Tax Avoidance

(These notes relate to tax avoidance transactions that start after 23 October 2014)

It is a long established principle that taxpayers do not have to arrange their tax affairs in a way that makes sure they pay the maximum possible tax. Taxpayers are fully entitled to structure their affairs in a tax efficient manner.

But there is a difference between structuring your affairs in a tax efficient manner (claiming the reliefs in the manner in which they were intended to be claimed by the Oireachtas) and tax avoidance.

What is tax avoidance?

Tax avoidance can be described as using tax reliefs and allowances in a way in which they were not intended to be used or seeking to re-label or re-characterise a transaction undertaken primarily to seek to claim a tax advantage and not primarily for business reasons. As a taxpayer, it is important to consider whether an advisor (including a promoter or marketer of a scheme) is providing you with advice on structuring your affairs in a tax efficient manner or whether you are being sold a tax avoidance transaction. If you are unsure if you are engaging in tax avoidance, then there are a number of key questions to consider.

  • Does the tax benefit promised seem disproportionate or excessive compared to the real economic risk you are taking? 
  • Do you have difficulty understanding the proposed structure or transaction or in identifying the commercial reasons behind the structure or transaction?
  • Do you think the structure seems very complex or artificial, given the real commercial aims you have?
  • Is the fee unusual, in that it is an upfront fee, a no win / no fee basis, a fee built into the transaction rather than billed separately or a fee based on the percentage of tax saved?
  • Does the fee being charged appear very high for what you thought was a simple transaction?
  • Does the transaction involve unusual items such as:
    • a circular flow of cash,
    • the use of tax havens or countries with banking secrecy, or
    • offshore companies or trusts,
    where you can’t see a commercial reason for including these?
  • Does the advisor selling you the scheme try to impose unusual confidentiality conditions, such as not providing copies of written advice?
  • Is an advisor who is giving you once off advice unwilling to liaise with or explain the transaction to your normal accountant or business advisor?
  • Do you believe that Revenue would seek to counter the scheme, if Revenue became aware of it?
  • Has the promoter offered you insurance against the structure being challenged by Revenue?

The list of questions above is not exhaustive but if you have answered yes to any of the above, then you may have engaged, or may be about to engage, in tax avoidance.

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What will happen if I engage in tax avoidance?

When taxpayers engage in tax avoidance it means that the Exchequer – and thereby every other tax paying citizen of the State – loses out. Revenue has sophisticated analytical tools and strategies to detect and combat taxpayers using tax avoidance schemes. Revenue will always investigate and challenge tax avoidance schemes and will litigate cases up to the High Court, Court of Appeal and/or and Supreme Court, if necessary.

If you engage in tax avoidance you are potentially exposing yourself to significant costs over a long period often in excess of the potential tax advantage. Revenue will examine any scheme to determine whether or the not the scheme complies with the applicable tax legislation outside of the General Anti-Avoidance Rule. It should be noted that many of these challenges have been successful with the result that taxpayers are found to have submitted incorrect tax returns, thus attracting a penalty. This means that in addition to the fees that you paid to the advisor to put the scheme in place and the legal fees you must pay to defend the scheme in the Courts, you may, if the scheme is successfully challenged by Revenue, be subject to interest and be also subject to a penalty which range from 3% to 100%.

In cases where a tax avoidance scheme falls foul of the General Anti-Avoidance Rule contained in section 811C or a Specific Anti-Avoidance Provision contained in Schedule 33 a tax return seeking to obtain a tax advantage is an incorrect tax return. If the scheme is successfully challenged by Revenue you may be liable to interest and a penalty or a 30% tax avoidance surcharge.

You should also note that cases in the High Court, Court of Appeal and/or Supreme Court are heard in public. Additionally, depending on the level of tax default and penalty arising, taxpayers involved in tax avoidance may be published on the list of tax defaulters.

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What should I do if I think I may have engaged in tax avoidance?

You should know that if something sounds too good to be true, then it probably is. If you are unsure about a transaction you should always seek a second opinion. You should seek advice from an independent, reputable tax advisor with the particular expertise required to understand the transaction. This should be someone who is not connected with the scheme and preferably someone who has not introduced you to the promoter.

If you have implemented a transaction which in hind-sight you believe was tax avoidance, then you should consider whether or not you should claim the tax advantage from the tax avoidance transaction when submitting your tax return.

If you have claimed the related tax advantage you should consider informing Revenue with a view to settling any tax liabilities that arise because of the tax advantage claimed. You should consult the "Qualifying Avoidance Disclosure" link for details on how to make a disclosure and the benefits of so doing.

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Can Revenue investigate tax avoidance outside of the normal 4 year rule?

If Revenue is seeking to challenge a transaction using the General Anti-Avoidance Rule in section 811C then there is no time limit on when an officer may carry out enquiries or when an officer may make or amend an assessment (unless a protective notification has been made – refer to the General Anti-Avoidance Rule section for more details). That is, there is no time limit on Revenue’s power to challenge a tax avoidance transaction.

If a Revenue officer is enquiring into a complex transaction where it appears there was what is known as an ‘implementation fail’ (the taxpayer did not correctly follow the advice given), then there is no time limit on that officer’s power to investigate that series of transactions and make or amend assessments on foot of those investigations, as required.

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Revenue does not approve tax avoidance schemes

Revenue does not give approval or tax clearance to tax avoidance schemes.

The promoter of a scheme may be legally required to file a mandatory disclosure outlining the details of a transaction and details of any clients entering into such transaction. Revenue will issue the promoter with a Transaction Number which any taxpayer who seeks to obtain a tax benefit from the transaction must put on their Form 11, Form CG1 or Form CT1, as appropriate. However, this should not be regarded as Revenue approving a transaction. It is merely part of the process whereby the promoter is complying with their obligations under the mandatory disclosure regime.

Separately, the promoter or your advisor may file a protective notification or an expression of doubt in relation to a transaction. Again these disclosures should not be regarded as Revenue approving the transaction or that Revenue is prevented from challenging the transaction.

A protective notification brings Revenue’s attention to a transaction that a taxpayer has undertaken where the taxpayer is of the view they have not entered into a tax avoidance transaction but the taxpayer wishes to mitigate the consequences of Revenue assessing that the taxpayer has entered into a tax avoidance transaction. A protective notification will prevent a tax avoidance surcharge from arising and will delay interest accruing if the transaction is successfully challenged by Revenue using the General Anti-Avoidance Rule You should consult the General Anti-Avoidance Rule for details on how to make a protective notification and the benefits of so doing.

The purpose of expressions of doubt is to bring Revenue’s attention to a matter where you have a genuine doubt about the tax treatment of a particular matter, and so partly protects a taxpayer from interest on the late payment of tax and reduces the chance of a penalty arising. However, an expression of doubt will not protect you from interest or penalty where you have entered into a transaction to avoid or evade tax. In this regard, the legislation specifically provides that an expression of doubt shall not be accepted where Revenue is of the opinion that the taxpayer was acting with a view to the evasion or avoidance of tax. You should consult pdfmanual 41A-03-00 (PDF, 70KB) for more details on expressions of doubt.

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The costs a taxpayer may incur where he/she engages in tax avoidance

We set out below examples, illustrating the potential costs and risks to a taxpayer who engages in tax avoidance. The costs are estimates and illustrate that they can be significant. While we have estimated the legal costs of an appeal to the Appeal Commissioners, the legal fees, if the taxpayers choose to appeal to the Higher Courts, would increase many fold.

Illustrative example – scheme challenged under specific anti avoidance provision

Mary is an employee subject to PAYE. In 2015 she entered into a tax avoidance transaction, which was not disclosable under the Mandatory Disclosure regime, which saved her €25,000 in tax that year. She paid €10,000 in fees to have the scheme put in place.

On 1 December 2017 Revenue challenges the scheme under one of the specific anti-avoidance provisions. In December 2018 the Appeal Commissioners find in Revenue’s favour and Mary settles her bill on 11 January 2019. Revenue inform Mary she owes:

Original tax                                              	  €25,000
Interest   [25,000 X 0.0219% X 1,198 days approximately]  	  € 6,559
Sub-Total due						  	  €31,559
Tax Avoidance Surcharge [€25,000 x 30%]				   €7,500
Total due to Revenue		                         	  €39,059
Additional costs incurred by Mary
Promoter’s fees		                              	   	  €10,000
Legal fees (estimated for Appeal Commissioners only) 		  € 5,000

If Mary had submitted a Qualifying Avoidance Disclosure

If Mary had submitted a qualifying avoidance disclosure before 1 December 2017 then the rate of tax avoidance surcharge could have been reduced to 3% and a portion of the interest charged would not have arisen. Mary would not need to go to the Appeal Commissioners and may not have incurred any legal costs. This could have reduced the settlement payment which she eventually made by up to approximately €8,978.

Original tax                                              	  €25,000
Interest   [25,000 X 0.0219% X 791 days approximately]  	  € 4,331
Sub-Total due							  €29,331
Tax Avoidance Surcharge [€25,000 x 3%]				   €  750
Total due to Revenue		                         	  €30,081
Additional costs incurred by Mary
Promoter’s fees		                              	   	  €10,000
Legal fees (estimated for Appeal Commissioners only) 		  € Nil

A taxpayer does not have to wait until Revenue issues an Assessment for additional tax. A taxpayer can submit a qualifying avoidance disclosure at any time after filing their tax return provided it is before the hearing of a taxpayer’s case by the Appeal Commissioners. However, the rate of tax avoidance surcharge will increase as any Revenue Compliance Intervention progresses. In addition, the earlier a taxpayer submits a qualifying avoidance disclosure and pays the additional tax due the less interest that will arise.

Illustrative example – scheme challenged under GAAR:

John is a self-employed individual. In 2015 he entered into a tax avoidance transaction which saved him €25,000 in tax that year. He paid €10,000 in fees to have the scheme put in place.

On 1 December 2017 Revenue challenges the scheme on the basis that it did not work under the general anti-avoidance rule (section 811C TCA 1997) and issued an Assessment. In December 2018 the Appeal Commissioners find in Revenue’s favour and John goes to settle his bill on 11 January 2019. Revenue informed John that he owes:

Original tax  advantage claimed                                	  €25,000
Interest   [25,000 X 0.0219% X 1,155 days approximately]  	  € 6,323
Sub-Total due							  €31,323
Tax Avoidance Surcharge [€25,000 x 30%]				 €  7,500
Total due to Revenue		                         	  €38,823
Additional costs incurred by John
Promoter’s fees		                              	   	  €10,000
Legal fees (estimated for Appeal Commissioners only) 		  € 5,000

If John had submitted a Qualifying Avoidance Disclosure

If John had submitted a qualifying avoidance disclosure by 31 December 2017 then the rate of tax avoidance surcharge could have been reduced to 5% and a portion of the interest charged would not have arisen. John would not need to go to the Appeal Commissioners and may not have incurred any legal costs. This could have reduced the settlement payment to Revenue which he eventually made by up to approximately €8,308.

Original tax                                              	  €25,000
Interest   [25,000 X 0.0219% X 779 days approximately]  	  € 4,265
Sub-Total due							  €29,265
Tax Avoidance Surcharge [€25,000 x 5%]				 €  1,250
Total due to Revenue		                         	  €30,515
Additional costs incurred by John
Promoter’s fees		                              	   	  €10,000
Legal fees (estimated for Appeal Commissioners only) 		  € Nil

If John had submitted a Protective Notification

If John had filed a protective notification he would not have been subject to the tax avoidance surcharge and the interest charged would have only begun to accrue 30 days after Revenue amended his assessment rather than when the tax was originally due for payment. This would have reduced the settlement payment to Revenue which he eventually made by approximately €11,764. A protective notification must be filed within 90 days after the commencement of the transaction.

Original tax                                              	  €25,000
Interest   [25,000 X 0.0219% X 376 days approximately]   	  € 2,059
Sub-Total due							  €27,059
Tax Avoidance Surcharge [€25,000 x 0%]				   €  Nil
Total due to Revenue		                         	  €27,059
Additional costs incurred by John
Promoter’s fees		                              	   	  €10,000
Legal fees (estimated for Appeal Commissioners only) 		  € 5,000

Illustrative example – First principles challenge:

Barry is a professional. In 2015 he entered into a tax avoidance transaction which saved him €25,000 in tax that year. He paid €10,000 in fees to have the scheme put in place.

On 1 January 2017 Revenue issued an audit letter. On 1 December 2017 Revenue challenges the scheme under first principles and issued a Revenue Assessment. In December 2018 the Appeal Commissioners find in Revenue’s favour. Barry went to settle his bill on 11 January 2019. Revenue informed Barry that he owes:

  
Original tax                                                €25,000
Interest   [25,000 X 0.0219% X 1,155 days approximately]    € 6,323
Sub-Total due		                                    €31,323
Penalty (75% deliberate behaviour with co-operation only)   €18,750                                              
Total due to Revenue	                                    €50,073
Additional costs incurred by Barry Promoter’s fees €10,000 Legal fees (estimated for Appeal Commissioners only) € 5,000

Barry is a tax defaulter and Revenue is obliged to publish his details on the list of tax defaulters i.e. his name, address, occupation and details of tax, interest and penalties imposed.

If Barry had submitted an unprompted qualifying disclosure

If Barry had submitted an unprompted qualifying disclosure on 31 December 2016 his penalty would have been charged at a rate of 10% and the majority of the interest charged would not have arisen. This would have reduced the settlement payment to Revenue by approximately €20,306.

  
Original tax                                                €25,000
Interest   [25,000 X 0.0219% X 414 days approximately]      € 2,267
Sub-Total due		                                    €27,267
Penalty [25,000 x 10%]					   €  2,500                                              
Total due to Revenue	                                    €29,767
Additional costs incurred by Barry Promoter’s fees €10,000 Legal fees (estimated for Appeal Commissioners only) € Nil

Barry would not have his name and the details his tax settlement published on the list of tax defaulters as the penalty did not exceed 15% of the tax which is ultimately due. A taxpayer can make an unprompted qualifying disclosure at anytime prior to the notification of a Revenue audit or Revenue investigation.

January 2016


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