Chairman, this session deals with the accounts of the Revenue for the years 2009 and 2010 as well as a set of related chapters contained in my annual reports for those two years. Because of the volume of material, I will confine my comments mostly to 2010. In 2007, the net revenue of the State was €47.3 billion. It has fallen each year since then, and the revenue collected by the State in 2010 was €31.8 billion. Revenue as a proportion of national output, as measured by GDP, has also fallen. It stood at 21% in 2010 compared with 26% in 2006. The Office of the Revenue Commissioners says that the fall is mainly attributable to the fact that the part of GDP that has diminished relates to investment or, more particularly, property and construction. These sectors have traditionally yielded relatively higher levels of tax, so the reduction in activity in them has disproportionately impacted on the tax take. In this respect, chapter 12 confirms that, in volume terms, the major reductions in revenue occurred in the sectors that have been hardest hit by the economic downturn, which are property, construction, wholesale and retail.
Repayments of tax when expressed as a proportion of collection increased from 15% in 2005 to 20% in 2009. Repayment levels have begun to stabilise in 2010, although they remain much higher than before the downturn in the case of both corporation tax and capital gains tax. Overall, 17% of the gross yield was repaid in 2010 compared with 20% in the previous year.
The 2009 report identified instances of duplicate repayments due to taxpayers making claims for relief under both the income tax and PAYE systems. We were concerned that our computer-based scans only extended to cases where the repayments were identical, leaving open the likelihood that there were other instances where credits had been offset against liabilities. The Office of the Revenue Commissioners undertook to review the matter and I note that it quantified the amounts in its follow-up to the committee.
From a general perspective, the Office of the Revenue Commissioners faces three main challenges: to ensure the full tax is declared by those taxpayers who are within the system, to collect the debt arising out of assessed liabilities and to identify persons who have not registered. I will discuss each of those in turn.
On the completeness of declarations by taxpayers, random audits show that the level of under-declaration is approaching 2% of the value of taxes collectable in a particular year. However, when account is taken of all undeclared tax surfaced by these audits, each audited taxpayer ends up with an additional liability equivalent to 4% of the declared annual liability. The pattern varies by tax head and by sector. The greatest financial effect is in the area of VAT, which accounted for 57% of the additional yield from random audits. The greatest rate of non-compliance is in income tax, where the total additional liability was of the order of 22%. The sector with the largest non-compliance rate was the hotel and restaurant sector. We concluded that the Revenue Commissioners could make more use of the random audit programme results to identify key sectoral and tax head risks as well as to derive a preliminary indication of the audit gap, which is the extent to which the tax that is undeclared by registered taxpayers would be identified if all cases were audited.
With regard to collection of assessed debt, approximately €300 million was written off in 2010 and €2 billion was uncollected at the end of March 2011. One third of this was under appeal, one fifth was under enforcement and payment agreements were in place for 6% of the debt. A total of 54% of the debt relates to taxpayers with small to medium sized tax liabilities who pay between €6,000 and €300,000 annually, while 32% relates to taxpayers who pay less than €6,000. Overall, approximately two thirds of all debt was more than three years old. Revenue set a target to reduce the level of uncontested debt not being managed under instalment agreements or by enforcement by 25% in 2010; its achievement in this regard was to reduce it by 7%.
Revenue's principal compliance indicator is a composite measure based on both filing and payment compliance. It is based on counting cases that have filed or paid in each tier. I should mention that Revenue splits the tax paying population by case size into five tiers. We suggested that its performance measurement could be improved by capturing the extent and period of credit taken by taxpayers and classes of taxpayers.
When the current indicator is disaggregated, payment compliance in general lags performance as measured by the composite indicator by approximately 2%. The gap is largest in the third and fourth tiers. When taken in conjunction with the pattern for debt outstanding, it seems to suggest a need for Revenue interventions aimed at that category of taxpayer.
With regard to unregistered taxpayers and the shadow economy, Ireland's shadow economy is put at approximately 13%. Revenue has outlined the range of measures it takes to identify cases not on record and the Accounting Officer will no doubt elaborate on this in the course of the meeting.
Chapter 15 of the 2010 report looked at what is called the commonality programme. The general idea in this area is to identify, link and, if appropriate, pursue cases where a particular business has links to other businesses with significant tax debt or a history of non-compliance or has links to a failed business where the protection of limited liability might have been abused. The audit in this area found there was no evidence of checks in 18% of cases where checks should have occurred, the full set of relationships were not identified in 24% of the cases checked and some cases appropriate for referral for pursuit were not referred. Overall, we concluded that Revenue needs to improve its management in this area and, at the same time, it needs to address the referral of inappropriate cases to the pursuit units, which is clogging up the system.
Looking at Revenue's compliance measures, a number of trends emerge. In the large cases division the number of audits completed has decreased since 2007 and the yield has also decreased. In other Revenue districts, there has been a 17% decrease in audit activity in districts since 2007. However, because the remaining audits are largely targeted, there has been an increase in audit yield of approximately 19% since 2007. Revenue will need to keep these trends under review. There is no doubt that focusing available resources on the riskiest cases is efficient in terms of yield. However, there is also a need to consider the overall systemic risks in determining the extent and focus of tax audits.
The 2009 report examined Revenue's arrangements to counteract smuggling in the case of tobacco, which is estimated to cost the State €200 million a year in lost excise. We suggested that Revenue should attempt to estimate the level of illicit tobacco importation on an ongoing basis, develop a strategy within which to pursue defined outcomes designed to reduce or contain the problem and compare its detection rate with that of other jurisdictions.
Losses that have built up during the recession will impact on future revenue. Most of this over-hang impacts on corporation tax. Losses that were used in the corporation tax area in the latest period are estimated to have reduced the tax take by approximately €2.5 billion. Unsurprisingly, the overhang of losses relates predominantly to the banking sector. Revenue was not in a position to estimate the likely extent of future loss utilisation by firms in the sector. However, it considers it unlikely that the full €50 billion of the accumulated losses that existed when the 2009 computations were completed will be utilised. The Accounting Officer will be in a position to update the committee on all of these matters.
