Speech by Frank Daly, Chairman Revenue Commissioners Small Firms Association Annual Conference Dublin Castle, 7 September 2004

Good Morning

It was Pat Delaney who suggested the title of this session – 'Nothing to fear, nowhere to hide' and either by accident or design he has come up with something that is a perfectly apposite summary of our preferred approach right now to managing Revenue’s business. So much so in fact that if it hasn’t already been copyrighted we might (with the SFA’s kind permission) adopt it at some stage as a slogan for Revenue!

The Small Firm Sector

I’d like to begin with a word of thanks to the SFA for the invitation to speak to you today. I greatly welcome any opportunity for dialogue with the business community and particularly with a group that is as representative and dynamic as yourselves. My colleagues in Revenue and I are keenly aware that your success in business is vital to Ireland’s success as an economy and society and that if you succeed in 'raising your game' then we all, without exception, rise with you. It’s important then that where we can, Revenue should assist you in this process and, in the context of our role as one of the regulatory authorities with whom you have to deal, ensure that the burden of that regulation is minimised to the greatest possible degree.

At the outset then I should assure you of our sensitivity to the burdens that regulatory compliance can place on the small business sector and of our continued determination to keep such burden as low as we can. This must of course be consistent with Revenue’s responsibilities for collecting the taxes and duties that are properly payable and ensuring that you, no more or no less than any other sector, are in compliance with your tax and customs obligations.

That presents us both with a challenge. We need to find the right balance between the light touch that minimises the burden of compliance and the harder squeeze that provides assurance of such compliance and assurance that taxpayers are meeting their obligations. This is difficult. But however difficult it may be it is best achieved by working together in a spirit of partnership. I believe that the ongoing dialogue that exists and will continue to exist between Revenue and the SFA is a very valuable element in meeting that challenge.

A balanced approach

As suggested by the title 'nothing to fear, nowhere to hide' it is the concept of balance – between the light touch and the hard squeeze - that I wish to address this morning.

Like many firms represented here today, Revenue is a service organisation. We have customers just like you and, just like you, we need to keep them. However it could be said that there are some unique features about our situation.

Firstly, once we get customers on to our books we rarely lose them!

More serious however is the fact that Revenue’s relationship with our customers exists on two levels because our focus must be not just on serving individual businesses and citizens in the daily course of tax administration, but also on serving the community as a whole. Our key tasks of collecting over 93% of exchequer funding and of protecting trade and frontiers are vital to the general well-being of this country (and indeed also to the well-being of the European Union).

The bottom line for both of these Revenue relationships (with the individual taxpayer and with the wider community) and indeed our primary business goal, is that we collect the taxes and duties that are due and that in doing so each business and individual pays what is due from them. The community requires this of us so that Government programmes can be funded and individuals require this of us so that they know they are not being treated unfairly compared to neighbours or competitors.

Compliance – the core challenge

This brings me to the core business challenge that we face – maximising taxpayer compliance. Revenue has a well articulated strategy in this area. It is a combination of what we call the 'soft' and 'hard' approaches. The 'soft' approach is to encourage voluntary compliance by working to make the meeting of tax liabilities as easy as possible by providing top quality accessible services to taxpayers.

The 'hard' approach is to provide a sharp and uncompromising response to non-compliance, through carefully targeted audits and investigations, through the strict application of interest and penalties and through the increased use of criminal prosecutions for serious cases of fraud and evasion.

Let me focus for a moment on each of these two approaches.

Towards Voluntary Compliance

In relation to promoting voluntary compliance what is it that we have been doing and what more can we do to make the meeting of tax obligations as easy and attractive (maybe painless would be going too far here) as possible?

Well our overarching approach has been to change the culture of Revenue to one focussed on the customer and on customer service (and we’ve learned a lot from commercial firms like yourselves in that process). We have worked very hard on this over recent years – we’re by no means finished as we’ve always more to learn and more to do.

In recent times to take a few brief examples:-

We have invested hugely in technology providing a 24/7 on-line facility through ROS or our website to make returns and payments, download your employees’ tax credit certificates or apply for tax clearance. Most of you I hope will be aware that you can now apply for Tax Clearance Certificates on line through the Revenue web site. The application is processed overnight and the Certificate or appropriate response is issued the following day.
We have worked to reduce and simplify the number of forms, for example by combining return filing and payments into a single event.
We continue to develop a range of payment options including extending the single debit authority to VAT and Corporation tax, direct debit for instalment arrangements and annual payment and filing facilities for small cases.
We set up specific focussed customer service initiatives where there are new requirements on our customers, for example by establishing a dedicated help-desk to assist employers in managing the recent changes to Benefit in Kind rules
On a broader note our new organisational structure is designed around the customer base rather than around particular taxes and duties. This will, over time, serve to reduce the number of offices and officials you will have to contact to do business with us.
Encouraging taxpayers/small business with tax liability of €7,000 per annum to switch to annual scheme for return filing/payment.

Separately, but just as importantly, we have worked to reinforce and reward high standards of voluntary compliance. The tax system cannot rely exclusively on legal coercion through powers and enforcement. Indeed an inappropriate heavy-handed approach can undermine our whole strategy of encouraging voluntary compliance. For example, if a relatively minor Revenue offence is punished disproportionately, and the taxpayer otherwise has a good track record, he or she is likely to feel that past good faith efforts at compliance have not been acknowledged and he or she is then more likely to respond in future only to threats – or, worse still, feel that his or her biggest mistake was getting caught!

We have tried then to build more proportionality into our approach to policing the tax system – to make the punishment more closely fit the crime where non-compliance is discovered. Two examples:

Before 2002, audit settlements above €12,700 were subject to the 'name and shame' publication provisions if there was any element of penalty involved – regardless of the seriousness of the offence. Since then, we have excluded from publication those settlements that can be regarded as arising from 'insufficient care' as opposed to the more serious categories of gross carelessness and deliberate default.
We have also put in place a very favourable regime for voluntary disclosure of underpaid tax and we allow taxpayers to 'self-correct' returns without penalty if they do so within a reasonable time. We want to encourage people to regularly review their compliance position and to come to Revenue before Revenue comes to them. This 'reward for coming clean' policy seems to be working: more and more people are coming forward to self-correct or to make voluntary disclosures under the arrangements set out in our new Code of Practice for Revenue Auditors. Would it be a reasonable conclusion that they are accepting that they have nothing to fear?

These are things we have done. There is more to do.

Quantifying Compliance Costs

Looking forward, Revenue will continue to promote electronic methods for return filing and payment as the preferred alternative to paper filing/payments.

We will continue to develop the Revenue website so that it provides a menu of 'Self Service' options for tax returns, leaflets and simple tax and duty requests, where authentication is not an issue.

However there is one other area we should explore. I would be very keen to do some work on objective quantification of the costs of tax and duty compliance to taxpayers. In particular I would like to begin this by focussing on the costs for small and medium sized businesses and I would like to suggest that in doing so we could work together with the SFA and other interested bodies – such a collaborative approach, besides bringing the knowledge and expertise of both sides to bear on a difficult subject, would doubtless contribute to validation and acceptance of the objectivity of the findings.

Two points we would need to be very clear about in any such undertaking:

Firstly such a study would be useful only if it yields practical benefits – it must therefore identify specific factors that contribute to compliance costs so that there can be a focus (from all sides) on minimising these. From Revenue’s point of view for example it might mean that we gain a clearer view of what particular identified areas we need to target our customer service initiatives at.
Secondly we need to be clear that where there is a compliance requirement, there will always be a compliance cost and it would be naive and misleading for anybody to think that an examination of compliance costs will lead to their elimination.

Dealing with non-compliance Having spoken about promoting voluntary compliance I’d like to briefly focus now on the second arm of Revenue’s strategy – that of dealing with those who choose not to comply voluntarily with their obligations. Cracking down hard on evasion, in all its forms, is about more than collecting unpaid taxes. It is a vital service to our compliant customers who rightly demand that their peers and competitors also pay their fair share.

The legacy of widespread, institutionalised tax fraud which has been revealed in recent years presented Revenue with both a huge challenge and major opportunity in terms of public perceptions of tax compliance.

The opportunity lay in the hardening of public attitudes to tax evasion that these revelations have generated. The challenge lay in how Revenue responded to the revelations. If we were not clearly seen to vigorously pursue these frauds then compliant taxpayers would inevitably become cynical and disenchanted and our task in creating a culture of compliance would become much more difficult.

We can, I think, take some satisfaction from our successes in dealing with this legacy of non-compliance. To date we have collected some €1,569 million but much more importantly from a longer term view we have demonstrated that we mean business. These investigations are sometimes slow and tedious, they are a considerable overhead on Revenue, but by persisting until we collect what is due, we are driving home the message that there is no hiding place.

I have no doubt that the scale of response to our recent deadline for holders of offshore assets to come forward voluntarily, over 14,000 cases, was in no small part due to fact that we had proven our determination to follow through on the earlier investigation of bogus non-resident account holders. In that case there were certainly people who believed that if they kept their heads down we would not have the resources or the will to find them. But we did – while some 3,750 cases came forward voluntarily in 2001, Revenue has subsequently identified a further 8,500 cases. That’s what I mean by there being nowhere to hide.

Improved Detection and Investigation

Establishing that Revenue means business on non-compliance is about more than cleaning up the legacy of past scandals. Along with gaining greatly improved powers, we have invested heavily in enhancing our ability to rapidly identify, investigate and prosecute tax evasion. · We have established a dedicated Investigations and Prosecutions Division with a clear mandate to bring increased numbers of criminal prosecutions for tax evasion.

We have established a dedicated Investigations and Prosecutions Division with a clear mandate to bring increased numbers of criminal prosecutions for tax evasion.
We have developed sophisticated Intelligence and Risk Identification tools on our IT systems,
We have established local Special Compliance Districts in our Regions whose role is to target and monitor potential risk areas in real time – not allowing problems to grow before tackling them.
In addition, through new Tax Treaties and improved Tax Information Exchange Agreements with other jurisdictions we have greatly enhanced abilities to follow hot money wherever it goes.

It would be a vain boast for me to suggest that we have reached a point where there is nowhere for the evader to hide – but make no mistake, we are relentlessly working to root out and close off those hiding places.

And I think it is important to emphasise that our recent investigations are not transient examples of a Revenue enthusiasm and determination that will wane with time or be overtaken by some other priority. In equity to the majority who pay their share:

there can be no greater priority than vigorously pursuing those who do not comply;
there should never be a function that Revenue is more enthusiastic about;
and – to turn the title of this talk on to ourselves - there should be no hiding place for a Tax Administration that shirks from this responsibility.

Irish attitudes to tax compliance

Finally. Ladies and Gentlemen, in this very representative gathering of Irish business leaders, could I take a few minutes to talk about something that may not appear to be, but is in fact very relevant to this morning’s theme. I’d like to say a few brief words about the attitude of the Irish people to tax compliance and what I will call the 'disconnect' between taxation and public services.

The avalanche of tax evasion disclosures in recent years, the scale of which has confounded the suspicions of even the most hard-nosed and cynical of Revenue officials, raises some fundamental questions about the attitude of Irish people to tax compliance.

While our recent successes in tackling evasion (as I mentioned earlier the various special investigations have so far recovered over €1.5 billion) are mainly down to new effective powers and determined follow-through, the reality is that powers, enforcement and other deterrents will never, on their own, get rid of tax evasion. Wider 'attitudinal' factors, not just the risk and consequences of getting caught, also have a major influence on compliance behaviour.

So can I pose a (composite) question this morning?

After 83 years as an independent, sovereign State, does it seem to you that at the most fundamental level there is still a 'disconnect' in the minds of many Irish citizens between taxation and public services? Is the legitimacy of the tax system as 'the price we pay for a civilised society' either sometimes overlooked or unacknowledged by many of our citizens?

I believe we could do more to ensure that business and the broader community understand and accept what they are paying for through their tax system. This is of course a sensitive topic, because it touches on highly political judgements about the appropriate size of the State sector, the question of public expenditure choices and taxpayers getting value for money.

But while individuals and politicians may debate these aspects (and as a Civil Servant I’m certainly not going to express views on them here this morning) it seems to me there is one fundamental I can and should talk about – that in a democracy such as ours the payment of taxes is an essential part of good citizenship. The principle of 'no taxation without representation' after all dates to the Magna Carta in 1215, but it seems to me that at times there remains a very limited appreciation of the corollary to this – that the rights and privileges that we enjoy as citizens - such as services, security, infrastructure and, of course, democratic representation, are dependent on taxation.

All democracies operate on the basis of this type of 'social contract' - citizens enjoy rights – such as security, proper legal process, access to education, health care and other services – and, in return, have duties, which include providing the resources to ensure such rights.

As it happens, the Irish State sector is the smallest in the EU, even within the enlarged 25-member union, when measured in terms of gross domestic product (GDP): our tax-to-GDP ratio is just 28.6 per cent [1] . (The average tax-to-GDP ratio for the EU-25 is 40.4 per cent.) But even if we had a ratio as high as, say, Sweden’s 50.6 per cent, it is difficult to accept that high taxation in some way provides moral justification for tax evasion. This was the type of argument sometimes used to excuse the large-scale evasion of the eighties and early nineties in Ireland. It ignores the fact that governments that levy taxes are democratically elected, and taxpayers as citizens have their say, through the ballot box, in determining the general level and distribution of taxes.

It is interesting that in opinion polls, when people are asked if they are over-taxed they are likely to say that they are. But, if asked would they pay more taxes to fund, say, better health services, education or infrastructure the great majority say, yes [2]. It seems that when people make the mental link between taxes and the public goods and services they receive in return, they are much more positively disposed to the idea of taxation. However, taxation is rarely presented in such terms; instead it is seen as an inescapable aspect of life – 'death and taxes' – and is commonly associated with negative rhetoric such as 'burden' and 'imposition'. (Any chance we could start talking about 'contribution' or 'share'?) A greater public understanding of the connection between taxation and public services could, I believe, improve the tax compliance culture in this country, notwithstanding the political sensitivities involved in such an exercise.

I also believe that more could be done to recognise explicitly that good tax compliance behaviour is an important part of the country’s social capital, and on the other side that bad compliance behaviour by 'free riders' should be more widely disapproved of by the community. Increased public disapproval of evasion, and the sanction of peer-imposed stigma, is a powerful way of improving compliance.

This is borne out by the hardening of public attitudes in other areas of concern, such as drink driving and bogus insurance claims. For example, the 'pick-pocket' radio advertisements used to discourage exaggerated compensation claims – emphasising higher premiums for everybody else – appear to have been highly effective in stigmatising Ireland’s 'compo culture'. The same basic message could indeed be applied to discourage tax evasion: evasion is picking the pockets of compliant taxpayers.

Conclusion

In conclusion Ladies and Gentlemen I believe that the challenges I’ve talked about, of developing and fine-tuning a balanced approach to taxpayer compliance will continue to be the biggest task facing Revenue in the coming years.

We continue to work at developing an organisation that is more responsive to this challenge.

By implementing a new organisational structure that focus outwardly on you, the customer, rather than inwardly on taxes and duties, Revenue has become more aware of and sensitive to the factors that drive compliance.

By strengthening our harder side, we are working to discourage those who might be tempted towards fraud and evasion.

By promoting debate on the real connection between the payment of taxes and the provision of services and by reminding everybody that the payment of taxes is an essential part of good citizenship we can all work together to build a climate in which the vast majority have nothing to fear from Revenue and the very small few have nowhere to hide.

Thank you.

[1] €stat figures for 2002 (latest available year).

[2] For example, an Economist magazine poll before the 1997 UK general election found that over three-quarters of the public wanted more government spending on health, education and welfare even if it meant tax increases.

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