy has completely undermined existing hotels that were viable. Is that not a serious indictment of the strategy that has been pursued by the Department?

Mr. Paul Ryan

The background issue of investment in the hotel sector is a policy question for the Government of the time.

Mr. Paul Ryan

I cannot comment on that.

Mr. Paul Ryan

I used the term "zombie hotel" because it is used in the media and to explain what has been done. I suppose we have what we have at the moment, in terms of these hotels. As the Chairman said earlier, the system that was put in place provides for clawbacks in the allowances if hotels are closed or used for another purpose.

Mr. Paul Ryan

That is one of the terms and conditions of the scheme, unfortunately.

The term "zombie hotel" is an accurate one. The impact of this strategy is close to rendering the hotel industry a zombie industry. It is easy to say it is a policy matter. I assume the Minister did not pluck this policy out of the air. I presume any changes in this area are based on studies.

We are discussing policy now.

I would be interested to know how this policy came about. I assume it was based on studies and assessments of its likely impact on the existing industry.

Mr. Paul Ryan

The policy relates to when the incentive was set up in the first place. The Minister can decide whether there should be a policy of closing these things and getting rid of the clawback.

Mr. Paul Ryan

I would like to finish this point, if the Deputy does not mind. If these things are closed tomorrow, those who have invested in them will have a problem. The clawback problem will also have to be addressed. If there is a clawback on the allowances, the Exchequer could be exposed.

That is a different matter.

Mr. Paul Ryan

I know that. I accept that.

I do not want to stray into the policy area because Mr. Ryan is not answerable for that. The Department is answerable for its performance in protecting taxpayers' money. What happens in the Department when a Minister decides to implement a new policy? What work is done to assess its likely impact on an industry, or is any work done in that regard?

Mr. Paul Ryan

As I said earlier, all the property related schemes have been closed.

No. I apologise, but that is not what I asked. When a Minister comes up with a new policy idea to be implemented, does the Department undertake any assessment of the likely impact of that policy on a particular industry?

Mr. Paul Ryan

If it involves a tax break, of course we assess its impact on the industry involved.

I thank Mr. Ryan. That is what I wanted to hear. What studies were carried out? A great deal of damage has been done to the hotel industry through these tax breaks. It is clear we have not got value from the considerable cost — €328 million to date — of these schemes to the taxpayer. We now have zombie hotels throughout the country. Huge damage has been done to the hotel industry. Was there a serious problem with the Department's studies or assessments of the proposed policy?

Mr. Paul Ryan

I do not have any information to hand on the studies that would have been done at that time. The hotel schemes were established ten or 12 years ago — I cannot remember exactly.

Mr. Paul Ryan

I can check whether studies were done at that time, or whether it actually involved a policy decision at the time.

Clearly, it did involve a policy decision. I am asking Mr. Ryan to outline the Department's response to that decision. It is not enough for one to say "too bad" when one considers the existence of zombie hotels and the destruction of the hotel industry. Not only should Ministers be accountable for policy decisions, Departments should also be accountable for ensuring policy decisions do not wreck whole industries, which is what has happened in this case.

Mr. Paul Ryan

We are looking at two things. Most of the schemes that were established five, ten or 15 years ago have already been closed.

That is not the question I am asking.

Mr. Paul Ryan

We have a different system in place for future schemes.

I am asking what assessment was done at the time. Did alarm bells not ring? Did the Department's studies not show that this would actually be a bad move?

Mr. Paul Ryan

I am not aware of what studies were done at the time. The Deputy will be aware that in the mid-1990s, a study was undertaken by the current Taoiseach when he was a Minister. Indecon did studies. An internal study was done. Some of the results of those studies fed into subsequent budgets and certain schemes were terminated. As I said to Deputy Fleming, they will attract a legacy cost even though they have been terminated.

Deputy Shortall is looking for copies of the briefing documents relating to the scheme that were prepared before the scheme was announced. Surely it is possible to provide all such papers that are available in the Department.

Mr. Paul Ryan

We will have a look. Is the Deputy asking about documentation on hotels in particular?

Mr. Paul Ryan

Okay. We will certainly have a look for those.

This is very central to the work this committee does. It is not enough to shrug one's shoulders after a disastrous experiment proves costly to the taxpayer and damaging to the industry. There is a need to establish some kind of accountability in this regard. There can be political accountability. Clearly, the Department of Finance has a role in assessing the likely impact of a scheme and presenting advice in that regard to the Minister for Finance. It is important we establish what went wrong so that lessons can be learned for the future.

Mr. Paul Ryan

I take the Deputy's point. It is not a case of anyone shrugging his or her shoulders. We will go back and have a look at it. A fair amount of time has passed since this scheme was introduced. The Deputy will appreciate that it might take us some time to dig up this stuff.

My memory of my short time as a Minister is that any time I proposed ideas and schemes to the Department of Finance, I got a fair grilling from officials in the Department before they nodded their heads and said the money was available. In this instance, we want to establish whether the officials rolled over and agreed to this proposal without giving advice about its cost implications. If they did give advice, we would like to see evidence of it.

I would like to ask Ms Feehily a few questions about write-offs. The last time she attended a meeting of this committee, we spoke about a €9.9 million write-off. It was the largest write-off of 2008. We know it was detected by the receiver rather than by the Revenue Commissioners. Have the Revenue Commissioners looked back on that case? How was the company in question allowed to run up such a huge tax debt? What lessons have been learnt from that case to ensure it cannot be repeated?

Ms Josephine Feehily

The Deputy can take it that we have carefully analysed the case. The pattern of what happened was something we have seen before. The size of it was very significant. We have scrutinised it. We are in close contact with the liquidator in that case. We are able to find out all about the case. That will help us to establish what we might have done earlier. The sector in which this business exists is now regulated by the Private Security Authority. It is probably helpful that the sector has been moved into regulation. The case is question is not over. Certain issues are still being dealt with by the Office of the Director of Corporate Enforcement. I do not want to go too far on it. We are always trying to learn from cases of this nature. Where were the judgment points where we should have spotted something? Would there have been a better outcome if we had moved earlier? In this particular case and in many of the bigger write-off cases, there were jobs at issue and this always influences us in how quickly we move. Perhaps this should not be the case or perhaps it should. That particular company was very compliant on paper so it has taught us to be maybe a little more suspicious about paper compliance. We have moved that sector into our high risk status, partly as a result of what we have learned from this case.

Is there any likelihood of getting anything back through the liquidation process?

Ms Josephine Feehily

It is probably unlikely we will get any money but disqualification and restriction of the directors is something we will be pressing very hard. We know it is under active consideration.

What was the largest write-off in 2009?

Ms Josephine Feehily

It was €3,460,000.

How old was this debt?

Ms Josephine Feehily

The debt went back to the end of 2007 and up until February 2009, a little over a year.

What action has been taken?

Ms Josephine Feehily

It was a VAT debt. This was a company with 613 employees which had trading difficulties. The company had spoken to us and we were doing our best to work through this with it. It made some instalments during 2008 which made it look as though it might continue to trade and so trade its way out of difficulties. However, it then became apparent in February 2009 that this was not going to be the case. The company went into examinership in the first instance. That process was not successful so it went into court liquidation.

I made the point before that it is very difficult for compliant taxpayers to understand how people can run up such large tax debts and not end up behind bars. Has the Revenue Commissioners taken any legal action? How many people has it taken legal action against in the past year? What has been the outcome of those cases?

Ms Josephine Feehily

Does the Deputy mean criminal tax prosecutions?

Ms Josephine Feehily

Obviously this is not in the same space as the write-offs and liquidations. We discussed this at some length when I appeared recently. Most of our write-out arises in a liquidation or examinership, which is a court process. Most of them are companies and it is done in a particular way. Generally speaking, there is not a criminal prosecution. The route provided for in company law is restriction of directors and so on. A different vehicle is used for dealing with bad behaviour by companies and company directors; it is company law and the Office of the Director of Corporate Enforcement. That is the only distinction I will make.

I appreciate that, but in those circumstances of a liquidation, is it not possible to take criminal proceedings against individuals? Is the only sanction that directors are debarred?

Ms Josephine Feehily

It is generally the only sanction. It would be unusual to have the evidence arising out of a liquidation. It should be remembered the business is gone so one is trying to create the evidence from the liquidator's papers and so on, from the liquidator's reports. It would be unusual to have the evidence to sustain a criminal prosecution against an individual in his or her own right. If there was to be legal action against such individuals in their capacity as a director, then obviously the Office of the Director of Corporate Enforcement is the route to go.

In how many cases did the Revenue take criminal action last year or in the most recent year?

Ms Josephine Feehily

We have two ways of counting them; one way involves the cases in progress and the other involves convictions. I am looking in my document for the details on convictions.

In 2008, we had 15 convictions for serious tax evasion. I apologise for the delay. I am trying to sum up from a table.

On page 102, there is a figure of 40.

Ms Josephine Feehily

I can update that table on the screen. That is the number we have in the process. We also have this table showing the convictions. That is the one I was working from. It is in figure 39 relating to 2008. In 2009 we had five convictions.

In 2009? The table shows three.

Ms Josephine Feehily

I beg the Deputy's pardon. The table shows 2008 and there are 15 convictions. In 2009 the corresponding figure for the 15 was six convictions for tax offences and nine for duty offences.

What happened in the case of those six convictions?

Ms Josephine Feehily

There were two custodial sentences, one of which was suspended. There were fines of €509,000, just over half a million in total.

Just one conviction ended up in prison.

Ms Josephine Feehily

One in prison and one with a suspended sentence.

What was the length of sentence imposed?

Ms Josephine Feehily

I do not know that detail for 2009.

It is still not too much of a deterrent. I wish to raise the question of the approach taken within Revenue. A self-assessment system will only stand up if there are adequate random audits carried out. In his 2008 report, the Comptroller and Auditor General expressed concern at the ongoing failure to complete the required set of audits. What action has been taken since then to address that concern?

Ms Josephine Feehily

Two things have been done. First, the random programme has received considerably more attention in recent years. We reinvented it four years ago, in effect, to put it on a proper and sound statistical basis. The first year was more of a learning year. Some of the cases had to be dropped because they were not appropriate. We have completed 100% of the balance. Every year since then, we have tried to improve the quality of the cases selected to ensure they are statistically valid. We have also tried to ensure they move through the system as quickly as possible. Since the table was published, the proportion of the 2008 programme that has been completed has increased to 94%. By the end of February, the proportion of the 2009 problem that has been completed had increased to 61%.

This year, we selected the cases immediately at the beginning of the year. We distributed them for work in February, as opposed to April as we did in previous years, with a view to making sure they move through the system as quickly as possible. There will always be a time lag. Audits start every month. Audits that start later in the year will not be finished in that year. That is the nature of our business cycle. We are determined that they will all be finished. The first three years have been finished, in effect, because the relevant percentages are well over 90%.

Since I last appeared before the committee, we established a group under our partnership programme. The staff and unions that are represented on the group look at the quality assurance of audits, not just in the random programme but across the entire audit programme. The group has made considerable recommendations about standardising and improving the quality of the data capture. It is not so much concerned with the reporting done by auditors as with the standardising of that reporting. That improves our ability to evaluate. In addition to considering the recommendations agreed by the partnership group, we are designing an improvement to our case management IT system. We hope to roll that out in the second half of this year to improve the standardisation of the data capture — what happens at different points in audits — in order to help our evaluation.

The random audit programme shows that there is an under-declaration rate of approximately 30%. That strikes me as very high. It indicates that the system is not sufficiently robust. What is the Revenue Commissioners' yardstick for measuring performance in this area? If a random audit or analysis shows that 30% of those who use the self-assessment system are under-declaring their income, I would have thought that to be a matter of serious concern.

We went over this issue when the Deputy was absent for a vote.

The Accounting Officer said that many of these cases arose from innocent errors or technical errors.

Ms Josephine Feehily

The yield is very low in a high proportion — over 90% — of the cases in question. When one considers that in cases of low yield there will be technical arguments and innocent errors, that reduces the proportion even further. A system of self-assessment that produces a modest yield from its random audit programme, and shows that more than 90% of people pay the right amount or almost the right amount of tax, is quite robust. That would be borne out internationally.

To what extent do those figures influence the Revenue Commissioners' approach to doing more detailed or more frequent audits in particular sectors?

Ms Josephine Feehily

As the Comptroller and Auditor General remarked in his report, outlying factors need to be looked at, particularly in cases of unexpected results. We take the results of the random programme and feed them into our risk analysis system. We decide whether the cases that led to a yield would have been marked as risky cases in the risk analysis system. It helps us to validate the risk analysis system. If we get a high yield from a case that we would not have deemed risky, we examine it to see whether it was a one-off phenomenon or something that should influence the rules of our risk analysis system. In other words, we consider whether it is indicative of a trend about which we need to be worried. Anything that does not match our assessment of risk is examined in detail to teach us how to improve our risk analysis system. I suppose that is the main learning we get from it.

I take it that the category of "professional services" includes barristers, consultants, general practitioners and accountants, and so on. Is that right? It seems that there is a 35% rate of under-declaration in that category. Do the Revenue Commissioners have a way of distinguishing between minor under-declaration and more substantial under-declaration within that category?

Ms Josephine Feehily

Yes, we do. We know the yield by case from our analysis of the cases. I do not have it with me.

Can Ms Feehily tell us what proportion of the 35% of cases of under-declaration in the professional services category, for example, would have been serious cases of under-declaration?

Ms Josephine Feehily

I cannot provide that information today. I do not have it to hand. One of the points we discussed earlier — it is an important point to make — is that the random programme is not sufficiently statistically sound to enable conclusions to be drawn at a sectoral level. My statisticians tell me that taking a sample of 400 is a very good way of evaluating a total population. It is a valid sample for such purposes. However, it is not statistically sound to draw inferences from it at a sectoral level, at county level or at any other level. I have seen resonances of that in other jurisdictions as well. One cannot draw sectoral conclusions from such information. That is not to say we cannot learn lessons from these cases, which may have been the Deputy's point. I do not have the yield by case with me — I just have the yield across the programme with me.

From the information available to her, I assume Ms Feehily believes there are areas in which the Revenue Commissioners could be much more successful if they had additional powers. Has she sought additional powers from the Minister of Finance? What are her views on professional services? For example, why do we not have a system whereby professionals are legally required to provide receipts to their clients? Have the Revenue Commissioners sought such a system? I assume that would improve compliance considerably.

Ms Josephine Feehily

It is important not to focus on a particular sector. In the entire random programme, just one case gave us a significant yield of more than €50,000. I do not know what sector that was from. It is important to make the point that the data on the professional services sector in the Comptroller and Auditor General's report could easily have arisen from one or two cases. From time to time, we look for new powers. This year, we have looked for new powers with regard to information sources. For example, the power to get information from NAMA was an important one for us this year. We spoke earlier about taxi regulation. I do not think anything serious is missing from our powers. If we can get information sources, preferably electronically, into our risk analysis system, that may be most useful tool we can have in challenging the professional sector or any other sector.

Within any sector, can Ms Feehily tell us what levels of income have been declared by what number of people? Can she tell us how many people in the professional services sector, for example, are declaring an income above €200,000? How many people are within the different bands of income?

Ms Josephine Feehily

We break down the receipts by what we call NACE code which is an economic activity code and that is published in the Comptroller and Auditor General's report. We break down the receipts by sector using the NACE codes. The professional services are one of those. Earlier, the Comptroller and Auditor General said he would do some work on that for his next report.

We can break down the tax receipts by income bands but I am not sure we can break down the income bands by sector. We publish income bands every year and the tax take from people earning over €100,000 and so on. We have never broken them down by sector. We have broken down the tax yield but never interconnected the two. I would have to see if that is possible.

It would be quite informative if we knew, for example, how many barristers or hospital consultants were declaring an income of more than €500,000. That would aid compliance if those figures were readily available because details of payments would already be in the public domain.

Ms Josephine Feehily

If the payments were in the public domain, obviously our main focus would be to get the information. We will see what we can do. However, in doing such analyses we have to be careful not to identify people. That is always a worry for us when one gets into outliers. I will look at it.

I am not sure about the position regarding receipts. Any business subject to VAT must issue receipts. A person in the professional sector, therefore, must issue a receipt with a VAT number on it. Outside of that, my main concern is to get the information about volumes of business. When auditing professionals we look for access to their appointment books and so forth. To obtain a health expenses tax relief, the taxpayer will need a receipt from the health care provider. There are a fair amount of receipts relevant to us in the system. I am not sure what a receipt from another profession to a citizen would give me. Maybe I have not thought about it the way the Deputy has.

The Revenue can check the VAT returns of professionals.

Ms Josephine Feehily

Taxpayers can claim amounts of tax relief for medical expenses. We sample the riskiest and largest ones and check the receipts involved. Where it is relevant, the taxpayer will ask for a receipt for their purposes. Likewise in the rental issue discussed earlier, tenants will get receipts from landlords because they will want to claim tax relief.

I presume Revenue does not add up all the receipts for one specific doctor given that it is a random check.

Ms Josephine Feehily

We do not but we do for rent relief and large payments when we get the information from Departments.

It often struck me that the tax relief on medical expenditure for the PAYE sector is fairly wide open. What is the annual cost of tax relief on medical and dental expenses? What are the extents of the audits conducted by the Revenue into the relief?

Ms Josephine Feehily

We are moving towards developing a risk analysis system for the PAYE sector. We are piloting it with a particular set of rules from our risk analysis systems that seem to be appropriate. We are headed in the same direction with the PAYE sector, as we did with the self-assessment sector, of moving the compliance programme on to a proper risk analysis footing.

In the meantime, every year all our districts have targets for PAYE compliance transactions which they have to check. Of those who claim tax relief under the on-line PAYE system, 33% are checked and claims over €1,000 are generated as work items which need to be checked. Between 30,000 and 40,000 PAYE compliance checks were done last year, ranging from flat-rate expenses to health expenses to one-parent family allowances.

Is there a specific figure on medical expenses?

Ms Josephine Feehily

I can give the Deputy the cost of the relief later. We do not micro-collect the data on individual checks. Some of our checking of a small business can check ten different matters during the same visit. It is not categorised in a micro way. More than 30,000 PAYE compliance checks were done last year, involving calls for documentation and examining the entitlement.

I am interested specifically in the tax relief for medical expenses because it strikes me it is open to abuse.

Ms Josephine Feehily

A number of the districts which reported under that heading indicated that they found their cases to be largely compliant. That does not mean every case was compliant but the audit did not indicate a massive risk.

That would have only been a small subset of the total examined. Has there been a specific audit of the medical expenses relief?

Ms Josephine Feehily

We have not done a specific audit but I know the districts have done many thousands of compliance checks.

Have they been specifically on health tax relief?

Ms Josephine Feehily

Yes, as they only have a handful of reliefs to check. If the districts tell me they have done more than 30,000 checks in the PAYE sector, it is inevitable a large proportion of those will have involved health expenses reliefs.

Ms Josephine Feehily

It was in 2009.

What is the total cost of medical and dental reliefs?

Ms Josephine Feehily

In 2007, the latest date available, it came to €225 million for all taxpayers. The relief has been standard-rated, with the exception of nursing homes, so it is not as costly as it used to be.

Does Ms Feehily have a separate figure for nursing homes?

Ms Josephine Feehily

Not to hand.

Is there a level of screening at district office for random audits?

Ms Josephine Feehily

No, not any more. Screening is done centrally. There would be a light level of screening at district office level. We do not encourage the districts to drop cases because the sample would become distorted. However, they may have some particular local knowledge, such that as the person in the audit had died. They are not allowed to take a view that this is not worth doing. Historically, there was an attempt to look at them and see whether they were worth doing, but that has now stopped and things are much more systematised. To maintain the validity of the programme, short of something very extreme like that, they cannot drop the case

When did that change?

Ms Josephine Feehily

We began the programme in 2006, but we dropped some cases that year. The year 2007 is probably better as a base year.

So there is a uniform system.

Ms Josephine Feehily

There is a uniform system. They are selected centrally. Even if the local auditor claims they were audited last year, it does not matter. To be statistically valid and to give us the kind of knowledge referred to by the Comptroller and Auditor General in his report, we need to ensure the sample is robust. We do not allow many variations.

You said there was one person convicted and fined €50,000.

Ms Josephine Feehily

No, there was one case in the random programme that yielded €50,000.

What profession was that?

Ms Josephine Feehily

I have no idea.

I was just curious. You gave a figure earlier of €109 million for urban renewal. Do property tax breaks for apartments come under the urban renewal programme or is there a separate heading?

Ms Josephine Feehily

They are in urban renewal. My colleague has reminded me that section 23 is a different thing altogether. Some of these tax breaks would come under urban and rural renewal by definition, but section 23 has a whole cost of its own.

Can the committee get a breakdown for every year since it started?

Ms Josephine Feehily

It is an allowance against rental income so we do not have it. We were talking about capital allowances earlier on. Section 23 relief is where income can be offset against all other income.

A developer building a block of apartments can seek tax relief in urban areas.

Ms Josephine Feehily

Residential elements can form a part of it for schemes such as the town renewal scheme, the so-called living over the shop renewal scheme, the integrated area urban renewal schemes and so on, but there can also be commercial developments in the renewal of streetscapes. We could not break it down into apartments and other elements. As long as it qualifies under the legal definition, including the geographical definition, that is how we catch it.

Can we get a full list of all tax breaks over the past six years? I know you cannot provide them now, but perhaps we could get them in the next week or so.

Can we have a correlation with developers who are offloading loans to NAMA?

Mr. Paul Ryan

We can give a list of all the schemes. We are in the middle of the Finance Bill at the moment, so we need a few weeks to do it. We can give a list with all the costs we have. However, we do not have the information being sought by Deputy Broughan. Many of the loans have not been moved across yet to NAMA.

Will the Department have that information at a later stage?

Mr. Paul Ryan

Yes, but I cannot remember the date offhand. There is a flow of information between NAMA and the Revenue Commissioners. It will take a lot of time to carry out this request, but we will pass it on to our colleagues in NAMA and see if we can get any information.

We would be grateful if the Department gave the information available to it so that we can make a judgment on whether the taxpayer has been taken for a ride.

Mr. Paul Ryan

We will give a list of the schemes and the costs up to 2007, which represent our latest figures.

I welcome the witnesses from the Revenue Commissioners and the Department of Finance, and I commend the Chairperson of the Revenue and her staff on the valuable work they have done for the country in recent years.

The distinguished journalist Tom Lyons reported the following in the public press:

Brookfield, a contract pilot supplier, has told 100 Ryanair pilots put on protective notice two weeks ago that they could face "potentially very serious ramifications" following a Revenue probe. New contracts issued to the pilots last week required them to use one of four accountancy firms selected by Brookfield. Each firm will charge pilots 3% of their gross income for their services, adding up to millions in fees to be paid annually.

I cannot raise the affairs of individual taxpayers, but do we know the percentage of Irish workers who are clearly working in our country but seem to have some kind of offshore taxation structure and the taxation involved in that? Are the Revenue Commissioners concerned about this issue and will they be looking at it?

Ms Josephine Feehily

The correct operation of the PAYE system is on our horizon, and perhaps that intervention demonstrates this. It is not confined to any sector. A couple of years ago and in the context of social partnership agreements, we reviewed the code of practice we had drawn up jointly with the Department of Social and Family Affairs on the definition of employed versus self-employed. It did not need much improvement. The status of employed and self-employed workers is usually a matter of fact, as it is well established in case law. We codified it a while ago in this code of practice because that Department has an issue in respect of the insurability of workers. We reviewed this in consultation with the social partners a few years ago and republished it.

Beginning with the construction sector, we put a lot of attention into the classification of workers. That grew as we developed joint working with the Employment Rights Authority. A substantial number of workers in the construction sector were reclassified in recent years. We have raised issues in other sectors. If an employer establishes the facts of the case, the tax treatment will usually follow. This is based on common law rather than tax law and relates to the historical principles of master and servant — who directs the worker and so on — to establish whether the relationship is one of employment or self-employment. Tax consequences follow from there. We have always been attentive to this area and we will continue to be so, including in the professional sector.

Is it a cat and mouse game between the Revenue and tax fugitives? They might be organising workforces offshore and utilising Irish tax law in such a way as to minimise their own tax liabilities. Have we quantified how much revenue could have been lost over the past five years owing to such practices?

Ms Josephine Feehily

We certainly have not quantified the loss of revenue. The offshore dimension is not mainstream at all. My main concern is with people who are paying their tax, some of whom pay through the self-assessment system while others pay through the PAYE system. My main concern is to not allow undermining of the PAYE system and the related PRSI system. It is not so much about off-shore concepts or anything. It is about employed versus self-employed people and the tax treatment that follows. There may be very little tax at risk, but it is about the correct operation of the system and the liability of employers to operate PAYE properly that is of interest to me.

However, it is a fact that some of those schemes have operated in tax havens. I noticed that Ms Feehily did not mention Gibraltar earlier.

Ms Josephine Feehily

Some of those schemes have operated offshore. However, in operating offshore those people would have had to pay tax on their Irish-sourced income if they were resident here so we are back to the discussion on residence. It is an area of concern. Deputy Broughan described it as a cat-and-mouse area. It is certainly an area where we have been challenged and we are challenging back. There are several cases that are proceeding and in one sector we won a significant appeal before the appeal commissioners at the latter end of last year on this very point of employed versus self-employment in the professional sector. We will keep working on it. It is something that is not an issue for Ireland only. The UK also got very concerned about the idea of employed versus self-employed. We share experiences on that as a tax risk.

I notice that some of those contractors are based in the UK. There has been no attempt by Revenue so far to try to get a global handle. The Comptroller and Auditor General commended Revenue for regaining €6 billion of our taxes in recent years through all of the various probes it initiated. However, we did not try to get a handle on the contractor phenomenon, particularly at the height of the Celtic tiger. It may well have funnelled away taxes due to this State by people living here and using our services, schools and everything else but who were effectively being paid and taxed in another even lower-taxed jurisdiction.

Ms Josephine Feehily

The main issue is not about offshore; the main issue is about those onshore and paying in the wrong tax system. In 2008 we reclassified 442 workers from contractor to PAYE, for example. We are still in the programme which covers professions ranging from pharmacy to medicine to construction to translators. We have projects in all of those sectors to ensure that where the employment relationship is a PAYE one we are getting the right money. That is my main concern and it is where the biggest risk occurs.

Obviously, it is a pattern that has been with us for a long time. Ms Feehily need not comment on this but I remember when CRH reclassified its drivers as self-employed contractors, with which many of them had grave difficulties in the late 1970s. The practice seems to be growing. It would be interesting to have a handle on it. We are dealing with figures and tax foregone. We would like numbers on this phenomenon to see whether we can tease it out. Perhaps our colleagues in the Department of Finance can look at ways we can make this more difficult. The State is losing its lawfully due taxes.

Ms Josephine Feehily

It would be important for balance to say that there are other views on our approach to this. There will be cases proceeding through the courts which may very well show that we are wrong. These are arguable points about the employment status of people.

Ms Josephine Feehily

I just want to say that for balance. Just because we are working in an area does not mean that in the event of a challenge which progresses through the courts a different view will not be taken. We operate in a common law space with an historical relationship between employer and employee grounded in case law which is quite old and traditional.

It would be helpful if the committee had a brief from Revenue on the contractor employee issue and its implication for each year's revenue.

My colleagues have asked about the substantive issue, but I have received complaints as other colleagues may have done also. Has Ms Feehily heard from her staff about security at our ports and a perception in recent years? These are policy matters and involve decisions by other State institutions to eliminate police forces, famously in Dublin and perhaps in Dun Laoghaire and Cork. I am the on-off marine spokesman for my party. There seems to be a serious implication that State port security has very fundamentally declined. My colleagues asked about this earlier when I was in the Dáil. The headline results suggest that we are losing the battle on contraband. Has Ms Feehily heard these concerns from her people? Has she conveyed them to the chief executives of our national ports and harbours?

Ms Josephine Feehily

I certainly have not heard concerns about the physical security of the ports. I know that the officers who head up our districts which look after the ports in Dublin and Cork have very close relations with the ports authorities and harbour masters. If they had concerns they would express them. That they have not expressed them to me suggests that if they have had them they are resolving them satisfactorily locally and they have not needed to elevate them to board level in Revenue.

If one went down to Gardiner Street or Talbot Street in our famous north side inner city right now, almost anywhere one could get a few packets of contraband cigarettes. They are just out there as a rival trade, allegedly sometimes in retail units. Given that this is a fact, surely security has collapsed.

Ms Josephine Feehily

That is a different question. I would not want to blame the port authorities for that. The issue of controlling tobacco, which is something we spoke about earlier is extremely complex.

We have been through all of this.

Ms Josephine Feehily

By way of example, something like 600,000 freight units come through Dublin port and Deputy Broughan probably knows this as he mentioned his marine responsibilities. In an open economy in a single market short of closing down the island, trade must function.

That is not what Ms Feehily's staff tell me. They say the opposite. They tell me that systems have collapsed and this is why it is happening. It does not just go back to finances. I know it is a policy decision; we jacked up the price of cigarettes to the highest in Europe but they state that there are security issues and I am asking whether Ms Feehily will have a look at this.

Ms Josephine Feehily

Perhaps the word "security" threw me. This issue of control of tobacco is something we take extraordinarily seriously. This year it is one of our key corporate priorities. We identify key issues to receive significant attention during the year and we have already done that this year. We invested in a new container scanner which will be almost permanently based in Dublin port. That went into operation in November. I established a group of senior people headed at commissioner level to examine the risks related to tobacco excise to advise us on what else we need to do. I apologise that I misunderstood Deputy Broughan. He can take it that we take that risk very seriously and we are learning and trying to improve our systems all of the time.

I commend Revenue for getting a high rating internationally but it is clear that it communicates with other jurisdictions. It is very regrettable that until very recently this phenomenon was a United States one. Philip Morris is often mentioned as allegedly having exported massive amounts of contraband to Europe from a very tax-compliant United States. However, such activity now has shifted to the east and the source has changed. I presume the Revenue Commissioners also has discussions with other jurisdictions about their behaviour.

Ms Josephine Feehily

Yes. Our key partner in tobacco control is the European Union Anti-Fraud Office, OLAF. We work extraordinarily closely with it and I personally had a meeting with its representatives in February. We intend to have a conference on tobacco law enforcement next September, mainly for legal professionals, on how to use legal instruments to challenge successfully across frontiers those who benefit from tobacco smuggling. One of my officers recently gave evidence in Florida that resulted in an American being put in jail. As it is an international game, it must be managed at that level and we work closely with OLAF. I believe the Deputy would find that OLAF would say good things about our approach and programmes. Last November, on foot of the highly significant seizure at Greenore, which was the biggest ever in Europe, the OLAF people were here in jig time to learn and to work with us, which resulted in a joint Irish-OLAF mission to the Philippines and so on.

I completely agree with the Deputy that this is an international phenomenon. It moves around and one factor of which we must be mindful is that for a long time, the size of the Irish market was a protection. Now however, the Irish market is so lucrative in its own right that its size no longer is a protection and criminal gangs will follow profits. The fact that they perceive it to be in their interest to counterfeit cigarettes that are only sold in Ireland shows how the value of the market influences the behaviour of criminals. While this is a roundabout way of answering the Deputy's question, we are very mindful of this issue and will be investing much attention on it this year at senior level. We will be holding an event at some time during the first half of the year because we must improve our profiling skills. We wish to ascertain what we can learn about how best to profile because, in light of the point I made about the freight units, this must be about profiling, focus and intelligence.

I note the Chairmen has been asked questions previously on the staff issue.

I have a question for the representatives from the Department of Finance. I understand that as of yesterday, we have in place some sharia provisions, that is, Islamic financial mechanisms or devices. Will this have implications for tax collection in the future or will it bring about fundamental change? Second, does the Department of Finance keep under continuous review the yield from different taxes such as the travel tax? Is continuous cost-benefit analysis conducted on how different taxes are performing?

Mr. Paul Ryan

On the Deputy's question on sharia, it has only been introduced in the Finance Bill that is going through the Houses at present and which will be brought before the Seanad in two weeks' time. It simply is to treat sharia finance transactions in the same way as we would treat our own. While I do not have papers to hand on this issue, I believe a paper on this subject was circulated by one of my colleagues during the week. We perceive no fundamental change or impact arising in this regard. It simply is trying to reflect what is happening on the market.

From the perspective of those who owe money, it appears to be a highly attractive system. It might have much merit, were we all to choose the Islamic road with regard to finance.

Mr. Paul Ryan

I do not know as I am not an expert on the subject. However, it certainly appears to be a way of having a system that does not have interest. However, if one drills down into it, I believe it does have interest. I believe Christianity in medieval times had the same system, whereby although nominally no interest was charged, in fact there was interest.

As for ongoing reviews, we always have taxes under review. Obviously, at the time of the budget and the Finance Bill, we consider this in detail. We keep them under review at all times and work very closely with our colleagues in terms of yields, outturns, etc., and whether they actually are working.

Were the Department to consider that one tax was damaging the yield from other significant taxes, whether it was excise on cigarettes, travel or whatever, would it keep it under review in the run-in to the next budget?

Mr. Paul Ryan

Yes. As Deputy Shortall noted earlier, we look across the economy and certainly consider the sectors that are hit by it. If, for example, a particular tax on cigarettes was having a damaging effect or was causing an increase in smuggling, while there obviously is a way to deal with smuggling, were it to have an impact on something else, we would take it on board.

I have a couple of brief questions and will not delay proceedings. I note the payment of €452,078 on exceptional performance awards ranging from €50 up to €19,000. How were they decided on and who evaluated the performances? Was this done externally or internally? Have such awards now effectively become part of people's salaries? Is there an expectation that a person might receive such an award every year?

Ms Josephine Feehily

Absolutely not. Many years ago, I do not know how many, the Department of Finance made a provision for a modest proportion of the payroll to be distributed in the form of exceptional performance awards. While some Departments call it merit pay, we never have used that language. Because effectively this is the staff's money and is part of the payroll, Revenue developed the model in partnership many years ago. Anyone can nominate anyone, the evaluation is done internally and I personally sign off on all of them. It absolutely is not part of someone's salary. When one considers that Revenue had 6,500 staff, this is a very modest amount of money when spread across that size of a team. While I do not know what is the average payment, it is very modest. As only 450 people received it, the Deputy can see that the average amount is quite small. It is a scheme that is used to motivate staff and to reward people. It is exceptional and is taken very seriously within the organisation. It is treated very seriously because were one not singling out the right people, the impact of singling out 450 people out of 6,500 would be highly demotivating. Consequently, we are very careful about it.

My final question is that I note a cost was incurred for staff who are on loan to other Departments that Revenue is unable to recoup. Why does Revenue have staff out on loan and why are the Revenue Commissioners unable to recoup this cost?

Ms Josephine Feehily

As for staff on loan without recoupment, from time to time there may well be an officer who goes to another Department for whom we do not seek recoupment. I am trying to recall an example off the top of my head. From time to time, we transfer people on request, if they have a special expertise, to a Department during a year and we do not receive recoupment. Perhaps they are definitively transferred in the following year. We have detached experts who go to the European Union, I am unsure whether they are captured in the aforementioned figure, for whom we bear the cost. It is in Ireland's interest to have experts working in parts of the European Commission. I apologise for struggling with my reply but the biggest group consisted of staff on loan to the Commission on Taxation without recoupment. The secretary to the commission and three others were on loan to the Commission on Taxation without recoupment. That probably was one of the bigger groups and the figure pertains to such activities. There also may be an officer on loan to a partnership company. They all are on loan in an official regime where we do not get recouped. They are working for the State somewhere else.

I call on Mr. Buckley.

Mr. John Buckley

Clearly, Revenue's responsibility is to have systems, practices and procedures in place to assess, collect and bring to account the revenue, which is where my office comes at it from an audit point of view. This is the reason we put considerable focus on matters such as the random audit programme and on examining its profiling system. These are the indicators of how well Revenue is doing. A key indicator of effectiveness is the audit gap, the amount of money that would be collected if every taxpayer in the system was rigorously audited. A properly selected random sample is the best way of getting assurance of the efficiency and efficacy of that kind of system.

The REAP and random audit programmes support each another and can tell us about how each is working. A key question regarding the random audit programme is how representative the sample is and whether the samples are selected and carried through in a systematic way. We will have further discussions on this matter. I make this comment because, given figure 49 in the report, one would expect more randomness to be apparent in each decile of risk. We will need to revisit the programme and ensure that it is implemented in a systematic way on the ground. It has an implication for what one can draw out of it when one tries to extrapolate the results. This is one of the reasons I resisted the temptation to take the €1,977 average yield from audit and extrapolate from it to reach a large figure. I had some residual doubts about the figure, which I believe we will be taking up with Revenue during the course of the coming audit. We should be and are using the random programme to help refine the profiling system.

Arising out of our work, two key areas seem to call for extra analysis. There are instances in which at least 3% of all random yield occurs in almost every 10% of cases irrespective of risk categorisation. This calls for an examination to determine what causes these outliers. Turning the situation on its head, more than 50% of the cases rated as highly risk do not yield anything when tested in depth. There is nothing necessarily wrong with this, but we need to look into the reason, try to isolate what it was about the initial categorisation that caused us to believe the cases were risky and determine how to refine the process so as to ensure that we do not go off on wild goose chases. At local level, profiling tools and so on can help to modify the risk of wasting resources, but the constant quest is to use the random programme and the information from REAP to refine each other so that, in the long run, we can get both working in a systematic way and get better bang for the resources we are investing in audit.

I thank Mr. Buckley. I also thank Ms Feehily and her officials for their attendance and clear and forthright responses to questions. I also thank the Department of Finance. Is it agreed that to note Vote 9 — Office of the Revenue Commissioners, and dispose of Chapter 10 — Revenue Collection, Chapter 11 — Revenue Checks and Investigations, Chapter 12 — Random Audit Programme, and Chapter 13 — Risk Evaluation, Analysis and Profiling in Revenue? Agreed.

On Thursday, 25 March we will deal with Vote 3 — Office of the Attorney General, Vote 13 — Office of the Chief State Solicitor, and Vote 14 — Office of the Director of Public Prosecutions. These will comprise our first session. In the second session, we will deal with Special Report 63 — Tribunals of Inquiry (Resumed).

The witnesses withdrew.

The committee adjourned at 1.45 p.m. until 10 a.m. on Thursday, 25 March 2010.

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