Wednesday, 5 October 2005
Question 80: To ask the Minister for Finance the action he will take arising from the widespread abuse of the relevant contracts tax system; if he will allocate additional staff to the Revenue Commissioners in order that this sector can be adequately policed; and if he will make a statement on the matter. [26925/05]
I propose to take Questions Nos. 79 and 80 together.
I am informed by the Revenue Commissioners that they fully recognise the tax compliance risks that arise in the construction industry and have carried out an extensive programme of checks, audits and investigations in the construction industry in 2005.
The Revenue Commissioners have reorganised along regional lines with each revenue region containing a special compliance district specifically set up to combat evasion. During 2005, both mainstream revenue auditors and special compliance staff have carried out substantial investigations of tax evasion in the construction industry. The extent of these activities is evident from the following brief summary.
Revenue's east and south east region devoted 50% of its available audit resources to a special investigation of the construction industry. In the first half of the year, the region completed almost 500 audits of principal and subcontractors yielding approximately €12 million so far. The region carried out a further 360 compliance checks, 37 site visits and 92 visits to subcontractors newly issued with C2 certificates. By the end of the year, this region alone will have completed over 1,000 construction audits, 800 compliance checks and 70 site visits.
Similar activity is taking place throughout the country. The Dublin region's special compliance staff carried out 35 site visits and 1,650 compliance checks in the first six months of this year. Dublin also has a Revenue district dedicated specifically to dealing with high-risk construction industry cases. That district alone completed 80 audits so far this year with a yield of €4.5 million in tax, interest and penalties. The Dublin region has undertaken intensive investigation of a number of high risk cases, and has developed a national relevant contracts tax monitoring group which tracks the activities of high-risk principal and subcontractors by working closely with every revenue district in the country.
In the other Dublin Revenue districts a high level of construction industry related activity has also taken place in 2005. For example, one district alone,out of a total of six districts, has completed approximately 300 relevant contracts tax field audits in the first half of 2005.
That story is replicated in Revenue's other regions. The south west region has undertaken an extensive programme of RCT audits and checks, and has also had an in-depth look at a range of infrastructure building projects. The Border, midlands and west region has conducted a wide-ranging programme of activity in the first half of the year. For example, its special compliance district completed nearly 70 site visits affecting 250 contractors, as well as over 130 covert surveillance operations aimed at gathering intelligence on possible evasion.
The Revenue Commissioners are now planning how to build on these activities in 2006. The construction industry will form a major part of Revenue's compliance and audit work in 2006. That work will take into account a risk analysis of the sector, which has been conducted recently. The introduction of a computer risk assessment system during 2006, covering all businesses, will help target further the Revenue Commissioners' anti-evasion work. This system will enable them to capitalise on the knowledge already gleaned on this sector.
The Government provided the Revenue Commissioners with additional resources, including 400 staff in the audit and compliance area some few years ago. The Revenue Commissioners are taking steps to police the construction sector within their existing staffing complement by appropriate deployment of resources, effective real time initiatives on the ground and innovative exploitation of technology to assess and contain risk. If the Revenue Commissioners come to the conclusion that additional resources would be of practical benefit, whether in the form of staff or otherwise, they will make a case to me and I will assess it on its merits and respond appropriately.
I am confident, therefore, that the Revenue Commissioners are alert to the emergence of new or increasing tax risks in the construction industry and that their 2006 audit and compliance work will focus on the sector.
I thank the Minister for his reply. Based on the report of the Comptroller and Auditor General, it is hard to share the Minister's confidence that this issue is under control. In the report, the Comptroller and Auditor General took a small sample in the large cases division of the Fingal and Cavan/Monaghan districts. The report found that on the RCT system, 49% of contractors had submitted returns late, 12% had made no tax deductions where deductions clearly needed to be made, and returns were not all being examined because of pressure of work. There was also clear evidence of the continuing problem where people are being returned as sub-contractors even though they are employees, which is not an acceptable practice. Only 12 cases of fraud were uncovered and it seems that only person has suffered a penalty and that was a community service order.
It strikes me that there is significant evidence of non-compliance. The building industry would probably raise between €10 billion and €12 billion in tax revenue, so non-compliance has major consequences for the Exchequer. It is not reassuring to find that the risk evaluation ordered by the Comptroller and Auditor General after his report in 2000 has not yet been examined by the Revenue Commissioners. While there are obviously builders and contractors who are abusing the system, there are many who are trying to be compliant. It makes it very hard for compliant builders to compete if others are actively engaged in non-compliance on the scale that the Comptroller and Auditor General's report suggests.
The Revenue Commissioners have been very successful in inculcating a compliance in this country, as tax collection has improved greatly and tax liability is being met responsibly by those who should bear it. The investigations undertaken by the Revenue Commissioners have also been very successful, but if they require further resources then they can put that case to me.
The risk based approach adopted by the Revenue Commissioners to audit and compliance interventions is now focusing on tax-payers that pose the highest risk. They have adopted a targeted sector wide approach to audit investigations and are conducting audits on higher risk cases. They have rebalanced their compliance measures by giving intense scrutiny to certain sectors where there are perceived risks, such as the construction industry. They have written to some tax-payers in the construction industry outlining their past experience of audit settlements in this sector and pointing out areas that give rise to underpayments of taxes, as well as inviting tax-payers to make corrections in advance of audits in that sector. They are not just looking at relevant construction tax issues in isolation, but are looking at cases as a whole, as there are other tax issues involved. This is part of the whole case management approach which they are developing to compliance interventions.
The strategy to maximise identification of tax-payers has been through the setting up of the special compliance districts in the revenue regions, where the Revenue Commissioners have a focused approach to the gathering of intelligence and information on tax-payers at sectoral level. I have full confidence in them. If the Chairman of the Revenue Commissioners wishes to speak to me about any further deployment of resources he is free to do so, and I am sure he will do so.
Has the Department attempted to quantify the cost of tax fraud in the building industry, especially in regard to RCT, but also the knock-on consequences for PRSI to which this is intimately linked? Has the Department attempted to quantify the risk? Would the Minister accept independent conservative assessments which suggest the risk and the loss to Revenue is in the region of €200 million to €400 million a year based on the value of the building industry?
In the context of the answer the Minister just gave, does he believe that 35 site visits to contractors in the Dublin area is an adequate investigatory response to the level of non-compliance indicated in the Comptroller and Auditor General's report? The Comptroller and Auditor General stated that last year only 15,000 audits were carried out, of which 1,500 were in the building industry. The Minister indicated in his reply that even with enhanced resources for this year there is no significant increase in that figure. Given the value of the building industry referred to by Deputy Bruton, how is the Minister responding to the failure to protect taxpayers' interests in collecting tax due from everyone in the building industry, and not just compliant builders who are obviously put at severe disadvantage by the fraud and scams that are prevalent?
I do not accept that such practice is prevalent. The Revenue Commissioners have responsibility for administering and operating all taxes in the construction or any other industry and ensuring that all operators within that sector comply with their taxation obligations. They recently advanced a number of key developments that are having a significant impact on tax compliance, which I outlined in my reply.
It is not simply a question of 35 site visits. To suggest that is the level of activity in the Dublin district of the Revenue in regard to the construction industry is to miss the point completely. There has been ongoing monitoring of this sector. For example in 1998 and 1999, in a major resource-intensive project the tax status of some 63,000 subcontractors was reviewed involving approximately 7,000 visits. The results of that exercise indicate that 88% of principal contractors visited had either correctly classified their employees or contractors or agreed to abide by Revenue's ruling as to the correct classification. They undertook a further programme of visits to 142 construction sites during 2001 and 2002 to examine the employer-employee classification. In the sites visited, 2,998 individuals were classified as employees and 984 as subcontractors. Of the 984 subcontractors examined only 65 were found to be misclassified.
On an ongoing basis based on risk assessment, Revenue auditors audit the books and records of a considerable number of contractors and subcontractors. The matter of employee and subcontractor status is always examined as a routine part of such audits. In each case the auditors examine the RCT1 forms that a principal contractor and a subcontractor complete in respect of each contract. These forms contain details of the duration and type of contract and a statement that the contracts are not contracts of employment.
Some 1,500 audits, 10% of all audits, were conducted on building contractors in 2004. There has been a substantial increase in the level of Revenue's activities around the construction industry this year, enhanced by a number of special new compliance initiatives. As I said, in the east and south-east region almost 50% of available audit resources have been devoted to a special investigation of construction industry projects. As part of that, in the first six months of this year, the status of some 500 subcontractors was examined and it was found that only three should properly have been classified as employees.
In the Dublin region, a designated contact officer has been appointed to receive information from trade unions and others where there are suspicions that employees have been misclassified as subcontractors. Similar arrangements are being considered for the other regions. A national RCT monitoring group has been established with contacts in every district. That has proved highly successful in intensely monitoring and tracking suspect principals and subcontractors.
On any fair analysis the Revenue Commissioners are doing everything they possibly can. They are bringing forward very pragmatic proposals which are working on the ground and they are liaising with others to make sure they deal with any misclassification that has taken place.
Has the Minister attempted to quantify the loss to compliant taxpayers of the level of fraud and tax evasion in the construction industry outlined in the Comptroller and Auditor General's report? Surely the Department of Finance, as the lead economic Department, must have done a risk analysis of the amount of money involved in these scams. That is the question I want answered.
No, I have not conducted such an audit. As I said, the Revenue Commissioners are charged under the law to do that. They are doing it and if there is any problems they come to me, either by way of the regular meetings I have with the Chairman or in the preparation of Finance Bills in the form of any proposals they would have for changes or modifications in the law. That is the normal way it works.
To be frank, I cannot give Deputy Bruton the answer immediately but I will get it for him.