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JOINT COMMITTEE ON ECONOMIC REGULATORY AFFAIRS díospóireacht -
Tuesday, 30 Nov 2010

Cost of Regulation: Discussion with Irish Taxation Institute

Chairman: I wish to advise that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If witnesses are directed by the committee to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to a qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that, they should not comment on, criticise or make charges against any person outside the House, or an official by name in such a way as to make him or her identifiable.
The meeting will be webcast live, and so can be seen worldwide on the Internet. I will now ask Mr. Redmond to proceed with the presentation.

Mr. Mark Redmond

I thank the Chairman for his invitation to us to appear before the committee and I would also like to thank committee members. I will now invite our president, Mr. Andrew Cullen, to make an opening statement.

Mr. Andrew Cullen

I thank the Chairman and committee members for having the Irish Taxation Institute here today to present on the issue of business regulation and the costs arising from that burden. I appreciate that the committee has given much time to this issue to date and I hope that the research we have conducted amongst Irish businesses will be of benefit to the committee as it completes its work in this area.

I am joined by our CEO, Mr. Mark Redmond, our technical and policy director Ms Cora O'Brien, and Mr. Michael McGivern, tax partner at Farrell Grant Sparks accountants. Ms O'Brien and Mr. McGivern are members of the tax administration liaison committee with Revenue and other practitioner bodies.

Before I go through the details of our research and our proposals, I would like to give the committee a brief overview of the Irish Taxation Institute. The institute is the leading organisation on tax education and practice in Ireland for over 40 years. Our flagship qualification - the AITI registered tax consultant qualification - is recognised at EU level and is held in high regard by both the private and public sector here in Ireland. We represent over 4,000 AITI registered tax consultants who provide tax expertise to thousands of businesses and individuals in Ireland. We also have many members who advise through senior roles within multinational companies, the Government, Revenue and State bodies.

The work of our members takes them to the heart of the transactions that drive the Irish economy every day, and their collective wisdom gives us a real insight into the challenges facing businesses, particularly those in the small and medium sector. It was their feedback and day to day experience that prompted us to carry out our research. We have been working for some time with our members, the Government and businesses to propose new policies and ideas that will help address any obstacles that may stifle economic activity and we have engaged with the Department of Enterprise, Trade and Innovation, the Department of Finance, Revenue officials at both national and regional level, the tax administration liaison committee, the better regulation forum, as well as the Commission on Taxation.

We appreciate that much progress has been made to date, including simplification of on-line registration and filing, collaboration between the CSO , the Company Registration Office and Revenue and a flexible approach by Revenue to businesses facing cash flow difficulties, reflected in the new code for Revenue auditors and the Collector General's office protocols. However, the current economic challenges have left all of us in no doubt that practical measures which give real encouragement and reassurance to entrepreneurial activity have never been so critical for Ireland. Employers and managers must be allowed to spend most of their time doing what they do best, namely, running and maintaining a business, while more time than ever needs to be spent on developing new markets, managing cash flow, controlling costs and satisfying customers.

Businesses need to ensure that they meet their compliance obligations and that they safeguard their finances and business reputation through comprehensive management of their taxes. However, they should also be able to meet their compliance obligations without unnecessary complexity. Our analysis has identified that any one company could have over 110 tax administration obligations in a given year and, on average, a company could have up to 70 tax obligations in a given year. Apart from the administration burden and the cost of resourcing that activity, the cost of the penalties and interest imposed upon those who make mistakes is a real financial issue. An inadvertent tax mistake is a cost too severe for most to withstand, given the current economic climate.

I hope that our presentation today will give the committee an insight into the issues I have mentioned and we look forward to engaging with committee members in the question and answer session. Before that, I will hand over to our CEO, Mr. Mark Redmond, who will outline the research findings and our proposals.

Mr. Mark Redmond

Slides have been made available to committee members, and I will speak on these along with Ms Cora O'Brien. We will take the committee through a number of key issues that we wish to bring to its attention.

We carried out research among the Irish business sector, asking it what issues it had in respect of the burden of tax administration and where it saw obstacles or barriers in our tax system for starting new businesses. We also asked for views on the business expansion scheme and how it could be improved. We note that the four year plan states that a major improvement and expansion of the business expansion scheme is on the agenda.

We will then give the committee illustrations from international best practice as to how our tax administration system might be further improved. Great progress has been made in recent years by Revenue and others, and initiatives such as Revenue's on-line service are to be welcomed. We will then conclude with key recommendations and proposals.

I want to look first at the independent research we commissioned from Red C among the business sector. The research was conducted among 500 companies across Ireland and it investigated their attitudes to the tax system and it how the system might be improved. Some 60% of companies surveyed stated that they found their tax compliance requirements to be a burden for them. That was broken down between small, medium and large companies. Some 55% of large companies saw it as a burden, whereas it was 60% and 61% respectively for small and medium companies. We then asked those companies where the burden fell most heavily. The most burdensome tax, in terms of compliance and operation for business, is value added tax, followed by the payroll taxes, namely, PAYE, PRSI and the recently added emergency income levy. In that context, the proposal to move to a universal social charge represents an opportunity to make the operation of these taxes more simple for business and easier to administer. That is an important point to note when planning for the universal social contribution.

The average business would spend one and a half days per month complying with its tax obligation requirements. Up to 30% of businesses in the medium sized sector are reporting that they spend at least two to three days per month meeting their tax compliance requirements. We suggest that it would be important that Ireland moves to measure more scientifically tax compliance obligations on business and other taxpayers, as is done in other countries.

I will now hand over to Ms O'Brien, who will speak about the research findings on start-up companies.

Ms Cora O’Brien

I will take the committee members through some of the administrative challenges that businesses face when they are starting up, and will talk about some of the issues facing businesses that are seeking investment. The next slide shows us the top three concerns for businesses that are starting up. There is a general view of being a little daunted by the tax administration system and a worry about getting things wrong, such as missing payment deadlines, and the penalties that have to be paid for that. Approximately three quarters of the people who were surveyed had concerns in those areas.

We can see from the next slide that this finding shows that there is much anxiety among people that they would make mistakes in their tax returns in the first few years, as the tax system is complex. Approximately 80% of the people surveyed thought realistically there was a chance they could get something wrong in the first few years.

The next slide is particularly interesting. It shows that almost 100% of the businesses surveyed thought it would be very beneficial if there was to be guidance provided by the Revenue Commissioners on the most common types of mistakes that the commissioners come across when they see people who have filled in their tax returns. This is about getting it right first time. In order to prevent mistakes happening, these business owners would like to see information published about things that are likely to go wrong.

The survey next asked about investment and efforts by businesses to raise funds. We specifically considered the business expansion scheme, BES, vehicle to ascertain businesses' views of it. As the next slide demonstrates, the main issues businesses had when applying for BES funding may not come as a huge surprise. They found the application process to be difficult and complex, that it involved quite a lot of red tape and perhaps there was insufficient information on eligibility for and the terms of the scheme. As Mr. Redmond mentioned earlier, these obstacles have been referenced in the four year plan and a new scheme is being proposed under the badge BITES, or business investment targeting employment scheme. We are hopeful this will address these issues and make it a little easier for businesses to access investment and streamline the process a little more.

These were the main findings of the survey we carried out and on foot of it, we decided to look internationally at what some other countries are doing to provide support to business. There are a few interesting comments to make with regard to the United Kingdom. It can be quite daunting for a new business to make its income tax return and for a business there, the Form 11 or income tax return is approximately 22 pages long. Consequently, the United Kingdom has tried to simplify this with a four-page model whereby the smallest businesses simply fill out basic information and any additional items can then be added and consequently it is not too intimidating. The institute thinks this would be a useful measure. The United Kingdom's HM Revenue & Customs, HMRC, also runs workshops. As well as running them itself, it leads an initiative with other State bodies in the United Kingdom aimed at helping small businesses to get through the first few years and explaining their various obligations. For example, representatives from local enterprise boards and from Companies House go along to the workshops. Interestingly, the HMRC has stated that 90,000 businesses have booked places on such workplaces in recent years and they definitely appear to be popular. The HMRC also publishes what are called toolkits pertaining to areas in which, from its experience of examining tax returns, it has identified common mistakes being made. The toolkits provide taxpayers with checklists of things to look out for in areas such as revenue versus capital or research and development expenditure, simply to try to make sure that businesses do things properly. Furthermore, the United Kingdom Government has introduced an initiative by launching an Office of Tax Simplification, which has been charged with examining the overall burden of that country's tax administration system and which is due to report sometime next year.

The institute next considered Australia to find out what has been done there and some similarity exists with its initiatives. For example, it has a small business assistance programme and runs workshops for small businesses to try to help them with their tax obligations. Moreover, in Australia, assistance visits are carried out whereby the Australian revenue service will, if requested, visit a business's offices for anything between half an hour and half a day to take the firm through its basic obligations and get it started. Australia also has some interesting initiatives for businesses that have got into trouble in paying their taxes. I acknowledge that Ireland has done some good stuff in this regard, such as the instalment arrangements into which Revenue will allow one enter. In Australia, small businesses with a reasonably small debt, but which is relatively large for them, of up to approximately €20,000 may avail of an automated service whereby one can apply online for some assistance and where there are calculators available with which one can work out what one's monthly cost would be, were one to enter an instalment arrangement. This might be an interesting proposition for small businesses. In addition, for somewhat larger businesses with turnovers of up to approximately €1.5 million, a facility exists whereby one can get some help for 12 months on an interest-free basis, which sometimes can get firms out of difficulty in paying their taxes or at least helps to get them over the hump.

The institute has substantially more information about this subject and would be happy to provide it to members who sought it as a follow-up to this meeting, as quite a lot of comparative data are available. We took the international research, the findings from our survey and feedback we received from members such as Mr. Michael McGivern, who is present today, and have used them to pull together the following recommendations for the joint committee. We suggest a basic income tax return model similar to the one I described in the United Kingdom. It also may be worth considering the South African system. The authorities there introduced a simplification regime for the smallest of businesses or micro-businesses that have turnover of up to approximately €80,000, whereby they have the option of submitting a single return to cover all taxes in order that one is not obliged to make separate VAT and income tax returns but one simply has one turnover tax on everything. The institute thinks it would be great were Revenue to provide or publish its first-hand experience of where people are making mistakes in order that we would try to prevent them. We also would like to see a co-ordinated approach whereby the various State bodies that small businesses encounter would reach out to businesses and proactively talk to them and help them to get through this difficult period.

As for policy initiatives, as Mr. Redmond noted, one of the most onerous obligations for small businesses is the VAT obligation. It might be useful to have another look at Ireland's VAT registration thresholds. At present, we have separate thresholds for goods and services and we would like to see them aligned and increased to €85,000 for the smallest businesses. In addition, we would like to see the VAT cash receipts basis increased from its current level of €1 million to €2 million in an attempt to help people with their current cash flow difficulties. Income tax commencement rules are highly complex and when a business is just starting out and trying to get on its feet, it can be both difficult and costly in respect of fees and cash receipts to work one's way around the income tax commencement rules. Consequently, we would like to see them streamlined as they have been with us for many years. Good work has been done on VAT and PAYE to give people a longer period to file and pay. As the institute believes that the thresholds and periods are quite different for VAT and PAYE, which can cause confusion, streamlining them would make life much simpler. Finally, the institute would like to address the issue of the cost of getting it wrong. At present, in addition to paying penalties if one gets things wrong, the interest rates are between 8% and 10%, depending on what tax was involved. This can constitute quite a heavy burden on business and we would like to see that addressed. These are our overall recommendations. Perhaps I can hand back to Mr. Cullen for closing comments.

Mr. Andrew Cullen

In conclusion, I wish to stress that positive work has been done, in particular by Revenue and those in key State bodies and organisations. However, an honest assessment of the merits and shortcomings in both our policies and our business culture can only serve our economy well. We must be sufficiently honest to recognise where improvement is needed and accept that we have some way to go if we are to create the sort of entrepreneurial culture and positive business environment that is required by one of the most export dependent countries in the world. We are an exporting nation and as a country, we must improve our performance with regard to supporting start-ups and ultimately developing them into a thriving global exporters.

First, I thank the witnesses for their attendance and for assisting members in the work they are undertaking. This is the final group the joint committee is meeting before drafting its report. It certainly is extremely helpful to members to have the contributions from the Irish Taxation Institute. It has been a few years since I was involved in taxation but I note that in his presentation, Mr. Cullen referred to "a flexible approach by Revenue to businesses facing cash flow difficulties, reflected in the new code for Revenue auditors and the Collector General's office protocols". Just how flexible is this approach, now that so many businesses have cash flow difficulties, particularly because of the liquidity situation and the unavailability of banking facilities? Has this unavailability of banking facilities made much of a dent in the amount of money collected by Revenue or in the timing of its collection? In the institute's experience, what is Revenue's attitude to the reduction in facilities available in the banks to their customers, that is, the SMEs and companies that are clients of Revenue?

I will ask a number of questions. There is important business in the Dáil today so our time is limited. Tax advisers are often looked upon as people who assist people with wealth to avoid paying tax. Are tax consultants to blame for the tax schemes in place that are used frequently by so many people? What should the Government do to position itself on the side of the people and close down tax avoidance schemes? Should they be closed down? Are these schemes equitable and what of the view of the institute on the moral aspect of what is happening at the moment?

There are some tax practitioners who work on the edges, like any other group in society. What regulations are in place to ensure the highest professional standards are adopted by members of the Irish Taxation Institute? I thank the witnesses for their contributions.

Mr. Mark Redmond

Cash flow difficulty is the number one issue our 4,000 members tell us their business clients are facing. I will ask Ms Cora O'Brien and Mr. Michael McGivern to discuss the instalment arrangements put in place by the Collector General. It is a welcome development and has been well received by our membership.

The second question concerns tax schemes, equity and what the Oireachtas can do in that regard. Many tax incentives and schemes have been removed from the statute books. They were there for a specific purpose and in many cases they outlived their usefulness. That has now been addressed. There are a number of elements to the work done by the tax profession. In the current climate, a key concern is that business people and individual taxpayers pay taxes on time and in full. This is an important element in the context of the recent pay and file deadline, where our members were working around the clock seven days a week to ensure businesses met the requirements.

Regarding what the Oireachtas can do where legislation is perceived as being used in an unintended way, the institute believes the Oireachtas must be allowed sufficient time to debate and consider tax legislation. A rigorous process is very important when tax legislation is going through the Houses. Taxpayers will work with the legislation on the Statute Book so the greater amount of time given to debate on legislation, the better.

Regarding regulation, much statutory legislation applies to tax advisers and anyone giving tax advice, including the need to report any suspected tax evasion. It is a crime not to do that and Ireland is probably to the forefront of global economies in terms of the specific and general anti-avoidance legislation on the Statute Book. In the context of the Irish Taxation Institute, we have a code of professional conduct that is binding on members and students. That code is aligned with European best practice under our European body, Conféderation Fiscale Européenne. We have the investigation and disciplinary procedures one would expect from a professional body.

Ms Cora O’Brien

I will address the instalment arrangements. Without wishing to speak for the Revenue Commissioners, I understand they are approaching the instalment arrangements by trying to take a practical approach to people in difficulties. The key messages are to come early and make us aware there is a problem so that we can address it before it gets out of control. If there is a viable business, the Revenue Commissioners will work with the taxpayers to try to bridge the gap and give more time to pay. The Revenue Commissioners look for a substantial amount of documentation in some cases and one must prove one's case. They are conscious that they do not want to be the bank of last resort and have an obligation to the taxpayer to ensure they collect as much tax as they reasonably can.

The experience of our members is that they welcome the instalment arrangements. They are working reasonably well. With the best will in the world, people have been entering into instalment arrangements over the past few months and put forward a business case in good faith thinking their business will go in a certain direction or grow. Sometimes that does not happen and one must renegotiate instalment arrangements. One may get a tax clearance certificate for a shorter period of time if one is in that negotiation period. The instalment arrangements are working well and we are glad to have them. They are quite balanced but it is a fine line at the moment where one has to go back sometimes when the best intentions do not work out. The code of practice referred to for revenue audits is also positive and was the result of a long consultation between the Revenue Commissioners and the profession. When revenue audits are carried out, there is a balance between ensuring the Revenue Commissioners collect the correct amount of tax where errors have been committed but they have a commercial eye for people with inability to pay so that they can reach agreement on something that is reasonable and the person can pay without going out of business. We welcome that consultation.

I welcome the delegation. Can they give us some day-to-day examples of tax administration burdens? What are the top three issues they would like to see addressed? Would these proposals cost much?

Ms Cora O’Brien

The idea of reaching out to taxpayers works well in other countries and is something we would like to see more of here. Interaction between State bodies, including the Revenue Commissioners and others, involves going out to businesses, talking to them, helping them first-hand and perhaps providing clinics. Engaging with them and helping them over the hump would be good.

Good work has been done on VAT and PAYE and giving people in smaller businesses more time to pay and file. Paying bi-monthly, three-monthly, four-monthly, six-monthly and annually can be confusing. It all depends on the tax and the threshold. If that could be streamlined, it would mean taxpayers could pay on a few dates in the year and it would make their lives simpler and less daunting.

Another issue is information about publishing errors and helping people get it right first time so they do not end up being audited by Revenue or end up in trouble facing a large interest bill.

Will the delegation expand on the interest burden? What is the current rate of interest people pay if they are overdue on tax?

Ms Cora O’Brien

Per annum, it is 8% for income tax and corporation tax and 10% for fiduciary taxes, namely VAT and payroll taxes.

That is excessive. Does the Irish Taxation Institute want these linked to market rates?

Ms Cora O’Brien

That would be good, yes.

The Irish Taxation Institute wants the VAT rate for goods and services aligned.

Ms Cora O’Brien

Yes. At present, the threshold for services is €37,500 and for goods it is €75,000.

Service industries are benefiting most.

Ms Cora O’Brien

Yes, small service industries.

What would the Irish Taxation Institute like to see with regard to the simplification of the income tax rules? In the UK, a four-page form is returned and we also have a shorter form. Ms O'Brien also made reference to all tax returns being returned together; will she expand on this?

Ms Cora O’Brien

We have a shorter tax return form but from memory it is 16 to 18 pages long and we would like something shorter than this. The UK form includes very basic information in four pages and if one has capital gains or foreign activity one has the option to fill out additional pages with that information. It builds on a very basic profile.

The idea of having only one tax form is South African and it is novel. Instead of the smallest of businesses paying income tax, VAT and payroll taxes every year, they have the option of paying one tax in three instalments which means such businesses have only three events each year.

How is it assessed?

Ms Cora O’Brien

It is a percentage of turnover. The return form is very short at two pages and depending on one's turnover the rate is up to 7%.

How long has this been done in South Africa?

Ms Cora O’Brien

It has existed for approximately 18 months.

Ms Cora O’Brien

There has been a good uptake so yes.

It is available only below a certain level of turnover?

Ms Cora O’Brien

The threshold is approximately €80,000.

We have a time constraint and I thank the witnesses. The Irish Taxation Institute is the final delegation to come before the committee for our discussions on business regulation. We may revert to the witnesses for clarification on some points. I thank them for coming before the committee.

The joint committee adjourned at 4.15 p.m. until 4 p.m. on Tuesday, 14 December 2010.
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