Mr. Seamus McCarthy:

As the Chairman said, the committee is examining the remaining three chapters dealing with Revenue matters from my report on the accounts of the public services for 2015.

In addition to looking at the Revenue account, previously we also considered taxpayer compliance.

Chapter 13 examines an ongoing programme of reviews of the tax affairs of medical consultants carried out by Revenue, beginning in 2010. The focus of the review is on cases where medical consultants set up companies through which they provided medical services. Some consultants set up more than one company. Revenue had concerns about the nature of the transactions between the consultants and the companies, and about the level of evidence available to support the commercial nature of those transactions. By 30 June 2016, Revenue had initiated reviews of 763 cases and had closed 403. Arising from the closed cases, Revenue had identified additional financial yields totalling €48.7 million inclusive of tax due, interest and penalties. A total of 70% of the closed audit cases had resulted in financial yield, at an average of €173,000 per case. A total of 29 of the closed cases had been published in the Revenue defaulters list up to mid 2016.

My examination looked at 37 of the closed cases in some detail. In general, we found that Revenue had used a consistent approach while carrying out the reviews. We recalculated the interest and penalty amounts charged by Revenue in ten of the 37 cases. While the correct interest and penalties had been applied in eight of the cases, we found that there had been undercharging in two cases - the estimated undercharge amount was just over €45,000. This suggests that Revenue’s process for ensuring the correct calculation of interest and penalties could be improved.

In 30 of the 37 cases we reviewed, the taxpayer involved had made a disclosure to Revenue indicating an amount of tax and interest due. We would have expected to see that the Revenue auditor had calculated the liability due in the remaining seven cases, where no taxpayer disclosure had been made. In four cases, the settlements agreed were based on calculations submitted by the taxpayer’s advisers. In the remaining three cases, calculations on the file were not signed or dated, so it was difficult to identify who had prepared them. Surprisingly, the Revenue code of practice for audit did not require Revenue auditors to quantify the liability due in an audit case. In two of the cases examined, negotiated settlements were agreed. The terms of the settlements required adjustments to the subsequent company financial statements, but Revenue did not formally communicate the required adjustments to the taxpayers. Revenue has agreed that, in future, where adjustments to subsequent financial statements are required, this will be communicated formally in the audit closure letter. Revenue has also committed to following up on a sample of such cases to ensure that the relevant adjustments have been made.

Chapter 14 examines the operation of the research and development tax credit which was introduced to incentivise private company expenditure on in-house research and development undertaken in Ireland. The credit can be claimed at a rate of 25% of qualifying expenditure, in addition to the standard 12.5% corporation tax deduction, that is, a total tax benefit of 37.5% offset against corporation tax liability. Since 2009, Revenue has been paying out rebates in respect of the credit. The cost of the credit has risen substantially since its inception, as shown in the diagram that members can see on the screen. The cost was €553 million in 2014, which was equivalent to 26% of the estimated business expenditure on research and development for that year. The diagram illustrates that the offset of corporation tax receipts is part of the cost of the scheme, but also that the payable credits is quite a significant amount in 2014.

Our examination found that Revenue did not have readily available information relating to the cost and number of beneficiaries of the scheme, or about compliance interventions or case reviews it had carried out in respect of research and development tax credit. As a result, information in these areas had to be extracted from individual files by Revenue for the purposes of the examination. Revenue has stated that the introduction of its electronic case management system from July 2015 will allow it to more easily identify research and development credit cases. Given the high cost of the scheme, however, Revenue needs to also develop the capacity to monitor the effectiveness of its compliance work in this area.

A Revenue intervention in respect of a research and development claim involves the application of two tests: a science test to ensure that the activities included in the claim are eligible for credit; and an accounting test to ensure that the associated costs have been properly tracked and accounted for. The examination reviewed a sample of 17 intervention cases closed by Revenue in 2015 that involved an element of disallowed research and development tax credit. The total research and development tax credit claims in those cases was €46.4 million. Following intervention review, Revenue identified a total of €8.4 million for recovery, including tax, interest and penalties. This was equivalent to 18% of the tax credit claimed.

A condition of obtaining any public service contract with a value of €10,000 or more within any 12-month period is that the contractor is required to produce a tax clearance certificate. Revenue uses experts to assist its own caseworkers when checking the scientific aspects of research and development tax credit cases. In 2015, Revenue had paid five experts more than €10,000 each but was unable to provide evidence that the tax status of the experts had been confirmed prior to processing payments. In addition, Revenue had not requested copies of qualifications from individuals applying to be included on the panel of experts. Revenue has agreed to incorporate this step as part of its procedures.

Chapter 16 deals with a specific issue that arose in 2015 in respect of the collection of tobacco excise, which yields revenue of approximately €1 billion a year from a small number of tobacco producers. The excise is collected through the application of stamps to tobacco packaging. In October 2015, the Revenue Commissioners agreed to allow one tobacco manufacturer to defer part of its payment of tobacco stamp liability due in December 2015 until January 2016. The amount deferred was equivalent to 11% of the company’s liability for the year. Members may wish to note that the cash amount is not disclosed in the report as it could lead to identification of the company.

The legislation underpinning tobacco excise has, since 1996, allowed Revenue, in exceptional circumstances, to permit a tobacco producer to defer payment for up to one month after the liability arises. Revenue exercised this power for the first time in 2015, in the context of uncertainty around the introduction of new cigarette packaging legislation. The examination found that Revenue had not established a written procedure for granting such a deferral nor was the deferral in 2015 formally documented. I recommended that Revenue improve its documenting of high-value decisions and exceptional cases, and Revenue has agreed to implement the recommendations.

As part of the standard arrangements for the purchase of tobacco stamps, tobacco companies are required to have in place a bank guarantee or bond which can be called on by Revenue in the event of a default. The company availing of the tobacco stamp liability deferral had an adequate guarantee in place at end of 2015 and so no tax was at risk when the payment was deferred.