COMMITTEE OF PUBLIC ACCOUNTS díospóireacht -
Thursday, 22 Oct 2009

Abuse of Concept of Limited Liability: Discussion.

Chairman

We are now in public session to deal with the abuse of the concept of limited liability. I draw everyone's attention to the fact that while members of the committee enjoy absolute privilege, the same privilege does not apply to witnesses appearing before it. The committee cannot guarantee any level of privilege to witnesses appearing before it.

Furthermore, I remind members of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable. Members are also reminded of the provisions in Standing Order 158 that the committee shall also refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policies.

I welcome Ms Josephine Feehily, Chairperson of the Office of the Revenue Commissioners, who will introduce her officials.

Ms Josephine Feehily

I am accompanied by Gerry Harrahill, the Collector General, and Paddy O'Shaughnessy, principal officer, who is the main liaison person with the Committee of Public Accounts.

Chairman

I welcome the officials from the Department of Enterprise, Trade and Employment.

Mr. Vincent Madigan

I am Vincent Madigan, principal officer in the company law section, and I am accompanied by Clair Gordon and Connor O'Mahony from the Office of the Director of Corporate Enforcement.

Chairman

I welcome the official from the Department of Finance.

Mr. Paul Ryan

I am Paul Ryan, principal officer in the taxation division in the Department of Finance.

Deputy Jim O’Keeffe

Is there anybody here from the Department of Enterprise, Trade and Employment?

Mr. Vincent Madigan

I am from the Department of Enterprise, Trade and Employment.

Chairman

This is the third occasion that we have had Revenue in here with us. I thank Ms Feehily and her staff for the submissions they have made to us and the help they have given us in preparing for this session. I thank also the representatives of the Department of Enterprise, Trade and Employment for their submissions. We commissioned a research paper from Mr. Frank Mitchell, barrister at law, and I publicly record the committee's gratitude to him for his cogent and well-argued policy document on the issue. I ask Mr. Buckley to make his opening statement.

Mr. John Buckley

As the Chairman stated, the matter has been dealt with previously. Therefore, I will be brief. A set of case studies reported in the annual report of my office for 2001 noted instances where the separate legal personality that attaches to companies was being used by the principals of certain of those companies to evade tax liabilities. In general, this involved the cessation of trade by companies without discharging their liabilities to the Revenue and recommencing what was essentially the same business as a separate legal entity.

The review identified the need for improved practice in the areas of promptly ascertaining the trading position of newly registered companies; monitoring cessation of trade after completion of ventures that were in an ongoing tax repayment situation, including property development; combating the phoenix syndrome generally; and linking the affairs of principals, including directors and shadow directors, to those of the related companies and other trading vehicles.

Revenue outlined changes that were being made to address the issue. These included in the case of new registrations, the separate monitoring of all nil returns and permanent VAT repayment cases; requesting legislation to counteract abuse of VAT and corporation tax in the case of trade cessation immediately following the property development; strengthening the link between tax clearance certification and actual operations; closely monitoring new business associated with persons who had walked away from insolvent companies leaving tax debts; and where appropriate, seeking to have the directors restricted or disqualified for fraudulent or reckless trading through the liquidation process.

While most of these were administrative in nature, some involved seeking new legislative powers. One such power that was considered was making those who controlled companies responsible for the discharge of fiduciary taxes, which are those taxes deducted from employees and suppliers in their capacity as an agent. More than €100 million of such funds are written off annually by the Revenue. The Accounting Officer will be in a position to outline the result of the deliberative process in that regard.

Chairman

I ask Ms Feehily to make her opening statement.

Ms Josephine Feehily

As the Comptroller and Auditor General stated, this issue first came onto the agenda of the committee arising from his office's report in 2001, and I will not reiterate the concerns. However, he recognised that we in Revenue were taking steps administratively to improve our response to the issues, and then went on to recommend changes in the law, as Mr. Buckley outlined. The committee in its annual report supported, in principle, changes in the law to restrict limited liability so as to make persons controlling companies responsible for unpaid fiduciary taxes by those companies.

In response to that recommendation, Revenue developed proposals to have such a legislative amendment included in a number of Finance Bills, and the committee has seen the relevant correspondence. We felt that the proposal we developed was a measured one which did not seek to impose a duty on all directors but only on those with a track record of non-compliance. We felt that the existence of the possibility that in very defined circumstances a director might lose the protection of limited liability might act as a deterrent to deliberate failure to remit fiduciary taxes. In other words, we saw it as an aid to prevention rather than a cure. Those proposals were considered in detail, and I recall personally discussing them at a meeting of the tax strategy group. In the event, it was decided, as a matter of policy, not to proceed with them.

Revenue acknowledges that there are many different perspectives on this question. Rightly or wrongly, businesses can often regard fiduciary taxes as simply another cost on the business and a cash flow challenge which these days can be a significant problem for many of them. We also recognise, as observed by Mr. Mitchell, the legal expert retained by the committee, that proposals in this area could have the effect of increasing the incidence of liquidation.

We appreciate that the Department of Enterprise Trade and Employment has a different perspective to us on this matter. This is understandable because we both have different jobs to do. However, in one sense I hope we share an understanding that anything that could diminish economic activity is bad for the economy and bad, therefore, for maximising tax collection and in this context, we must recognise the dramatic changes for the worse in the economy since we first made our proposals.

In the meantime, we have optimised the tools available to us. Our phoenix and commonality programmes have grown. Briefly, the phoenix programme, as its name suggests, is concerned with early identification of entities that reappear under a new name, and subsequent close monitoring of those entities. The commonality programme identifies entities which are related through a common director or directors and, where there are significant debts, the entities are drawn together and monitored together to ensure the highest possible compliance levels. In other words, we do not merely monitor one business but ensure that if they are non-compliant in one area, the entire group is looked at together. Businesses which are compliant are moved out of these programmes after approximately two years.

Also, it is important to note that since 2001 the Office of the Director of Corporate Enforcement has been fully established. In 2004, Revenue signed a memorandum of understanding with the director and we regularly exchange information with his office. Perhaps of greater significance, however, is the fact that liquidators are obliged to report any suspected criminal offence by a company or a director to the ODCE. In the case of an insolvent company, liquidators are obliged to apply to the High Court to restrict each of the directors from being involved in other companies unless the ODCE tells them not to. Revenue was the petitioner in a significant proportion of cases where such proceedings have been brought by the liquidators. We have funded liquidations in a small number of cases, not in the expectation of recovering tax but to enable us to support the liquidator in taking restriction or disqualification proceedings.

We have also secured, with the support of the Department of Finance, legislative changes to strengthen the operation of VAT, particularly the introduction of a reverse charge mechanism in the supply of construction services.

In summary, Revenue acted on the recommendation from the Comptroller and Auditor General and this committee on abuse of limited liability, and then we accepted the policy decision. In parallel with the legislative proposals, we continued to strengthen our administrative response to the underlying issue of tax evasion.

In this regard, I note the committee, in its report on the 2006 accounts just published in May of this year recommended that: "A comprehensive review of the effectiveness of oversight checks on the emergence and operation of phoenix type companies should be undertaken by Revenue." Revenue agrees with this recommendation and such a review will be carried out. The review will be informed by the contributions to date and today of the Comptroller and Auditor General and of the committee on this subject.

Chairman

Is it in order to publish your statement?

Ms Josephine Feehily

Yes.

Chairman

Would Deputy Fleming like to open the proceedings?

Deputy Seán Fleming

I thank the Chairman and welcome the opportunity of speaking on this issues of the abuse of limited liability and fiduciary taxes. We are talking about taxes which employers or companies pay by way of PAYE, PRSI, relevant contracts tax, etc. In a way they hold these taxes in trust on behalf of the people from whom they deducted it, as in the case of VAT, for onward processing to the Revenue. I say that at the beginning by way of explanation because many will not understand the phraseology of fiduciary tax.

The total amount written off last year was approximately €150 million. What percentage would that be of the total tax collected? It is a massive figure, but put it in perspective for members with a ballpark figure.

Ms Josephine Feehily

What proportion of last year's collection——

Deputy Seán Fleming

What proportion would the €150 million of fiduciary taxes written off in 2008 be of the total tax collected? I ask for a ball-park figure to show the committee the scale of the problem. The numbers are massive. I will move on and somebody can come back to me.

Ms Josephine Feehily

Somebody will work out the figure.

Deputy Seán Fleming

I am sure it is a fraction of a percent. There are a couple of issues involved in this. To cut to the main issue, I am sure 99% of companies are not affected by this issue. I am sure the Department of Enterprise, Trade and Employment officials will agree with this. It would put an enormous burden on the more than 99% of companies that do not fall foul of these provisions to introduce provisions on 100% of companies to deal with the fraction of 1% which are causing a problem. That must be stated at the beginning because people at the outset would see that this looks on the face of it like a very neat issue and that we should change the law and change limited liability. However, I put it to the officials from both Revenue and the Department of Enterprise, Trade and Employment that the general view people would have is that it would be more bureaucracy, red tape, administration and costs to their companies and that Revenue would be putting a burden on the 99% of compliant taxpayers to root out the less than 1% of companies concerned. Perhaps the officials from the Department of Enterprise, Trade and Employment will comment on that general issue. I wish the matter to be placed in perspective before we begin.

Mr. Vincent Madigan

The Department supports the Committee of Public Accounts in respect of the objective of finding an effective way of ensuring the payment of fiduciary taxes by legal persons. However, the Deputy is correct in stating that there has been constant evolution in the area of company law in recent years. In 2000, the report on compliance with company law recommended the establishment of the Office of the Director of Corporate Enforcement. Following the commencement of the work of the latter and its bedding down into the system, there has been a significant improvement in the area of compliance with company law.

Some provisions were previously introduced in 1990 and these related to the possibility of having directors of companies restricted. These were put in place in order to address what had been perceived as the phoenix syndrome. We also enhanced the disqualification provisions. In light of the establishment of the Office of the Director of Corporate Enforcement, what happens, as Ms Feehily outlined, in respect of liquidations and the obligation on liquidators to make reports to the Office of the Director of Corporate Enforcement and the fact that matters can, in particular cases, then proceed to the courts, it is fair to say that there is much more compliance among companies.

There are some general principles of company law of which we would always want people to be aware and to which they should have regard when designing proposals to address specific problems. The most obvious of these is the basis concept of limited liability. The reason most people use a company to conduct their business is because of the protection it affords them from liability if things go wrong. It is, therefore, the shareholders who have the protection. The company that is formed is a separate legal entity and if attempts are made to interfere with that basic proposition, then careful consideration must be given to the matter because it could have knock-on effects.

The Department's starting point is that people must have regard to those basic principles. They must be borne in mind when either a solution or a resolution is being sought. We could then consider whatever proposals emerge in order to see what impact they would have on those and see where that takes us.

Deputy Seán Fleming

As I calculate it, €115 million is less than one tenth of €1 billion. If we collect €50 billion, then it is less than one fifth of 1%.

Ms Josephine Feehily

Yes. We were trying to disaggregate the fiduciary tax part from the total write-off. The total write-off in 2008, as a percentage of tax collection, was 0.31%. In fiduciary tax terms, it was 0.29%.

Deputy Seán Fleming

Was that of taxes written off or of total taxes?

Ms Josephine Feehily

The fiduciary taxes written offer represented 0.29% of the tax collected in 2008.

Deputy Róisín Shortall

Was that of all taxes collected?

Ms Josephine Feehily

Yes.

Deputy Róisín Shortall

What was the position with regard to fiduciary taxes?

Ms Josephine Feehily

We will be obliged to carry out a further calculation in respect of those.

Deputy Seán Fleming

I thank Ms Feehily for providing that information. We get the picture and there is no need to provide exact figures. Some 99.8% of tax is properly collected and is not affected. Only a fraction of 1% of companies are, therefore, non-compliant.

I was extremely impressed by the letter Ms Feehily sent to the committee on 6 August 2009. In the section entitled "Inadequacy of existing powers" she states:

However, particular problems arise in relation to the deployment of these measures where in certain instances there is deliberate action taken by companies using the protection of limited liability to frustrate Revenue's attempt to target willful and deliberate delay or the complete withholding of tax payments.

That which Ms Feehily outlines is extremely serious and it surely constitutes fraudulent trading. Is a deliberate and willful attempt to withhold tax not fraudulent? Are all cases where such behaviour occurs sent forward for investigation for prosecution?

The words used by Ms Feehily in her letter were extremely strong and I compliment her on being so direct. I am of the view that the cases to which she refers must be pursued if we are to resolve the problems in this area. In her letter, Ms Feehily also made the point that, ultimately, the Revenue is the only body which does not receive final payment in these cases. The people involved pay their local suppliers in order that if they launch a new business, they might continue to enjoy their good will. In simple English, they set out to deceive the Revenue. Does what they do not constitute fraudulent trading. Are there mechanisms in place which might be used to pursue these individuals?

Ms Josephine Feehily

As I made clear in my letter, it is rare. This is a small enough issue for us. The reason we are focusing on it relates to its corrosive potential, the reputational risk to Revenue and the fact that it is unfair on other businesses. That is why we are in this space.

Where possible, we refer the cases of businesses which behave in that way to the Office of the Director of Corporate Enforcement. That is really where the lever is located. However, in many instances there is a significant delay. For example, the second entity may go into liquidation and the liquidator will carry out his business. By the time the end of that process is reached, there is an evidential issue and there can be all sorts of difficulties with regard to prosecution for fraudulent trading. If possible, referring cases to the director is certainly what we would like to do.

I stated in my letter that an entity may be established and may either fail to make returns or may make negligible returns. It can do this over a period of many years and, therefore, can appear to be quite compliant on paper. However, when an audit is carried out, it will emerge that the entity in question was understating is liability. At that stage, we immediately move to try to liquidate the business, recover the moneys owed and so on. The process is extremely long and by the end of it one can run into difficulties with regard to evidence of reckless trading. Where possible and where there is evidence of an entity continuing to trade without keeping proper books and records or in the aftermath of having been struck off, we refer the case to the Direct of Corporate Enforcement.

Deputy Seán Fleming

Does Revenue send forms to businesses each year on which they must list payments to third parties, that is, other companies and suppliers? Is there a computer programme which Revenue can use to identify returns from such third parties which would indicate that payments to a particular company do not tally with the turnover figure relating to a corresponding VAT or PAYE return?

Ms Josephine Feehily

We do not have a systematic programme. The form to which the Deputy refers is the return of trading details form. It is a form which businesses should complete at the end of year and it is one which they absolutely hate.

Deputy Seán Fleming

Yes. Completing it is a massive task.

Ms Josephine Feehily

Yes. It is an EU form, which makes it even longer. In general, there is no money at issue and, therefore, it is one of those forms that we work hard to have businesses complete throughout rather than at the end of the year.

Deputy Seán Fleming

Is there a high rate of non-compliance with regard to the completion of that form? There is a lack of enthusiasm in respect of it.

Ms Josephine Feehily

There is definitely a lack of enthusiasm.

Deputy Seán Fleming

Will Ms Feehily provide details on the level of compliance in respect of the completion of this form?

Ms Josephine Feehily

Sure.

Deputy Seán Fleming

These forms provide the type of third-party information which could be fed into a system in order to provide estimated turnover figures for other companies. I do not believe such a system exists.

Ms Josephine Feehily

From looking at such forms in the past, I am aware that in the context of them being used for the purpose to which the Deputy refers as opposed to simply being used for gathering trade statistics for the European Union — which is their main purpose — the identities provided in respect of the relevant entities are usually extremely unhelpful, particularly in the sense that PPS numbers, etc., might not be provided. I refer to how people describe on the form from whom they bought items. For instance, they might refer to a company called ABC Limited as John Smith because John Smith is the person they pay. I have seen these forms and the quality of the data provided. We work with the Department of Enterprise, Trade and Employment in a high level group on business regulation and the reduction of the administrative burden. It is an aspect about which there are constant complaints.

Deputy Seán Fleming

I ask the Department to send the committee a note on the operation of that system. I know it is burdensome but it would be good if there was a way of collating the information.

I have a question for Revenue. Is there any possibility that some form of bonding system for companies will be looked at? Developers were supposed to pay a housing bond. As many businesses such as travel agencies are bonded, that fund is available. A fraction of motor insurance moneys is given to the Motor Insurance Bureau to cover those who are uninsured. Is this a feasible concept?

Ms Josephine Feehily

There are two concepts of bonds and I can comment on one of them. The one mentioned by the Deputy is a collective bond which spreads the cost across other businesses. I will leave it to the Department of Finance to comment on whether it would be fair on other businesses if they had to pick up that tab. The Revenue Commissioners very occasionally make use of a power to look for a VAT bond but this power is quite restrictive. If a business is regarded by us as very risky and if we are not that comfortable about it making a repayment claim, we can look for a bond for the amount of the claim. It costs businesses a lot of money because they have to pay for the bond in a bank. With regard to the point made by the Deputy, it is not something we use very frequently because it imposes a significant cost on a business which may well be only in start-up phase. We use VAT bonds very occasionally and in a particular case when we believe there is a real risk. Quite often what happens to the chancers is that they de-register when we look for a bond. They do not pursue the registration or the repayment claims. In that sense, it is useful but it can only be used very sparingly because it is a real imposition on business.

Deputy Seán Fleming

I will ask the delegation from the Department of Enterprise, Trade and Employment to comment. Bonding systems are widespread and not new. I note that more than 900 directors have been restricted or disqualified by the High Court for dishonest or irresponsible behaviour arising from liquidations. Have the Revenue Commissioners a list of such persons and, if so, who monitors it? If I were to set up with an employer registration number tomorrow, in order to employ somebody, what checks would be carried out on me before Revenue issued me with an employer registration number for PAYE deductions?

Mr. Vincent Madigan

The Deputy has asked two questions. The firsts relates to the suggestion a company might have to put up a bond. I have two observations on that suggestion. Company law provides the general framework within which companies are incorporated and operate. It does not deal with the micro-management of the business concept. Coming up with such a proposal in a company law context would seem——

Deputy Seán Fleming

In a trading context, not a company law context.

Mr. Vincent Madigan

There is no requirement in company law dealing with the trading aspect. On the trading aspect and purely from the point of view of the enterprise side of the Department, this would be moving into the space of imposing a burden on a business when it is being established.

Deputy Seán Fleming

The burden is already €115 million. The taxpayer is paying rather than businesses.

Mr. Vincent Madigan

No. I understood the Deputy to be saying that when every company was incorporated and before it could commence trading, it would have to put up a bond to cover the initial operations of the company. From a company law concept point of view, company law does not deal with that aspect.

The other question asked by the Deputy was about restrictions and disqualifications. As I mentioned, those provisions were put in place in the Companies Act 1990 but it is really only since the establishment of the Office of the Director of Corporate Enforcement that they have been actively pursued. I will defer to my colleague, Mr. O'Mahony, who will describe what has been happening in that regard. The Deputy asked, in particular, about where information was held on restricted and disqualified individuals.

Mr. Conor O’Mahony

As indicated in the departmental response to the committee, in the region of 900 directors have been restricted or disqualified on foot of the regime in place to review the actions of insolvent companies. The number currently restricted is around 650 because the restrictions last for a period and some would have expired at this point. The details of all the names are listed on the CRO website; therefore, it is publicly available information. The information is also routinely published in the annual report of the Office of the Director of Corporate Enforcement and widely available. The office also keeps track to some extent of incidences where a restricted person has continued to be involved with company directors and not complied with the conditions of the restriction. There have been cases where the office has sought to take action against such persons as it is a criminal offence to so do. However, it is difficult to establish but there are provisions available to deal with such a case.

Deputy Seán Fleming

I have another question for Ms Feehily. I refer to people who set up companies and to which Ms Feehily referred in her letter to the committee last summer. If we were to change the legislation to make those directors personally liable, given that they set out to deliberately delay or withhold, would they not organise themselves to ensure there would be nothing to take from them? There may not be an answer but I ask the delegation to make a guess. If we were to go after company directors in respect of the sum of €115 million, how much would we collect? It is probably the case that such persons would arrange their affairs in such a way that they would not have many assets held in their own names. That is how such people operate, the nature of the particular beast. They will certainly not be caught by a new technical requirement that would make them personally liable. I am sure they have been through that revolving door before. Even if we were to do so, is there not a high risk they would organise themselves to get around that aspect?

Ms Josephine Feehily

As the Deputy said, I do not know if I can give him the answer to that question. The nature of the person who will take such action is that he or she will seek to organise his or her affairs in order that he or she will not have a liability. That is probably a fair comment. With the various programmes, in particular, the phoenix and commonality programmes, we aim to create a barrier to make people stop and think about whether they want to take such action and consider the personal consequences. As I said, it is about prevention and is not a cure by any means. That behaviour will not be cured. We are trying to ensure it does not extend; we put a line in the sand in that regard. Our approach is through the phoenix and commonality programmes where there is a sharp response to persons who appear a second time. They will be immediately monitored if they miss a payment and a return. This is what the current law allows. We aim for a sharp response in order that more people will not think they can do the same and will reflect on the issue of personal liability before they do so. I fully agree with the Deputy that there will always be people who will not want to pay anybody.

Deputy Seán Fleming

Of the fiduciary taxes written off last year, how much can be attributed to individuals who deliberately set out to do this?

Ms Josephine Feehily

My colleague, Mr. Gerry Harrahill, might have a view on that issue.

Deputy Seán Fleming

That is the group of people about whom we are really talking. The other cases may involve businesses which fell on hard times and are no longer operable. There might not have been any deliberate attempt to do this before the business collapsed. We are trying to go after the people who do this deliberately.

Ms Josephine Feehily

The Collector General, Mr. Harrahill, might have an opinion on the matter.

Mr. Gerry Harrahill

There is a crucial distinction to be made. The vast majority of the tax written off last year related to genuine cases of business failure, in which there was no deliberate attempt by the company or individual concerned to run into difficulties. Despite their best intentions, they ran into difficulties and ended up with debts they simply could not meet. I estimate that between €1.5 million and €2 million of the overall debt the Revenue Commissioners wrote off last year arose from cases that would have been monitored in the phoenix and commonality programmes. The relevant proportion of the 0.29% — the amount of tax at issue in phoenix and commonality programme cases — is decreasing. Much of the money collected on foot of phoenix and commonality programme cases comes in specifically because such cases are closely monitored. It is clear that if we divert our attention from such cases, the people in question will not pay. When the chairman of Revenue Commissioners spoke to the committee about the instances of deliberate action, she was speaking about deliberate attempts to delay and frustrate the Revenue Commissioners' work, including enforcement action, as distinct from fraud.

Deputy Seán Fleming

Is Mr. Harrahill saying between €1 million and €1.5 million of the €115 million came from——

Mr. Gerry Harrahill

Correct. It came from phoenix or commonality programme cases.

Deputy Seán Fleming

It is a smaller figure than I would have thought at the outset.

Mr. Gerry Harrahill

Yes.

Deputy Seán Fleming

Do the Revenue Commissioners need additional powers to help them with their commonality and phoenix programmes? Could we recommend the introduction of such powers? Is it simply a question of putting more people on the case?

Mr. Gerry Harrahill

We need to maintain a focus on these cases for the reason I have mentioned. If we do not maintain such a focus, I guarantee that the write-off figure will increase dramatically in a short space of time.

Deputy Seán Fleming

I assume everyone shares my feeling that there is probably a greater risk of people operating in the black economy instead of registering with the Revenue Commissioners. I suspect that will begin to become a bigger issue this year and next owing to the nature of the economic situation. It must be a higher risk issue this year and next than it was in previous years.

Mr. Gerry Harrahill

It is a higher risk issue. In the last 12 months we have noticed an increase in the number of phoenix and commonality programme cases emerging. They are all encompassed by our dedicated monitoring programme.

Deputy Róisín Shortall

I welcome our guests. I would like to ascertain what is known about the write-off of €115 million in fiduciary taxes last year. What analysis has been made of this huge loss to the State? Have the Revenue Commissioners examined the matter in detail to establish whether many of the directors in question would have been on their list, for example, in the cases of the phoenix companies they were pursuing? Do the officials know whether many of the directors offended in the past?

Ms Josephine Feehily

As the collector general said, it is important to recognise that the vast bulk of the money written off — approximately 60% by value — relates to businesses which went into liquidation, receivership or bankruptcy, or ceased trading with no assets. The vast bulk were business failures — there is no two ways about it. As the collector general said, it is probable that €1 million or €2 million came from the phoenix and commonality programme cases we were monitoring; in other words, cases that had offended previously. It is quite a small proportion of the €115 million about which Deputy Fleming spoke. Approximately €1.2 million of the total relates to cases where there were previous offences — there was either a common director or the entity had existed previously under a different name.

Deputy Róisín Shortall

Does Ms Feehily know how many directors the Revenue Commissioners would have been watching or had on their list?

Ms Josephine Feehily

I cannot give that information off the top of my head. If we think of it while we are discussing——

Deputy Róisín Shortall

Would it be a significant number?

Ms Josephine Feehily

It could not be, given that such a small amount of money is involved. Approximately 1,200 or 1,300 cases are under commonality programme scrutiny, which means common directors are involved. I can tell the committee how much money is involved in such cases. If the figure is between €1 million and €2 million, it would be quite small.

Deputy Róisín Shortall

Do the Revenue Commissioners have figures for this year? I assume the situation is changing drastically in the light of the economic climate.

Ms Josephine Feehily

The write-off to date——

Deputy Róisín Shortall

I wonder if the Revenue Commissioners have any indication of how things went in the first six months of this year.

Ms Josephine Feehily

The number of cases will certainly increase this year. The number of liquidations is up. The total write-off figure for the year to date is €151.316 million. I am not sure whether "to date" refers to the end of August or the end of September.

Deputy Róisín Shortall

Is that the figure for this year to date?

Ms Josephine Feehily

Yes.

Deputy Róisín Shortall

It can be compared to a full-year figure of €115 million last year.

Ms Josephine Feehily

The figure of €115 million relates to fiduciary taxes. The equivalent figure for last year was almost €129 million.

Deputy Róisín Shortall

Are they all write-offs?

Ms Josephine Feehily

The total figure for last year for all taxes was almost €129 million. This year's figure to date, for approximately three quarters of the year, is €151 million.

Deputy Róisín Shortall

Do we know what the fiduciary taxes element of that figure is?

Ms Josephine Feehily

I do not have that figure with me. I know that €101 million of it was due to liquidations, receiverships and bankruptcies. A further €30 million was due to cessations of trading. Approximately €131 million is accounted for in these categories. This year's figure is running ahead of the figure of 60% of write-offs due to liquidations last year. I am sure my colleagues know better than I do that the number of businesses failing and going into liquidation is growing on a weekly basis.

Deputy Róisín Shortall

We know that the single largest write-off last year was €9.9 million. It is hard to know how such a huge figure could have arisen, or how it got to that stage. I am surprised people have not ended up in prison because of it. I suppose we always have to ask why more people do not end up in prison. I would have thought that the law had been sufficiently strengthened. Can Ms Feehily tell us something about how that case was detected?

Ms Josephine Feehily

I will ask the collector general to take the Deputy through it in detail. In essence, it was an unusual situation. I have described the things that can happen in a business. In this case, the business seems to have deliberately sent in returns with the wrong amounts. At the end of a certain period, it sent in a return with a massive balloon payment. That is the essence of the matter. It was making returns with the wrong amounts. I ask the collector general to take the committee through the case in some detail.

Mr. Gerry Harrahill

As the chairman of the Revenue Commissioners said, the firm in this case was registered for VAT, PAYE and PRSI and had a generally compliant record. Near the end of 2007, it submitted supplementary returns for periods in respect of which returns had already been made. These additional returns gave rise to a substantial part of the debt of €9.9 million ultimately written off. As a result, the Revenue Commissioners formed the view that the company was insolvent. As a consequence of its behaviour, it sought to have the company liquidated and a liquidator was appointed in 2008.

The issues in relation to that company are still ongoing because the liquidator going in is actually the start of the process as distinct from the end of the process. It would be fair to say that it is a case that Revenue has a keen interest in as a member of the committee of inspection. I would not like to comment at this stage as to what the final outcome would be, but certainly Revenue would be looking to see whether there would be options arising from the liquidation to bring a case to have the directors concerned restricted or disqualified.

Deputy Róisín Shortall

What was the timeframe on the debt?

Mr. Gerry Harrahill

The timeframe in the debt would have been around 2006 or 2007, so it was quite recent. It was in the context of a receiver being put in that the supplementary returns arose. That is what gave rise to the additional amount of debt in the case.

Deputy Róisín Shortall

I wish to ask about the 500 companies on Revenue's phoenix monitoring programme. How many of these companies have gone out of business since Revenue established that programme?

Mr. Gerry Harrahill

There is a combination of outcomes from the phoenix programme. There are those who because we have them in the phoenix monitoring programme and know that they are in it become compliant and stay compliant. At the end of September of this year our view would be that close to 60% were fully compliant. Of the 500-plus that are in that monitoring programme, in excess of 60% would be fully compliant and we would not have a concern or an issue about them, but we would keep them under close scrutiny.

There are two outcomes that arise from Revenue's actions in dealing with the cases. One is that they are forced to be compliant. That may involve the threat of action by Revenue or actual action in the form of some type of enforcement and sometimes the threat of liquidation action. What is definitely a feature in terms of the phoenix programme is where the company will realise that Revenue is serious and will voluntarily cease operations or will itself invoke voluntary liquidation. It is not always the case that the outcome is a Revenue liquidation. It can be that the company decides it is not worth the effort because it is simply not going to be allowed to avoid payment or delay payment and that enforcement action follows fairly rapidly.

In terms of the phoenix programme last year, I would say that close to 50 would have ceased to trade voluntarily because of the close monitoring and probably a dozen or so would be cases where Revenue would have taken action in terms of heading down the liquidation route. So about 50 out of the 500 would have voluntarily ceased.

Deputy Róisín Shortall

How many of those would have had repeat offences?

Mr. Gerry Harrahill

The bottom line is that they are in the phoenix programme because they have a track record or history of delayed payment or non-payment, or deliberate efforts to frustrate the collection effort. It would be fair to say that the 500 that are in there have had a track record. The 60% that I mentioned are ones that have changed their behaviour. As the Revenue chairman said earlier, if they keep a track record of positive behaviour for a period of two years, we then take them out of the programme. If they fall off the rails again we will put them back into the programme. By definition they are in there because they have a bad track record and the question of what happens to them in there depends on whether they become compliant and stay compliant or we have to take action against them.

Deputy Róisín Shortall

Is there any comparable system of tracking errant directors?

Mr. Gerry Harrahill

There is to the extent that the trigger in terms of identifying the cases is common directors. So ten entities, the examination that Revenue will take at the registration stage is to see what directors are involved in that particular business and whether those directors have been linked to any other businesses that have had a tax compliance issue. That is the basis on which we identify them as potentially suitable cases to come into the phoenix or commonality programme.

Deputy Róisín Shortall

I wish to ask about the delay in taking action against companies. We have data on VAT written off. In 2008, some 68% of the VAT written off was more than a year old. The Comptroller and Auditor General's analysis of the age profile of debt shows that 45% of income tax was at least five years old. That raises the question of whether Revenue acts in a sufficiently speedy manner. Its collection systems seem to be generally fine. However, where debts come to its attention, the impression is that the situation is left to fester for too long before it uses its enforcement powers. Is that a fair criticism? Is there a need for Revenue to take tougher action at an earlier stage?

Ms Josephine Feehily

I do not think it is a fair criticism in general, but we would always have to acknowledge that there can be the occasional case where with hindsight we say, "Oh my dear, we should have spotted that a lot earlier." That is inevitable.

For the committee's information it is important to explain how the debt arises and how the debt is recorded. Take, for example, the Deputy's comment about income tax. There is a difference — this is reflected in the appropriation accounts and in the comptroller's report every year — between the debt on record and the collectable debt. For last year about €600 million of the debt was not collectable because it was under appeal. When one sees a debt recorded back into the past, a big proportion of that — particularly in income tax — will be debt which went on record maybe after an appeal, as a result of an audit or as a result of a special investigation, but it is attributed to the year it belonged to for proper accounting purposes. So the fact that it is debt on record, for example for 2005 or something like that, does not mean that we are only getting around to looking for it now.

If one looks at the debt that is over three years old, about half of it is what we call under collection. Under collection means that it has actually only come into the collection system in recent times because of these various events. About 77% or 78% of the debt in 2008 was less than three years old. Some 44% or 45% was in-year debt. So if we have 44% or 45% in year, and less than 77% or 78% in three years, I do not think that is bad. That is why I say I do not think it is fair criticism in general.

The second point is important to understand in relation to our speed of intervention. A debt can arise very quickly in the fiduciary tax area in particular, where a modest enough business has VAT liabilities — maybe it is selling high-value goods and it has a number of staff. If we take, for example, this month a business whose VAT for September and October is due in November and its PAYE and PRSI for October is due in November, that could be €100,000 in quite a modest business. If it does not arrive at the end of November we shall start looking for it in December. By then a further €50,000 has gone on the record because November's money has gone onto it. By Christmas it can be €200,000. So very quickly in a fiduciary tax situation a business that has never had a problem with us before — if it has had a problem we might be in sooner — and hits a trading difficulty in all innocence can find that in a period of two or three months the debt can be €200,000 or €250,000 for quite a modest business. That business is struggling to stay in business, very mindful of the number of jobs that are there. More likely than not these days, the question to Revenue will be to give them more rather than less time. That is a fact of the climate we are in. In terms of current debt it can happen very quickly.

Deputy Róisín Shortall

What about the representations received from the company——

Ms Josephine Feehily

We have been very open about this. We have been saying to businesses that it is in everybody's interests that businesses remain compliant. That means we want them to keep making their returns. If they are having difficulty paying, we want them to come and talk to us before we talk to them. We have experienced a good response to that, especially from the SME sector. Businesses are coming in with their returns and saying they cannot pay it or cannot pay all of it. We are concluding arrangements with them to spread their payment into the future. For example, at the moment we have about €139 million of tax debts under instalment arrangements. About €50 million of that is due to what we call normal instalments because we always have instalments. However, €85 million and 700 businesses are under special arrangements. They have asked for time to pay outside the normal instalment rules. We take a view about the viability of the business and their good faith and track record of compliance and we are giving them a longer time to pay. That is, we believe, the sensible response at the minute. I do not think anyone would thank us for putting otherwise viable businesses out of business at the moment.

I apologise for the long answer but it is important, in commenting on the age of the debt, to understand that some of the older debt is put on record in the year it belonged to and therefore looks older than it actually is. Secondly, in relation to current fiduciary tax debt, it can arise very quickly and we have to be careful about moving to enforce too quickly in the current climate. It is a balance. We and, in particular, the Collector General's staff struggle every day with a dilemma to take a judgment about which one of the businesses we give a chance to pay over time will blow up in our face. That is where we find ourselves.

Deputy Róisín Shortall

The Comptroller and Auditor General first drew attention to this problem in 2001 and this committee and its predecessors have been pursuing it at regular intervals. I note the generally supportive view taken by Revenue in this regard. Does the Secretary General have figures on the amount of fiduciary taxes written off since 2001?

Ms Josephine Feehily

I am sure I can get the figures.

Deputy Róisín Shortall

It is a significant sum. The committee has a concern that this issue was raised as a serious problem in 2001 and for one reason or another no action was taken on it. We continue to lose significant amounts of revenue from the Exchequer because of the failure to take action. I am interested in having a figure on what has been written off since 2001.

I will now address the Department. Looking back over all of the papers that have been provided to the committee since this matter was first raised in 2001, the Department of Enterprise, Trade and Employment appears to have been the main stumbling block to taking any action on the issue. The Department appears to place obstacles in the way of changing the law to tighten up on the situation. It is not clear what the Department is proposing to address the problem. I assume it recognises that the problem is significant. What does it propose should be done about it?

Mr. Vincent Madigan

As I have already stated, company law is and has been in a state of evolution for quite a long time. If one goes back as far as the Companies Act 1990, the basic genesis of the legislation went back even further. It went back to tackle the problem of the phoenix syndrome which had been identified even further back in the 1980s. The main provisions that were put into the 1990 Act were provisions that dealt with the restriction of directors of companies that went into liquidation and where a new company was formed out of the ashes which seemed to be exactly the same people doing exactly the same thing, having walked away from the debts that were owed by the original company. That was what I was explaining earlier. When the provisions were put in place in the 1990 Act, an enforcement office was not in place. It was as a result of the compliance and enforcement committee that recommended the establishment of the Office of the Director of Corporate Enforcement that the——

Deputy Róisín Shortall

Is Mr. Madigan saying that is the solution?

Mr. Vincent Madigan

I am trying to explain how the problem has been addressed. It has always been addressed from the point of view that there are certain basic concepts. The basic concepts are the ones I mentioned at the outset.

Deputy Róisín Shortall

I accept that but does Mr. Madigan accept that there is still a serious problem?

Mr. Vincent Madigan

The problem is very serious. Yes, I accept that.

Deputy Róisín Shortall

Does Mr. Madigan accept that attempts have been made by Revenue, this committee and recommendations of the Comptroller and Auditor General to deal with the problem and that the Department has always raised objections to proposals to deal with it?

Mr. Vincent Madigan

What I have been at pains to point out is that there have been a number of developments in the company law area, for instance, the Office of the Director of Corporate Enforcement. As I was about to explain, that office and what it has been able to do in more recent years in relation to both restriction and qualification has meant that the ability of people to use the corporate vehicle has become less easy, if I can put it that way.

Deputy Róisín Shortall

That is to suggest the problem has been dealt with. The problem continues to be significant and the figures being written off continue to rise.

Mr. Vincent Madigan

In the paper the Department submitted to the committee we point out that the Office of the Director of Corporate Enforcement works hand in glove with liquidators, in the first instance, but also with the Revenue Commissioners.

Deputy Róisín Shortall

That is fine but the figures speak for themselves. These efforts have not been very successful.

Mr. Vincent Madigan

The number of restrictions that have happened with the intervention of the Office of the Director of Corporate Enforcement shows that there is more enforcement in the area.

Deputy Róisín Shortall

While there may be more restrictions, the amount of money lost to the Exchequer continues to rise. The job is not being done terribly well.

Mr. Vincent Madigan

With respect, the improvements that have been made in company law have enhanced, from a company law perspective, the whole area of company law and compliance with company law is now much better. I think what the Deputy is talking about goes more into the area of how the Revenue pursues the collection of the taxes in the context of the legal environment that is in place.

Deputy Róisín Shortall

We are talking about a situation where there seems to be a relatively lax legal environment as regards the legal responsibilities of company directors. This has resulted in significant amounts of public money which were due in taxes being written off every year because it has not been possible to collect them owing to the lax regime in place. That is generally accepted. It is difficult to deny that given the level of write-offs we continue to see. Is Mr. Madigan suggesting the current position is satisfactory? Many of us would contend it is not satisfactory. If that is the case, what does the Department propose to do to address the issue? In light of the Department's objections to the committee's proposals to deal with the issue, what does it propose to do to tackle the problem?

Mr. Vincent Madigan

With respect, the company law review group, which is the body that looks at company law, has worked hand in glove with the Department, such that over recent years all of company law has been looked at. The drafting of the consolidated companies Bill is in hand and the legislation should come in next year.

Deputy Róisín Shortall

We have been told for some time that the Bill will be introduced next year. It appears to be endlessly on the long finger, which is not much use when I have difficulties now. Despite the obvious difficulties over recent years, there has been a failure to take any action.

Mr. Vincent Madigan

I do not think there has been a failure on the part of company law. Company law has examined what proposals have come forward, and company law and where it is and should be is the context in which we operate.

Deputy Róisín Shortall

The Department's basic objection over the years has been that if we tightened up and introduced changes, as the committee proposes and as is outlined in the paper from Frank Mitchell, it would put off investors. We know from the detail provided that there is a far tighter regime in operation in respect of fiduciary taxes in the United States, for example. Therefore, the argument does not really hold up in that regard. It is hard not to conclude that the Department of Enterprise, Trade and Employment is soft on errant directors.

Mr. Vincent Madigan

I certainly could not accept that. If one looks at the way the law has been re-enacted and the way in which new law has been brought forward, one will see that if one is the director a company which goes into insolvent liquidation and that if one is restricted, certain restrictions will apply if one becomes involved with a new company. If one continues to be involved in other companies which have not gone into liquidation, one must comply with more onerous requirements. No, we are certainly not soft on errant directors.

Deputy Róisín Shortall

I will ask a specific question. What is the Department proposing in order to protect public money and ensure there will not be a loss of public money to the extent we have seen in recent years, during which the loss was in excess of €100 million a year. The figure is likely to be higher this year and in coming years. What is the Department proposing to do about this loss of public money?

Mr. Vincent Madigan

I suppose the way I would like to answer that question is by saying we have a very specific remit — company law. We are putting in place the best company law there is. That does not address all the activities——

Deputy Róisín Shortall

Is that company law that will introduced at some point in the future?

Mr. Vincent Madigan

No, I am talking about the company law we have brought to the stage it is at now.

Deputy Róisín Shortall

It is not dealing with the problem.

Mr. Vincent Madigan

What I am really saying is the company law regime in place is always being improved. It remains under examination and will continue to be improved.

Deputy Róisín Shortall

That is not a good enough response. There continues to be a significant loss of public money because of our failure to tighten the regime covering the responsibilities of company directors. The figures speak for themselves. What does the Department propose should be done to save this loss of public money every year?

Mr. Vincent Madigan

With respect, what the Deputy is talking about is a Revenue problem more than a company law problem. When proposals are made, they are considered in the round and everything and everybody feed into the process. If there is a proposal on the table, that is how it is examined. A policy decision is taken by whatever Minister is promoting the proposal. Other Ministers feed into the discussion. That is where the ultimate decision is taken.

Deputy Róisín Shortall

While an issue may arise regarding policy, Mr. Madigan's Department has made arguments against what this committee was attempting to do on three occasions, in 2001, 2004 and again this year. The Committee of Public Accounts has sought to tighten the regime covering company directors but the Department has blocked it.

Mr. Vincent Madigan

It is not the case that we have blocked it; we have pointed out from a company law perspective——

Deputy Róisín Shortall

The Department argued against taking action in this area, or taking the action the committee wanted to see taken.

Mr. Vincent Madigan

However, from a company law perspective, the issues we point out are fundamental.

Deputy Róisín Shortall

They are.

Mr. Vincent Madigan

If one is talking about breaching the concept of limited liability, one must be conscious that it can have an impact. If one is to put directors on hazard of being held personally liable for the debts of the company, that will have consequences. As far back as 1990, at least four or five provisions were built into company law, in respect of which directors could be held liable. What happens is that, in the particular circumstances arising, the issues are brought before the court which adjudicates, on the basis of the information put before it, on whether the directors are to be held personally liable. That is the way in which in company law the directors may be held personally liable.

On the basis of the schemes we have seen so far – I am talking purely from a departmental point of view as distinct from a policy point of view – there is a difference in what is being proposed. We are at pains to point out that if a mechanism can be devised that will respect the approach available in company law, we will certainly be open to looking at it.

Deputy Róisín Shortall

Does Mr. Madigan accept that Mr. Mitchell's approach has been fair? He has considered the regime in place in a number of other countries. He seems to indicate that Ireland's regime is very much out of line with the regulatory regimes in place in many other developed countries. Does Mr. Madigan accept that Mr. Mitchell's proposal, based primarily on the Australian model, is reasonable and that it would not be overly restrictive in terms of companies using fiduciary taxes to deal with short-term cash flow problems? After a certain period, unless the companies are paying the taxes they owe to the State, the issue of personal liability would arise. Is the proposal not a fair compromise on the basis of the different regimes in place?

Mr. Vincent Madigan

As I said, it is not for me at this point to say it is or is not a workable proposition.

Deputy Róisín Shortall

I am asking Mr. Madigan whether it is because on previous occasions when proposals were made, he knocked them and said they were not reasonable. This is the third attempt of this committee to deal with the matter and it has made proposals thereon. Does Mr. Madigan believe they are reasonable?

Mr. Vincent Madigan

One must consider the matter in the context of company law and the submission we sent to the committee. If one looks at the submission, one will see we have pointed out there are some very basic contraventions of company law principles in what is being proposed. The most basic is that the committee is talking about imposing personal liability on directors for the debts of the company. The company is a separate legal entity. It is the entity which has been in business and the one which has contracted or is responsible for the debt.

Deputy Róisín Shortall

Does Mr. Madigan believe that is unreasonable?

Mr. Vincent Madigan

What I am saying is that in the company law context, if one removes the protection of limited liability just like that, one is moving into a totally different area.

Deputy Róisín Shortall

The protection in place is problematic and costing the State a lot of money.

Mr. Vincent Madigan

In the overall scheme of things one must have regard to the 99% of companies which are compliant, as Deputy Fleming suggested. If the proposal is to remove or threaten to remove the protection of limited liability in a small number of instances, one undermines the very concept of limited liability.

Deputy Róisín Shortall

It is not a small number of instances. I do not know where Mr. Madigan got the compliance figure of 99%.

Mr. Vincent Madigan

I believe Deputy Fleming mentioned that percentage.

Deputy Róisín Shortall

Mr. Madigan has used the figure. Is it correct?

Mr. Vincent Madigan

I was repeating the figure Deputy Fleming used.

Deputy Róisín Shortall

Members of the committee may make different points. Will Mr. Madigan state whether it is correct that 99% of companies are compliant?

Mr. Vincent Madigan

I would not have the information because the Deputy——

Deputy Róisín Shortall

Why does Mr. Madigan quote a figure if he does not know whether it stands up? He is the person who should know the correct figure.

Deputy Darragh O’Brien

How many companies are associated with last year's figure of €115 million?

Mr. Vincent Madigan

I do not have that information. It would be available from the Revenue Commissioners.

Deputy Róisín Shortall

In addition, there is a register of 500 companies which must be watched because of serious questions being raised about their identities. I will leave it at that. The Department's response has been entirely unsatisfactory.

Deputy Jim O’Keeffe

I missed the opening statement but read it in advance. I was attending the opening session on Committee Stage of the National Asset Management Agency Bill 2009. My first reflection is that the moneys in question at this meeting are relatively small beer compared to the €50 billion to which the taxpayer will be exposed arising from that Bill. Let me raise a couple of issues pertaining to both the Revenue Commissioners and Deputy Fleming's comment. Am I right in thinking that of the €115 million we spoke about last year, the figure associated with phoenix type companies was between €1 million and €1.5 million? Is Revenue happy with the development of the phoenix monitoring programme? Has it enough resources? Do the Revenue Commissioners feel they are keeping as close an eye as is reasonable?

Ms Josephine Feehily

It is an unusual notion to be happy with it. The success factor is if we actually get them – if they are bad guys – through a two-year hothousing to become compliant. In that sense, it is working.

Cases are being identified at registration. The number of cases has gone up so it is a funny measure of success. As I stated in my opening statement, we will carry out a full evaluation of the programme because it has been in place for some time. It also arose from the committee's 2006 report which recommended an evaluation. No doubt we will find ways of improving the programme. However, we are happy it is doing its job. It is identifying cases at registration because the numbers are growing. We are happy, as the Collector General said earlier, that the hothousing I described – the very close monitoring – is causing some of them to go into voluntary receivership early. That is the successful outcome we wish because we want an early and sharp response.

The commonality programme is a much newer programme in which we link entities through a director or directors. It has been in place since 2003 and it is also growing. We are concerned at the number of businesses and the amount of money that is under that hothouse regime and, if it keeps growing, whether we will be able to keep up the programme as it is very resource-intensive. At the moment, I am content the programmes are doing what they are supposed to do.

Deputy Jim O’Keeffe

We shall use the word "content" rather than "happy." The other side of the coin, apart from Revenue fulfilling its mandate to collect moneys, is about the jobs that may be affected by liquidations. Have we an assurance that when decisions are made on liquidations, the issue of jobs is taken into account by Revenue while pursuing its mandate? Using the word again, is Ms Feehily content that a balance is struck in this regard?

Ms Josephine Feehily

That is a tricky dilemma. It is a fine point and depends on where one is sitting. I have no doubt there are businesses which think we are not being fair. One of the drivers for our definition of fairness is fairness across the economy. We have to be careful that the treatment we give does not create a competitive advantage for a non-compliant business, even if there are jobs in the equation.

The first point is that if a business has a problem, it must get in touch and discuss it with Revenue. For those businesses that talk to us, we take account of every matter in the round. If a business has a track record of compliance and can show a business plan to trade out of its situation, jobs will be discussed as part of the process. If a business does not talk to us, it is hard for us to then take that balanced view. We believe we are doing everything we can to be as fair as we can to viable businesses that are facing cashflow or liquidity difficulties because of the restriction of credit elsewhere in their normal business model. We do find some businesses prefer to go into denial which means we go into enforcement mode. By then, it can be a bit too late and the jobs may go.

Deputy Darragh O'Brien took the Chair.

Deputy Jim O’Keeffe

If there were a helpful message to leave this committee, it is that if a business has difficulties it should talk to the Revenue Commissioners.

Ms Josephine Feehily

Yes. As I said earlier, we have worked very closely with the Small Firms Association in this regard and it supports this approach. It is not just Revenue talking to itself. The Collector General and I speak to business groups, encouraging them to take this approach. It is a message we would welcome.

Deputy Jim O’Keeffe

Would Revenue send a message out that in those circumstances a business which talks about its problems with Revenue will not have its head chopped off but get a fair chance?

Ms Josephine Feehily

Precisely. Not only will it not have its head chopped off, if it has a viable story and can look forward to trading out of its difficulties, it will find Revenue receptive to spreading its payments into the future.

Deputy Jim O’Keeffe

Has the Office of the Director of Corporate Enforcement noticed that its efforts are acting as a deterrent against people aiming to milk the system?

Mr. Conor O’Mahony

Yes, we have. This has been an issue of concern for some time and is not unique to Ireland. Every tax regime struggles with the concept of phoenix companies and the abuse of limited liability. Limited liability creates an exposure and people can walk away from debts, sometimes legitimately through genuine business failure, and sometimes not. Limited liability also brings significant economic benefits where it works. It is a question of having the right balance of sanction in cases where people seem to abuse it.

Our office was established on foot of 2001 legislation. Shortly after that we started to work in this area, particularly on liquidations. As a result, many directors are restricted and in some cases disqualified. We have conducted market research among company directors and their legal and accounting advisers which indicated there is a much stronger awareness of sanctions under company law which can and will be applied. As a result of this, people believe there is far better compliance in the marketplace.

That does not mean the problem is eliminated. There are a range of different issues that determine what goes on such as the strength of the collection systems. The Revenue Commissioners have outlined the steps they have taken in the phoenix and commonality programmes to tackle the issue. It will never be eliminated. It is more a question of containing it and keeping it proportional in a manner that does not frighten people off becoming involved in or stifle business. It is a delicate issue.

Several years ago, the Office of the Director of Corporate Enforcement was involved, through an international association, in a study of phoenix companies in various jurisdictions. It might be useful to provide that report to the committee and have it circulated to members. It is a type of survey, but the document is well summarised. It highlights the fact that this is a perennial problem, and perhaps the essential point of the report's conclusion was that it is a thorny issue. It is very difficult to distinguish between genuine business failures and people who might have another go. We always hear that the Americans embrace failure, for example. The European Union is running what it calls a "second chance" initiative, which is all about encouraging people who fail in business to go again, because they possess the requisite skills and perhaps they can learn from that. Again, it is a question of distinguishing between that category and people who are deliberately seeking to abuse the system — and trying to get the balances right, in that regard.

Deputy Jim O’Keeffe

I have always believed that for every complex problem there is a simple solution that does not work.

As regards the Office of the Director of Corporate Enforcement, one of the stronger powers it has is to haul directors before the courts and get them disqualified. Is that working?

Mr. Conor O’Mahony

We are doing that. In terms of direct intervention by the office, there is only a limited number of actions we can take in any given year. Ultimately, it is a very small office, with limited resources. In terms of insolvent companies the regime, as it exists, places most of the onus on the liquidators to take the actions. In a small subset of those actions, as well as looking for the restriction of the directors, they will also go further if particular malfeasance is involved and seek the disqualification of the directors. That happens in a small subset of the more extreme cases.

In terms of the company law regime, it is not all about our office taking action or requiring liquidators to take action. The law also establishes a whole set of rights for creditors to take action and provisions exist as regards fraudulent or reckless trading, for instance, that can be resorted to.

Deputy Jim O’Keeffe

There can be personal liability arising.

Mr. Conor O’Mahony

That is correct, but the onus is on the creditors in the event to take such initiatives through the courts in order to create that type of personal liability. That is not to say that they are easy to obtain, because the courts tend to set very high bars for achieving personal liability in such cases, but those tools exist and may be used by those who believe they are being unfairly done by debtors.

Deputy Jim O’Keeffe

This is more a question for Revenue, perhaps, rather than the Office of the Director of Corporate Enforcement. As regards the alleged merits of the Australian system, is it not true to say that it is not particularly effective? They serve the direct penalty notice system, but it triggers an immediate liquidation rather than producing any benefits. Would that be the view of Revenue?

Ms Josephine Feehily

Our knowledge of the effectiveness of the Australian system is quite limited. In preparation for the papers we sent a committee during the summer to find out about it. We suspect that the Deputy may be right, but we have not been able to establish that as a fact. Australian tax administration tends to put a good deal of information into the public domain as regards things that are working well. They have been coy about this one, and I am not saying that this necessarily means it is not working. We indicated that to the extent we had made inquiries we were not able to establish any data about its effectiveness. We just wondered whether it might have that problem.

Another noteworthy feature is that this regime has been in place since the early 1990s. Australia did not have VAT or GST in the early 1990s. Its only fiduciary tax was PAYE in effect, so there are various reasons it might not be as useful as they thought it might have been. However, I actually do not know. I am hoping that in the earlier part of next year, perhaps in the context of an OECD meeting, I might get a chance to ask my Australian counterpart face to face whether he has any insights into how it is working, because nothing is publicly available.

Deputy Jim O’Keeffe

If there was any tendency on our part to replicate the Australian system, I certainly would be very keen to have an assessment of the success or otherwise of the operation. There is no point in putting our head in a halter and just following blindly without having such as assessment. I believe it would be very helpful if we could get any information, either through Ms Feehily's efforts, the Department or Mr. O'Mahony's office. Any information would be helpful to us in that regard.

That leads me to the other area where it is suggested change should be made. I am attracted by the notion that we should adopt the UK system as regards PRSI, using the National Health Service's contributions model, and that this would mean a tighter regime. As I understand it, the amount of PRSI written off due to liquidations in 2008 was about €15.9 million. I gather the system in the UK is much tighter as regards PRSI-type contributions. I feel strongly that from every viewpoint the protections available to employees should be top priority. What sort of knowledge does Ms Feehily have of the UK system as regards PRSI?

Ms Josephine Feehily

We know about it and how it works. The most significant factor is that they use it very sparingly because they have recognised that it is quite an extraordinary power. It tends to be used very rarely, but it exists. It is the same notion as what we have been talking about, except that it is confined to national insurance contributions. It has a personal liability imposed on the directors.

Deputy Róisín Shortall

It this a deterrent power?

Ms Josephine Feehily

That was our view about it all along, that it is a deterrent. It exists on the books, and it has no proposals to remove it. Presumably, it believes it achieves an objective, but it does not use it often. To be fair, as regards the very narrow proposal we made, we never intended to use it very often. To that extent, we know it is on the Statute Book and that it uses it very sparingly.

Deputy Jim O’Keeffe

In that situation, if the special commissioner finds that a fault was due to irresponsible or imprudent behaviour on the part of the director, there is the possibility of personal liability.

Ms Josephine Feehily

There is a possibility, that is correct.

Deputy Jim O’Keeffe

While accepting that all the evidence suggests it is not a power that is used too often, does Ms Feehily believe it would have a deterrent effect, by highlighting the abhorrence of such activity, for example, to a greater degree?

Ms Josephine Feehily

I suppose so. One other thing that might be worth mentioning before we leave the UK situation is the fact that Her Majesty's Revenue & Customs is an amalgam of agencies that were previously separated. The National Insurance Agency introduced that power, but has not extended it to the other taxes, either fiduciary or otherwise. That is probably a significant point to note.

As I said in my conversation earlier with Deputy Fleming, we believe there are people for whom no deterrent matters. However, if one can raise consciousness in the minds of a small number of people, the deterrent effect of having that extra bar, as it were, might make some people think twice. We would not have looked for it, had we not believed it would be useful. Having looked for it, we accepted the decision that emerged and accept fully that our perspective may be narrow and not pro-enterprise. I am not complaining about this, but we believed that it was worth a shot.

Deputy Jim O’Keeffe

My last question is for Mr. Madigan and the enterprise side of things. I presume the approach of his Department is very enterprise orientated, encouraging the flow of foreign direct investment into the country and the development of indigenous enterprise.

Mr. Vincent Madigan

While I come from the specific company law area, company law itself is always developed in a balanced way. We are always conscious of the other side of the Department that supports domestic enterprise and foreign direct investment. Any proposals developed in the company law area would contain input from the other sides of the Department, which would reflect any impact that proposals have on enterprise development.

Deputy Jim O’Keeffe

So the down sides of job creation and job maintenance would be a major factor.

Mr. Vincent Madigan

They would always be factors that have to be taken into account.

Deputy Thomas P. Broughan

Is it not very striking that the home of free enterprise, the land of the free and the home of the brave, is the very country that has a trust system for these fiduciary taxes? When I was my party's spokesperson on enterprise, Mr. Madigan's Department used to argue very strongly in favour of ensuring that US inward investment was not damaged by any company law changes that we make here. It is very striking that the Americans have such a transparent system in this area.

Mr. Vincent Madigan

We are always looking at what is done in other countries. In recent years, membership of the EU has meant that this has played a great part in the development of many of the company law provisions that have come in.

Deputy Thomas P. Broughan

Yes, but we have been influenced a great deal by the US, given that American inward investment is so critical, particularly in certain high-tech industries.

Mr. Vincent Madigan

Yes, but in proposals that are put on the table, it is always instructive to know the context in which they operate. What the Deputy says is true, and we will look to see what is done in other jurisdictions.

Deputy Thomas P. Broughan

It is an area the committee feels we should examine.

I wish to go back to the witnesses from the Revenue Commissioners. We are dealing with €115 million of these fiduciary taxes that had not been collected in 2008, of which 30% referred to 2007. Ms Feehily gave a figure to my colleague of €151 million so far for 2009. Would there be a total of €600-€700 million and heading for €1 billion if we went right back to the turn of the century? How many companies are we talking about?

Ms Josephine Feehily

As I said to Deputy Shortall, I do not have the data with me that goes back that far. We can get the write-off figures.

Deputy Thomas P. Broughan

We need to know that. From the work of the Comptroller and Auditor General, it seems to be the case that once a company goes past a year on these fiduciary taxes, then we are in big trouble. Ms Feehily claimed it was between one year and three years, but if a company gets past that period, we are then talking about uncollectible money. Is this not very significant? In a while we will debate the NAMA Bill and we will do so again next week. We are facing into a budgetary situation where if we had €1 billion or €1.5 billion of additional taxation, the kind of terrible choices facing the Government would not be as severe. It is very significant. We need to have this kind of information.

Vice Chairman

I wonder what timeframe the Deputy is looking for?

Deputy Thomas P. Broughan

I would like to go back to the turn of the century.

Vice Chairman

Are we going back to before independence?

Ms Josephine Feehily

I think he is talking about 2000 and 2001.

Deputy Thomas P. Broughan

We are in the 21st century.

Ms Josephine Feehily

I will get them and I will send them to the Deputy. I did not bring figures for nine years, but I would like to clarify something because some confusion is creeping into the debate. Of the amount of taxes written off, fiduciary or otherwise, the vast majority arises from liquidations, receiverships of bankruptcies. Two thirds of taxes written off came from these situations last year, and probably more will come this year. They are not all phoenix companies. Only €1 million to €2 million of the value of those written off taxes came from entities that we regard as phoenix companies, with the pejorative overtone that goes with that. A total of 728 companies were represented in the liquidation figures, but they may have been voluntary receiverships, creditors' liquidations or Revenue liquidations. They are not necessarily doing anything wrong. They are simply business failures.

Deputy Thomas P. Broughan

Yes, but we have not got our due fiduciary taxes. The Revenue has not managed to collect them for us.

Ms Josephine Feehily

I accept that they have not paid the tax liability, but it is important to distinguish between regular business failures and inappropriate behaviour by a phoenix entity, which is really where the abuse comes in. For such entities, the amount written off last year would have been at most between €1 million and €2 million. I will supply the committee with figures for the write offs back to 2000.

Deputy Thomas P. Broughan

I would also like to see the number of companies involved.

Ms Josephine Feehily

The number of companies will be there by definition.

Deputy Thomas P. Broughan

From the information provided to us, we were just looking at 11 companies where the write up was greater than €1 million, so it would be useful to have that additional information.

Ms Josephine Feehily

In the table on write-offs contained in the report of the Comptroller and Auditor General, the amount and the number of cases is displayed. Since there are 728 cases, then by definition there are 728 companies. The number is in the various tables, but we just call them cases.

Mr. Conor O’Mahony

I would like to comment on the issue of the honest business failure versus the malfeasance element. Our office reviews reports from liquidators in every insolvent liquidation. We essentially operate a filtering system in which cases go forward to the courts to determine whether the directors of the insolvent companies should be sanctioned. Our statistics show that in about 85% of cases there is genuine business failure and that there is no irresponsibility or dishonesty on the part of the directors. We are talking about a very small subset of people involved in companies that become insolvent who have behaved in an inappropriate manner. Within that subset, phoenix activity is one subsection. There are many reasons we consider that people should be sent before the courts and have their behaviour reviewed, and the existence of phoenix companies is just one of those. Therefore, phoenix entities represent a small subset of the liquidations that arise with liabilities outstanding.

Deputy Thomas P. Broughan

In the earlier part of the discussion, there was reference to 900 directors who were restricted or disqualified from being directors following an appearance at the High Court. How many of them were involved in the phoenix 500?

Mr. Conor O’Mahony

That is a number of individuals over a seven year period. I could not give the Deputy a breakdown of the factors that would have led to them being disqualified or being restricted. However, there is a range of factors involved, of which deliberate and conscious evasion of taxes over a period of time to fund a business would definitely be a very significant factor in that cohort.

Deputy Thomas P. Broughan

Have we got a connection between those 900 directors and the 500 phoenix companies to which we referred?

Ms Josephine Feehily

I cannot make a direct connection with those 500 companies but I can say that of the directors restricted in 2007, 24% of those restrictions arose in the context of liquidations where Revenue was the petitioner. We would petition the liquidation of a company and that would lead on to a restriction——

Deputy Thomas P. Broughan

Is it not true that Revenue only did that in 19 cases?

Ms Josephine Feehily

No, we petitioned in many cases, but 24% of the restrictions achieved by the Office of the Director of Corporate Enforcement——

Deputy Thomas P. Broughan

Did Ms Feehily not tell members there were 704 liquidations and that Revenue initiated 19 of them?

Ms Josephine Feehily

That data were in a different table which was included in the documentation I sent during the summer. The indication for liquidations initiated was a point in time figure, that is, how many we initiated that year, but it is important to bear in mind that the liquidation process can take time. The decision to restrict was taken in 144 cases in 2007 and of those, 24% arose from Revenue petitions. The corresponding percentage for 2008 was 40%. The other point to note in mixing the two figures is that a liquidation can be one event but there may be many directors. I am merely making a connection between our management of the debt programme. I cannot make a direct connection between the 500 companies and the 900 directors. I would expect the number in question to amount to no more than a handful.

Deputy Thomas P. Broughan

Can that information be ascertained for the committee?

Ms Josephine Feehily

We will do our best. The number involved will be quite modest. As the Collector General observed, in some 60% of phoenix and commonality cases, the companies concerned will ultimately become compliant, with another proportion going into voluntary receivership. The important point in terms of our overall debt management programme is that we are the petitioner in a significant proportion of cases that lead to directors being restricted. If there is a way for us to connect the phoenix companies in, the Deputy can be sure it is being done.

Deputy Thomas P. Broughan

Of the €1.8 billion running total of taxes Revenue has failed to collect, uncollected fiduciary taxes are a significant element of that. It is important the committee takes a strong view in this regard. It is a policy issue in respect of which we should make proposals to the Government. Does Ms Feehily accept that uncollected fiduciary taxes are a significant portion of that still very large figure of uncollected taxes to which the Comptroller and Auditor General referred?

Ms Josephine Feehily

There is no question about that. The figures clearly show that fiduciary taxes are a large element of uncollected revenue. Such arrears can accumulate very quickly in the current climate as increasing numbers of businesses find themselves in difficulty.

Vice Chairman

Under the Social Welfare Act 1993, employees' PRSI does not form part of the funds available for distribution. Has the Department or Revenue looked at bringing employers' PRSI into that net?

Ms Josephine Feehily

We have not looked at the issue in that way. I expect a change in this regard would involve the Department of Social and Family Affairs. The point I would make is that in a liquidation situation, especially these days, it is often the case that nobody gets anything. Under the current system, a super preferential applies to PRSI and the current year taxes are the next in order. Moving some of those taxes from preferential to super preferential would merely change the book work, but the same amount of money is involved. If employers' PRSI goes into super preferential, there will be less for the preferential, that is, the other fiduciary taxes. It is essentially a case of moving the money around. I am not aware that the issue has been examined in this precise way.

Vice Chairman

Will Mr. Madigan comment on this?

Mr. Vincent Madigan

It has not been raised as a specific issue by the Department.

Mr. Conor O’Mahony

On the issue of preference for State liabilities and so on, there has been a trend internationally to reduce preference for Revenue-type liabilities and issues of that nature. There are varying views as to what is appropriate in terms of maintaining a balance between the whole body of creditors in regard to preference. I am not familiar with all the details but I understand there have perhaps been issues of reducing the preference for taxes rather than employee contributions.

Vice Chairman

In her opening statement, Ms Feehily observed that Revenue and the Department of Enterprise, Trade and Employment each has a different role to play in this area and that each is coming from a different perspective in terms of trying to assess the viability of the businesses Revenue is currently auditing. As Ms Feehily acknowledged, there are companies that are of the view that Revenue is not being fair in its current actions. What is the process regarding attachment orders on company bank accounts which seem to be flying about the place, as it were, at the moment?

Ms Josephine Feehily

I will ask the Collector General to explain in detail what is involved. However, I would emphasise that it is a power we use very sparingly. I assure the Vice Chairman that such orders are not flying about the place.

Vice Chairman

More have been issued this year than last year.

Ms Josephine Feehily

Yes, but I recall a very serious discussion with Deputy Fleming the last time I was here——

Vice Chairman

I was at that meeting and have read the transcript. It is still very relevant and I accept that Revenue must play a balancing act. What is the percentage increase in attachment orders this year versus last year and the year before? That increase is giving a reason or excuse for banks to remove credit facilities. Even where Revenue puts an attachment order of a relatively small amount on companies or individuals, the banks are refusing them access to credit. Will the Collector General outline the process involved and the degree of interaction between Revenue and an individual or company before steps are taken to initiate an attachment order?

Ms Josephine Feehily

Before the Collector General responds, I wish to point out that the numbers for 2008 and 2007 were broadly the same. The number of attachment orders issued in 2007 was 2,307, in 2008 it was 2,362, and this year to date 2,300 have issued. In other words, we are at approximately the same point as we would be in a full year, bearing in mind that activity tends to cease towards the tail end of the year.

Vice Chairman

So it is not a spike.

Ms Josephine Feehily

The number will be up a little but not excessively so.

Mr. Gerry Harrahill

In regard to attachment orders and all enforcement actions, it is fair to say that Revenue is very conscious of their potential impact on any business. An important issue in our consideration is that if we do not get engagement from business and do not take the appropriate enforcement action, we end up having to write off more tax than we are currently writing off.

An attachment order or any enforcement action taken by Revenue will never be taken without the business in question being put on notice that a specific and imminent consequence of continued non-engagement and non-compliance is that some type of enforcement action will be taken. We indicate that this has the potential to be sheriff action, proceedings in court by way of an enforcement of the judgment, an attachment order or, in very serious instances, liquidation action. I am satisfied this is a matter of standard and routine practice by case workers.

The first and initial engagement with a business in which a compliance problem develops is to put it formally on notice of such action. The second aspect pertains to cases in which we have not had engagement with a business over a 12-month period. Let us say it has had a problem, put itself back on track and then developed a compliance problem 14 or 15 months down the road. As a matter of routine policy, approach and practice, we again make contact with such a business and put it formally on notice of the potential consequences of continued non-compliance, including specifically mentioning the possibility of sheriff or court action or attachment.

Vice Chairman

This pertains to cases in which companies do not engage with Revenue at the outset.

Mr. Gerry Harrahill

Absolutely.

Vice Chairman

Mr. Harrahill is saying there is effectively a 12-month period before Revenue would go down the road of——

Mr. Gerry Harrahill

No. My point is that every 12 months, Revenue will renew that warning and put up in lights the possibility that enforcement action will follow if we have not had engagement with the business.

The second element is that we indicate clearly a timeframe within which enforcement action will follow. That may be 14 or 21 days, depending on the case and with what we are dealing. It is part of the reason we have put out a clear message to business about the importance of engaging with the Revenue Commissioners on a proactive basis. The potential for flexibility or finding a resolution to the issue is far greater and more likely if that engagement happens before we get down to the business of taking enforcement action. Once enforcement action has kicked in, all sorts of consequences will flow and it makes Revenue's capacity for engagement much more restricted. The other element in this regard is that it also shows the intent of the business. If a business engages with Revenue on a proactive basis, we can be satisfied that it has good intent in respect of trying to address or deal with the problem. However, if there is no engagement we are left in the position of being obliged to make a not unreasonable assumption that some harder form of action is required.

Specifically on attachment, Revenue recognises its consequences. It would be unusual, if I may put it that way, for attachment action to be taken as a first course of action. Such action normally would involve sheriffs or solicitors. We will choose attachment as a first step when we are satisfied that no other remedy will collect the money or if no other remedy has a likelihood of success. In general, however, attachment follows after other measures have been tried and either have not been successful or have not succeeded in changing behaviour.

Vice Chairman

I assume that Revenue considers the previous compliance track record of companies that are approaching it on a proactive basis at present. Revenue's inspectors have a tough job to do, which always has been the case. The area of VAT for businesses tends to be a grey area at best in certain sectors. When Revenue's inspectors are conducting audits, what instructions are given with regard to collection? What powers do they have to strike a deal regarding outstanding payments that a company or business might not have known were outstanding? I refer to a scenario in which an audit is performed on foot of which Revenue's assessment is there may be an outstanding liability. The complaints I have been receiving pertain to such cases, in that there does not appear to be flexibility when an audit's results look like that. For whatever reason, it is happening in respect of VAT in particular that when an amount is arrived at, effectively that amount must be paid in full. No flexibility is being provided with regard to staged payment of such arrears. What happens on an audit basis?

Ms Josephine Feehily

Generally speaking, what happens in an audit is set out in our audit code of practice for Revenue auditors, which is a public document. One should bear in mind that an audit is about reviewing past behaviour and finding, generally speaking, an under-declaration of some kind. As a result, historically the auditors were under instructions to collect the money and to secure the funds because what they were doing was reaching a settlement. The terms of the settlement are set out in the code of practice. For example, penalties, etc. are very modest if it is an innocent error, whereas otherwise penalties are higher and so on. Similarly, penalties are very modest when there is full co-operation. In cases in which the business co-operates completely with the auditor, the penalties are negligible. In fact, such a company will receive an opportunity to make a voluntary disclosure and so on. I believe members are familiar with this process. There is a tiered system that reflects whether it was innocent error and whether there was co-operation and it goes up to quite a high figure if neither of those apply.

I believe that when I appeared before the committee previously, I mentioned that through its audits, Revenue was beginning to see the emergence of businesses that were accepting the settlement figure but which were pleading inability to pay. In such cases, it is possible, if the auditor takes the view that the business has a cashflow difficulty, to get an instalment arrangement. While this has been quite a new route for us this year, it is possible.

Vice Chairman

When Ms Feehily says it is possible, is it happening?

Ms Josephine Feehily

Yes. They are referring them to the Collector General.

Vice Chairman

Very well. A company can have recourse through the inspector.

Ms Josephine Feehily

A company can have recourse through the inspector if it agrees on an audit settlement and agrees on figures. The possibility exists to state that while one agrees the figures, one cannot pay the amount at present and would like to discuss an instalment arrangement.

Vice Chairman

I wish to make a final point before letting Deputy Shortall in again. The last time Ms Feehily appeared before the committee, I recall that Revenue's non-collection rate compared favourably with those experienced by its counterparts in Europe and I invite her to comment on this issue. This involves big figures, which certainly is important, as when one adds up the amount over the past eight or nine years, it looks like a sizeable figure in monetary terms. However, in percentage terms of overall taxes collected, what is the non-collection rate and how does it compare with the top 15 member states within the European Union?

Ms Josephine Feehily

In the main, the average percentage of tax collected by the due date last year across the various tax heads was greater than 90%. For example, the rates achieved for PAYE and PRSI, VAT and preliminary income tax were 94%, 90% and 96%, respectively. This compares very favourably internationally. While I do not have to hand the percentages, I certainly can get them for the committee. Were I to comment on it, I would be obliged to state that I am slightly worried that these figures are slipping this year. I must be honest about this. It is because of the economy and not because of any default. For many years, our performance indicator in respect of collection has been to get the maximum amount of tax and to get it on time. During the middle years of this decade, we were achieving year-on-year improvements with timely compliance, to the point at which we had very respectable figures by international standards. This year we can expect to see some slippage in that regard. Although some of that will take place under the various arrangements and consequently will be compliant, it might be slipping a little on time.

Vice Chairman

Ms Feehily is referring to instalment arrangements.

Ms Josephine Feehily

Exactly. We compare very well internationally and I recently read a paper from the IMF on this issue. All tax administrations are facing exactly the same problem. They are seeing slippage in timely compliance, as well as business failures and are struggling to figure out what is the appropriate balance for a compliance strategy in an environment in which countries want their economies to recover but equally their exchequers require funds. All of my counterparts are facing exactly the same dilemmas about keeping collection up and debt down, while simultaneously supporting business.

Vice Chairman

When Revenue has to hand the other figures requested by Deputy Broughan, it also would be useful to provide this information to the committee in order that it can make a proper judgment on this issue. Consequently, were we to decide to prepare a report on this subject, we would be able to take into account the overall context in which the non-collection figures should be taken.

Deputy Róisín Shortall

I wish to raise a couple of matters. The granting of limited liability is not a right that people enjoy but is a privilege that is granted to them. This must be borne in mind as this committee merely seeks to restrict that privilege in the case of those who have a proven track record of tax default. This cannot be regarded as being unreasonable. It is our objective to do so and hopefully we will be able to further that in respect of making recommendations. Moreover, as Deputy Broughan noted, this may involve a figure of approximately €1 billion in lost revenue to the Exchequer during this decade.

There is additional loss to the Exchequer. In the case of a company that goes into liquidation and leaves large debts behind, it is not just a matter of writing them off. The company's employees have social welfare entitlements, so the social insurance fund is left short and must be made up. Redundancy payments must also be made where an employer goes bust. The figure is probably significantly more than that presented. Serious inconvenience, if not hardship, would be caused to those employees who find themselves abandoned by errant employers and company directors. It is a greater issue than has been quantified so far.

I have three sets of questions to pose to each agency. First, is it too easy to set up a company and should we be more restrictive in terms of the types of demand that we make of people who are seeking to establish companies? Is there room for improvement?

Second, are the legal responsibilities of directors too lax? When I raise this problem with people from other countries, they claim that the directors' legal responsibilities should address it. However, it seems that those responsibilities are particularly lax in this jurisdiction.

Third, is reckless trading an issue? Could the legislation be used more frequently in respect of errant directors or is it too weak and in need of tightening up?

Mr. Vincent Madigan

In response to the Deputy's question on whether it is too easy to set up a company, our company law regime is on a par with what is available elsewhere within Europe. This was my point earlier — since we joined the EU, more company law has been brought into line with that in Europe.

As regards the specific context in which the Deputy is interested, if a restricted director wants to establish a further company or remain involved in an existing company other than the one in respect of which his or her actions led to his or her restriction, specific restriction provisions apply. For instance, the capital of a private company in which a director is involved must have a nominal allotted value of €63,000 fully paid up. If a director is restricted and wants to set up another company, that company must be capitalised to a value of €63,000 and some odd euro.

The Deputy referred to directors' responsibilities. The Companies Act 1990 and some of the legislation since have added significantly to directors' responsibilities. They are now onerous. When the new reform and consolidation Bill, as we call it, brings everything together, one of the principal new concepts is that the common law requirements that apply to directors will be stated in statute for the first time. The Companies Acts contain statutory provisions, but there will now be a statutory statement of the common law provisions.

Deputy Jim O’Keeffe

To what common law provision is Mr. Madigan referring?

Mr. Vincent Madigan

That one must act in the best interests of the company. Nothing in the current law states it that simply, but there is a host of concepts. In its proposals to the Minister, the Company Law Review Group has tried to codify the common law obligations of directors. These will be set out in statute law.

Deputy Shortall asked about the provisions regarding reckless trading. Section 297A contains provisions on criminal and civil sanctions for directors who engage in reckless trading. Was the Deputy's question on whether these sanctions were sufficient?

Deputy Róisín Shortall

Are they sufficiently robust?

Mr. Vincent Madigan

Off the top of my head, I cannot remember whether we have proposed refinements in the reform and consolidation Bill. In some instances, directors have been brought before the courts on foot of these provisions.

Deputy Róisín Shortall

How many?

Mr. Vincent Madigan

I do not know.

Deputy Róisín Shortall

Is it a significant number?

Mr. Vincent Madigan

I do not believe so.

Mr. Conor O’Mahony

The power to take a reckless trading action is generally vested in the creditors. In this instance, Revenue has certain powers to do that, but it also has other powers. Its delegates can comment on that. The provisions create an opportunity for any other creditor, but this means that the State is not involved in the process and we would not necessarily have any statistics.

Vice Chairman

Would we not have any statistics? Surely there would be some in Mr. O'Mahony's office. Does the Department not have some figures on the number of cases taken for reckless trading?

Mr. Conor O’Mahony

It would not be the case that we have statistics, as we would not be involved in taking those actions. The legal powers created by the legislation create rights between debtors and creditors. It is not something in which we have an interest in monitoring. If creditors are unhappy with an outcome, they can complain to us about the behaviour of——

Vice Chairman

In regard to Deputy Shortall's point, there is no way of knowing whether the legislation is robust enough if we cannot monitor whether the relevant section is being used.

Deputy Róisín Shortall

What we are trying to draw the delegates out on is whether anything can be done to tackle this problem. Unfortunately, we have not heard any proposals from them. I suggested different headings, but nothing is coming from the Department. This is a matter of concern. Perhaps Revenue will respond.

Ms Josephine Feehily

To the same questions? I will not comment on whether setting up a company is too easy, as that expertise lies with the Department. In recent years, we have tightened our registration timelines — sometimes businesses complain about this — to ensure that we do commonality checks and so on and that it is not too easy to get a tax registration.

Deputy Róisín Shortall

Does one need tax clearance to set up a company?

Ms Josephine Feehily

No.

Deputy Róisín Shortall

It would seem like a basic thing.

Ms Josephine Feehily

We leave that to others.

Deputy Róisín Shortall

I will ask the other delegates about it.

Ms Josephine Feehily

The tax clearance legislation exists and anyone who wants to can apply for a tax clearance certification at any time. We have tightened up the registration for tax purposes.

As Mr. O'Mahony pointed out, the bar for reckless trading is extraordinarily high. The key High Court case pointed out that a director can only be held responsible for reckless trading from a point in the future when he or she became aware that something was reckless. This does not encourage the taking of cases. If we have concerns in that regard, we would tend to progress them through the liquidators and support a liquidator to take whatever action was necessary. This would tend to be in the area of restriction rather than reckless trading, which is reflected in our proposal on the directors that started this debate. It is also reflected in Mr. Mitchell's paper on the idea of putting a director on notice before moving into a penalty phase. It is a difficult issue, as the proofs are difficult. This is our legal advice. The bar is extraordinarily high.

Deputy Róisín Shortall

Is that an issue which might be examined in terms of improving performance or compliance?

Ms Josephine Feehily

I do not know enough about it. I only know that, according to the advice we received in respect of a case that we were considering, it would be difficult. As Mr. O'Mahony pointed out, most cases are taken by creditors.

The Company Law Review Group was mentioned. Revenue is one of its members and is active in pressing our concerns. We are looking forward to the new legislation because it will introduce the capture of PPS numbers for directors.

Regarding the company law review group, the issue of preference was discussed in its most recent report and we intervened strongly to ensure fiduciary taxes remained within the preference space in that discussion. As Mr. O'Mahony pointed out, the trend internationally is to put tax preference on a par with everything else. We have strong views on the matter and intervened to secure the agreement of the group that fiduciary taxes should remain within the preference space in the context of reform.

Deputy Róisín Shortall

Perhaps we can return to the Department because I am shocked to hear a person who sets up a company and is given the privilege of being granted limited liability does not need to have a tax clearance certificate. That seems extraordinary.

Mr. Vincent Madigan

I do not know it has ever been any different. The nearest we came to having that discussion was in the context of the Irish registered non-resident company problem in the mid-1990s. Irish companies engaged with the Revenue Commissioners and could state a company was not doing any business in Ireland and had no tax liability. The company was registered under Irish company law but non-resident for tax purposes. That created enormous difficulties for the reputation of Ireland. Irish registered companies were engaged in illegal activity in various parts of the world. To address the problem, we engaged with the Revenue Commissioners and provisions were included in company and tax law in 1999. In our discussions we explored whether there should be pre-clearance before one could set up and register a company to ensure there would be engagement with Revenue. My recollection is that the Revenue position was that until the legal entity was established, there was no one with whom Revenue could engage. Shortly after a company is formed, the Revenue Commissioners can seek information and if it is not forthcoming, it can notify the Companies Registration Office which can lead to the company being struck off. That was the nearest we got to coming up with a regime whereby Revenue would have to be satisfied with the incorporated company.

Deputy Róisín Shortall

If the Department was serious about tackling Phoenix companies, this is a fundamental requirement that should be in place. Why are the principals involved in a new company not required to seek tax clearance?

Mr. Vincent Madigan

This is a new proposal about which I have heard for the first time.

Deputy Róisín Shortall

It seems this should be a basic requirement if the Department was serious about tackling the Phoenix company syndrome.

Mr. Vincent Madigan

The last time the issue of pre-clearance was raised in the context of the formation of a company was in the way I have described.

Deputy Thomas P. Broughan

There are existing pre-clearance requirements for certain companies.

Mr. Vincent Madigan

That applies to companies operating in a regulated sector.

Deputy Thomas P. Broughan

The security industry is an example. Directors of companies in that industry must have clearance.

Mr. Vincent Madigan

The requirement is not included in company law but in place by virtue of the regulator and the Minister responsible for the regulation of that sector.

Deputy Thomas P. Broughan

One cannot be a director of a security company unless one has Garda clearance.

Mr. Vincent Madigan

That does not stop a company being created but it stops certain persons being a director.

Deputy Thomas P. Broughan

It stops anybody becoming a director.

Mr. Vincent Madigan

What I was saying is the regulation——

Vice Chairman

Excuse me, Mr. Madigan. I know what Deputy Shortall is getting at but it appears a legislative change would be required to enable this to take place. If we produce a report, this could be included as a recommendation from the committee. It seems having a tax clearance certificate is a basic requirement but Mr. Madigan is correct in saying that, for example, the insurance sector is regulated by the Financial Regulator and a company can be set up but that the directors cannot be appointed until they are cleared by the regulatory body. That is separate to company law. I suggest dealing with the matter in that way because we will not get any further on it.

Deputy Róisín Shortall

We need to know what concerns were expressed. Regarding the discussions on the review of company law, are the papers available or can they be accessed through a freedom of information request?

Mr. Vincent Madigan

We can provide a copy of the company law review group report of 2007. The reform and consolidation Bill, subsequent to the report of the company law review group, was published in 2007 and the proposals are available.

Deputy Róisín Shortall

Are the submissions received from the various bodies feeding into that process available?

Mr. Vincent Madigan

No, they are available from the company law review group. That body has a dedicated secretariat and the reports of the group are sizeable and available.

Vice Chairman

The clerk has agreed to seek them; we will see what papers we can get.

Deputy Seán Fleming

There has been much talk about the €150 million in fiduciary taxes written off last year. There is an assumption that all of this relates to limited companies. Perhaps the Revenue Commissioners might supply information on how much relates to those who operated as sole traders, unlimited companies or had branch operations not incorporated in the State. How much was connected with enterprises which were not limited companies?

There is a suggestion that €1 billion in tax has not been collected because of write-offs in the past decade in some €500 billion in tax has been collected. In a perfect world businesses would not run into difficulty and we would not have this problem. It happens that a competitor sets up shop next door and the first enterprise goes out of business because it operates from old-fashioned premises. Businesses go out of business and into receivership, administration and liquidation in the normal course of events. The idea that this does not happen is not real. When businesses go out of business, it is a logical consequence that these defaults will occur and it is not as a consequence of non-collecting. I say this because one would think it was all due to fraud.

How many companies and directors are being are being monitored under the phoenix monitoring programme? The witnesses referred to a number of directors they were examining in this context. Are these directors about whom Revenue has some reason to be concerned? I am sure there are many companies with common directors.

The Revenue Commissioners are preferred creditors in a liquidation process. There are restrictions already in place. Normally, corporation tax, VAT and PRSI payments are limited to liabilities for one year. A number of years ago they went back several years but that system allowed the Revenue Commissioners to become lazy. They knew that if a company went bust, they could hit it for tax payments for five years that they had not bothered chasing it for. This meant that unsecured creditors were left high and dry. The Oireachtas was correct to limit the preference status of the Revenue Commissioners by time. This kept them on top of cases and ensured they would not allow matters to drag.

Reference has been made to employees. Much of this can be PAYE and PRSI deducted from employees but not paid over and that is an extra cost. I am equally concerned about other deductions from employees that do not classify as getting any preference. Accrued holiday pay and compensation paid by an employer for breach of employment do not come under this and there is no preference. There is no preference if an employer deducts money from employees to go into a pension fund and does not pay it over. Health insurance schemes or staff saving schemes are not preferred creditors either. We must be careful when we speak about deductions from employees' wages. The only preference we have given so far is a limited preference to taxes. I am equally concerned about other income deducted from employees. Employees' health insurance or pension contributions might not be up to date. We should consider this in that context.

How much did the Revenue Commissioners collect last year by virtue of being a preferred creditor? It means other people lost out. The witnesses must have information on this and I would like to see the figures because the committee could usefully debate this matter. It would give us an indication on whether it is a big, small or medium issue. When I hear the figure I might have a question on it. I asked a number of questions and perhaps I am going a bit fast.

Ms Josephine Feehily

I am trying to compartmentalise them. I shall hand over to the Collector General to answer the final question on the return on liquidations and the first question on the breakdown of write-offs other than companies.

With regard to preference, from the view of the Revenue Commissioners I do not disagree with the Deputy's argument on preference being restricted to one year. That was a reasonable outcome but I do not want it eroded any further. That is my position. We argued that strongly in the company law review group and it accepted the principle that as fiduciary taxes are trust taxes, the preference should continue for them. That is the only point I want to make. Using the example I gave earlier, a business can, in a couple of months, run up liabilities very quickly on the fiduciary tax side in a year. Our preference is for current year taxes and we think it is reasonable, particularly for fiduciary taxes, that we hold on to that preference.

I agree that businesses fail and when we produce figures for the past ten years members will see that the proportion of write-off each year due to liquidations was substantial. I do not want to over-egg this because it does not give us very much money but we have the right to write back a liquidation if, in the course of the liquidation, the liquidator unearths funds that were not evident at the beginning and that there will be a yield. It is very rare but the power exists to do so.

Deputy Fleming asked about directors and phoenix cases that we are monitoring. At the end of September we were monitoring 1,269 cases in the commonality programme. They are cases where there are common directors, the tax debt is significant and there were previous problems. This is slightly up on last year because in September last year the number of cases was 1,235. The incidence of non-compliance in that group over the year increased from approximately 40% to approximately 50%. It means we are targeting the right kind of problems. As I stated earlier when I was discussing this with Deputy O'Keeffe, it is a funny measure of success but we are finding non-compliance in that group. At least that is what we should be finding there so in that sense it is a measure of success. Likewise, in those 12 months the phoenix programme increased from approximately 400 last year to 536 this year and the level of non-compliance has increased marginally from 30% last year to 38% this year. There is more of it and we are finding more of it.

That deals with the Deputy's middle questions and I will ask the Collector General to deal with the other two parts.

Mr. Gerry Harrahill

The first thing to say about preference is that our preference position does not in any way influence how we handle individual cases. What I regard as a very successful case for Revenue is where there is a liquidation and there is no Revenue debt. Ultimately, that is the objective towards which we want to strive. The other matter to which it is important to draw attention in the context of preference is that invariably if a company goes out of business it will have been making far less profit in the preceding years than it will have made previously. The exposure to corporation tax, or income tax for an individual, is reducing by virtue of the fact that there is less profit in the business. Therefore, of its nature this means that VAT, PAYE and PRSI will probably be higher.

We did sampling in the context of our input to the company law reform group on what we got out of preference. I recall that we took a sample of approximately 25 cases where the liquidation process had come to an end and we had managed, through preference, to get 10% of what theoretically we should have got from preference. In many liquidations we do not get any preference, and if we do it is probably only a portion. Unfortunately, in many instances there is absolutely no recovery whatsoever. It is very important for us because on occasion it gives us the wherewithal to fund the actions of a liquidator. Sometimes, if Revenue does not do so there is no money there to do it.

On the question of write-off, I do not have a detailed breakdown but in the context of the report produced every year by the Comptroller and Auditor General there is a breakdown of the various grounds for write-off. The Revenue Chairman referred to a number of them which can only be in the context of companies. I suggest that all of the write-offs under the heading "liquidation, receivership and bankruptcy" are companies. A substantial portion of those on the grounds of "ceased trading — no assets" are also companies. Those on the grounds of "deceased and estate insolvent" are invariably individuals and the grounds of "uneconomic to pursue" probably has a mix but are substantially individuals. However, the majority of the value, approximately 80%, is from companies.

Deputy Seán Fleming

Does Mr. Harrahill have a breakdown of the other 20% with regard to sole traders? How much of the €115 million of fiduciary taxes was sole traders and limited companies? Does Mr. Harrahill understand my question?

Mr. Gerry Harrahill

I do.

Deputy Seán Fleming

We need to remove that from the debate on limited liability.

Vice Chairman

If Mr. Harrahill does not have the information will he make a stab at it? We will not hold him to it exactly.

Deputy Seán Fleming

Perhaps he did not answer the question but I did not follow what Mr. Harrahill said. I asked how much Revenue got by way of its legal right of being a preferred creditor and he said that by and large it received 10%. That is not the question I asked. I asked how much money Revenue collected as a result of its legal right as a preferred creditor and not the percentage due. Does Mr. Harrahill have that figure?

Mr. Gerry Harrahill

I do not have that figure.

Deputy Seán Fleming

I refer again to the letter of 6 August 2009 which the Revenue Chairman gave us. Section 4 deals with the amounts recovered from liquidations in the past three years. It was €1 million in 2006, €765,000 in 2007 and €2 million in 2008. That seems a very small amount to recover from voluntary and court liquidation. Is that all the big regime of giving Revenue preference in liquidations is worth? How much would Revenue have received if it was not a preference creditor? Ms Feehily said she wants to hold on to it. I am trying to determine its value to the taxpayer.

Mr. Gerry Harrahill

I would say all of it is preference.

Ms Josephine Feehily

We would not have received it otherwise. In general, very little is paid after liquidation so I assume if we did not have a preference claim we would not have been paid anything. The figures indicate it was worth €2 million last year. The more important point is that preference gives us a status in the liquidation process which enables us to seek to appoint people to the committee of inspection. Sometimes we fund the liquidation where issues arise in terms of reckless trading — I do mean that in the legal sense — or inappropriate behaviour. The status is as important as the money. I will confirm the figure but I am pretty certain it pertains to preference claims.

Deputy Seán Fleming

I am amazed that the figure is so small in relative terms. It is approximately €1 million per year. We have built a statutory regime and discussions have been held with the review group. The Oireachtas has invested a great deal of effort to give Revenue a power which does not translate into much money at the end of the day. How much was paid out in total from liquidations?

Vice Chairman

We acknowledge Ms Feehily's point on the importance of status.

Ms Josephine Feehily

It is reasonable to compare the amounts of money with the small figures we discussed earlier. We rightly got excited about the €1 million to €2 million written off in phoenix and commonality. Those sums were worth pursuing. Status is also significant. Nobody gets anything in the majority of liquidations in Ireland.

Deputy Seán Fleming

Except the liquidator.

Ms Josephine Feehily

Sometimes we have to pay the liquidator to bring regularity to a situation. It is our status which enables us to do so.

Deputy Seán Fleming

How much did it cost Revenue to get that €2 million?

Vice Chairman

We will have to move on. I invite Mr. Buckley to make his closing comments.

Mr. John Buckley

We are more comfortable in reviewing the administration in practice of Revenue's powers. At the core of what is being discussed is changing the legislation, which is a policy matter for the Government. The only comment I would make is that when we are changing policies it is important the Executive informs the Legislature by way of business cases which calculate the potential benefits and dysfunctional effects. I welcome Ms Feehily's undertaking on the comprehensive review of effectiveness of oversight checks and the emergence and operation of the phoenix syndrome because this can only help to inform the debate. Generally speaking, however, I am precluded from commenting on policy and, therefore, the committee will have to reflect on what it heard in private session.

Vice Chairman

I thank the witnesses for their contributions to a fruitful discussion. The committee will conduct a further review of the issues raised today and the clerk will follow up on the information members have requested.

The witnesses withdrew.

Vice Chairman

If there is no other business we will agree the agenda for the next meeting, namely, the HSE, chapter 37, management of private patient income, and chapter 39, implementation of the medical consultants contract. Is that agreed? Agreed.

The committee adjourned at 12.55 p.m. until 10 a.m. on Thursday, 5 November 2009.