Public Accounts Committee Hearing, 8 December, 2005.
Revenue Vote 2004
Opening Statement by Revenue Chairman, Frank Daly
I thank the Chairman and members of the committee for this opportunity to make an opening statement in relation to paragraphs 2.8 and 2.9 of the Comptroller and Auditor General's Report.
Paragraph 2.8 deals with Relevant Contracts Tax. A special tax deduction scheme for the construction industry was introduced in 1970 to deal with problems, which were endemic in the industry, of engaging workers, often mobile and difficult to trace, on a "cash in hand" basis, coupled with a poor record of complying with tax obligations. The scheme was extended to the meat processing and forestry industries and is now called Relevant Contracts Tax (RCT). Over the years some changes have been made to the scheme but it still retains the basic features of a withholding regime (at 35%) unless a sub contractor has a permanent place of business and a good tax compliance record, of relying on paper vouchers to evidence payments between contractors and subcontractors. As with any such system there are inherent risks.
In recent years we have been both re-examining the operation of RCT and putting additional resources into policing the tax. Our focus, working where appropriate with the Industry, has been driven by the objectives of:
- Reducing the regulatory burden of the scheme, ensuring that business fully understands the workings of the system and encouraging them to get the employment status of their workers right.
- Improving the level of compliance by businesses and individuals with their tax obligations.
We are working on reducing the regulatory burden through providing online services via ROS. This makes it cheaper and simpler for businesses to file their RCT returns and pay the tax. We hope to expand these services in future by allowing for further online transactions in the RCT area.
We have met and continue to meet with industry representatives to ensure they fully understand the workings of the RCT system, the compliance requirements and the need to get the employment status of their workers right.
Most importantly we have been putting an intense focus on improving our ability to police RCT effectively and to very quickly identify and tackle those businesses and individuals who fail to comply. Our new organisational structure has put us in a better position to target riskier cases with real time interventions and we have invested heavily in bringing RCT into our mainstream Integrated Taxation Services (ITS) computer system thus enabling us to capture, analyse and match RCT data and use it to target non compliance. Our new computerised risk assessment selection tool, known as ESKORT, which enhances our capabilities to detect non-compliers and target resources at them, will in future be populated with RCT data as well as that coming from other sources. A valuable side effect of ESKORT is that it will allow us to minimise the number of interventions with compliant tax and duty payers.
The construction industry makes a substantial contribution to the Irish economy; accounting for around 19% of GDP and in 2004 had a level of output of approximately €28 billion. It directly employs over 220,000 people. The amount of Relevant Contracts Tax collected from the industry was approximately €612 million in 2004 and to end October 2005 exceeds €617m. Revenue is very conscious of the significant risks arising in the operation of RCT but without it I am convinced that the risks would be immeasurably higher and accordingly, given the significance of the construction industry to our economy in recent years, the Revenue response has been to devote increasing resources to policing it.
In 2004 for example we devoted 18.6% of our audit programme activity to the industry and carried out 3,036 audits across all our main programmes out of a total of 16,321 audits. Those audits yielded approximately €57 million out of a total audit yield of €549.6 million, amounting to 10% of the total audit yield recovered in 2004. Approximately 45% of the 3,036 audits were nil yielding, a figure that is not out of line with the percentage of nil yielding audits across all programmes.
Our focus on construction continued in 2005 with up to 20% of audit and compliance interventions being targeted on the construction sector. Up to the end of October 2005 we had carried out over 4,400 compliance interventions in the sector yielding over €73m. Obviously that total will rise by year end.
In these interventions during 2004 and to a greater extent in 2005, our nationwide focus has been on various construction and infrastructure projects, both large and small. Not only have we been carrying out site visits to gather real time information, we also have been looking at key risks in the industry such as VAT avoidance schemes, property syndicates, issues relating to the use of bogus labour hire arrangements, fraudulent claims for VAT and RCT, cash and other payments to contractors and subcontractors. I must stress that much of this work is ongoing and reliable final results are not readily available yet.
We are just finalising our plans for 2006 and we will be targeting 25% of all our audit and compliance activities on the construction sector. We will continue to tackle suspect principal contractors and subcontractors; we will continue our programme of site visits to gather research and intelligence to identify persons who are not on our register or who are not tax compliant; we will identify and challenge avoidance schemes and we will continue to focus on the ongoing issue of the proper classification of workers within the industry. Our prosecution programme and our enhanced computer developments will support all of this activity. In particular, as we will be capturing RCT data electronically, our ability to identify risk cases and target our resources accordingly will be greatly enhanced.
We have already undertaken an in-depth review and evaluation of the risks in the sector and a comprehensive action plan has been agreed by the Management Advisory Committee in Revenue to implement some technological, administrative changes and legislative proposals. I am confident that these developments, together with the increased resources targeting the sector will greatly increase tax compliance in this sector. Of course we will continue to refine our risk evaluation and further target our resources in the light of emerging results and insights from the 2005 and 2006 results.
Paragraph 2.9 deals with the CREST system of collecting stamp duty on shares transferred by electronic means. A gross yield of €255 million was recorded for 2004. The collection of stamp duty, which commenced in 1996 through the CREST settling system, is a unique collection tool in Revenue. The agreement signed that year between the operating company and Revenue underpins the collection and represents an early example of public/private partnership. The agreement affords a significant advantage to Revenue. This is due to the fact that the cost of collecting the duty is relatively negligible because the bulk of the duty automatically flows from a single source (the operating company) to the Central Bank on a weekly basis. Moreover the administrative burden on Revenue in handling that flow is minimal. In addition the system reflects the modern day trend of moving from paper based collection systems to electronic systems and is a trend Revenue has been to the forefront in promoting.
The compliance interventions taken by Revenue in respect of potential stamp duty for trades settled through the CREST system are ongoing and developing in sophistication. This is particularly demonstrated by the use of computer based techniques for conducting desk based audits. These techniques encompass activities such as the examination of statutory reports to ensure compliance and the identification of customers who have failed to properly engage with Revenue. The annual Revenue business programmes envisage a greater use of such techniques and the extension of computer usage in the external auditing by Revenue of its CREST customers.
Additionally, the upgrade of the Revenue CREST computer is expected to be completed next year and the enhanced facility will contribute to and further strengthen the compliance interventions presently undertaken by Revenue.
Thank you Chairman