Mr. Niall Cody:

I thank the Chairman for this opportunity to make a short opening statement. As time is limited, I will focus on providing a brief overview of the three relevant chapters from the Comptroller and Auditor General’s report of 2015. At the outset, I should state my obligation to uphold taxpayer confidentiality as provided for in section 851A of the Taxes Consolidation Act 1997.

The Comptroller and Auditor General has reported on Revenue’s review of the tax affairs of medical consultants. This is a good example of how compliance issues identified locally are extended nationally when necessary. During a routine audit of a medical consultant as a high-wealth individual, certain risks were identified which led to an examination of transactions that took place at the time when the medical consultant incorporated. A focus on the substance of these arrangements revealed no evidence of commercial reality in the structure and transactions involved. The issues that Revenue challenged centred on the incorporation of a private practice with a view to securing an overall reduction of tax payable, through tax arbitrage between personal and corporate rates of tax. This identified significant tax risk and, therefore, a targeted sectoral compliance programme was implemented nationally.

The Comptroller and Auditor General’s report provides some detail on how cases were selected. As with any Revenue compliance programme, we used analytics to identify and select cases and then conducted the appropriate intervention in each case.

The tax risks that were identified included the purported disposal of goodwill by medical consultants to their controlled companies, cross-charges made between medical consultants and their controlled companies that lack any commercial basis, claiming personal expenses against professional income, insufficient or no supporting documentation to support large expenses claimed as tax deductions, excessive incorrect tax deductions claimed in relation to salaries-pensions of spouses and children, and deferring professional income to later tax periods, thus delaying taxation. The project has not yet concluded. As at March 2017, there were 279 open cases, 84 of which are under appeal.

By way of update to the figures from paragraph 13.9 of the Comptroller and Auditor General's report, as at 30 April 2017 Revenue has initiated 825 cases, 552 of which were closed by that date, yielding €61 million in tax, including future uplift, interest and penalties. This yield relates to 276 consultants, 36 of whom have been published in the quarterly list of tax defaulters.

The Comptroller and Auditor General made seven recommendations arising from his examination of this compliance programme. Revenue has agreed to six of these, either in full or in part, and the committee has been provided with updates on their implementation. Progress has also been made in relation to the recommendation which was not agreed and this is being considered again, as part of a review that is currently under way.

The Comptroller and Auditor General also reviewed the operation by Revenue of the research and development tax credit. The cost of this tax credit scheme is significant and in the period from 2004 to 2014 has increased from €71 million to €553 million. In 2013, the economic and fiscal division of the Department of Finance reviewed the scheme, concluding that since inception the tax credit was a significant driver for increasing research and development spend and an overhaul of the research and development tax regime was not required. Revenue interventions in respect of the research and development credit have increased in proportion to the risks associated with the increasing cost of the credit. In 2011, there were 26 such interventions, yielding €2.6 million. In 2015, this rose to 178 interventions yielding €13.5 million.

During his examination, the Comptroller and Auditor General sought detail on the number of research and development cases selected for intervention and the element of yield directly applicable to research and development. This information was not readily available because Revenue records yield from interventions by reference to tax head, rather than by reference to the tax credit or relief giving rise to the yield. In order to provide the detail requested, it was necessary to examine each individual case. The Comptroller and Auditor General considered that the cost of the research and development scheme justified collating information on the compliance work carried out specifically on research and development and made a recommendation to that effect, which Revenue accepted. In implementing this recommendation, Revenue has adopted a two-pronged approach. First, the Revenue case management system provides better labelling functions to enable research and development interventions to be identified; and, second, changes to the corporation tax return will allow case workers to raise assessments in respect of research and development adjustments to claims, enabling identification of cases where research and development yield has been established. This will facilitate compiling accurate statistics on clawback amounts in respect of research and development activities. By way of an update, the research and development intervention figures for 2016 are a total 271 interventions, 93 of which yielded over €13.3 million.

The Comptroller and Auditor General made two additional recommendations in relation to the engagement of experts by Revenue. Revenue agreed with both recommendations, and we have recently strengthened our procedures to ensure that tax clearance is confirmed before any expert is accepted for work and we have also taken the opportunity to improve our processes concerning the verification of experts' qualifications.

Since 20 May 2016, tobacco companies are only permitted to manufacture tobacco packs that conform to the second tobacco products directive as implemented in Ireland under Department of Health regulations. In March 2016, the Department of Health published measures to implement the directive in Ireland. Under the new regulations, any stock manufactured before 20 May 2016 could be released for sale up to and including 20 May 2017.

In late 2015, it was not clear when or how the new directive would be transposed into Irish law, and neither was it clear as to the format in which tobacco packs could be produced after 20 May 2016. As a consequence, one tobacco company decided to build up sufficient stocks of stamped tobacco packs in the old format and hold the product in warehouses for release onto the market in 2016. In discussions with the tobacco companies on transitional arrangements, Revenue agreed with one tobacco company that the deferral element of the additional-stock element of the tax stamp charge due for payment on 21 December 2015 could be extended to 28 January 2016. Tobacco products tax legislation provides that in exceptional circumstances a longer period of deferment can be applied. A deferral of one month was granted on the basis that the uncertainty around the introduction of the new directive represented a set of exceptional circumstances. The tobacco company in question had a guarantee in place covering the amount of the tax stamp charge that was deferred and no tax was at risk as a result of the deferral.

The Comptroller and Auditor General has made two recommendations arising from his examination of the deferral and Revenue has agreed with both. We now have in place a robust procedure which sets out the various authorisations required for the use of powers relevant to tobacco products tax legislation and which ensures that approval decisions in that regard are fully documented.

I am happy to discuss any issues and answer any questions raised by the committee, subject of course, to taxpayer confidentiality.