Some food for thought on Revenue Interventions
I just wanted to share some of our experiences in dealing with Revenue when they make enquiries in relation to our clients. Also what are the “hot topic” areas that Revenue will continue to focus on?
Expenses
This has been a significant earner for Revenue over the last number of years. They rolled out a contractor’s pilot project in one of the regions which was quite successful for them so it was introduced countrywide. The contractor’s case was where a small company, a typical two director company, was engaged to provide services to a multinational company. Usually the small company was a husband and wife team with one of them providing the service. In most of these cases the issue arose around the level and type of expenses being taken out of the company by the director. Say the small company Super Services Ltd [SSL] charges Big Corporation Ltd [BCL] €10Kper month for IT services. As that money belongs to SSL the Director then has to get paid to meet living expenses. Payment can be by salary which is taxable or by expenses which are non-taxable provided they meet the criteria .Unfortunately for them many contractors took the mick and plundered the company for expenses that wouldn’t have been genuine. There was a case of a honeymoon to Florida being paid for by a company that was claimed as an expense. The main trend in a lot of the companies like SSL was that the Directors salaries were quite low and the level of expenses were quite high.
What also arose in their audits was the level of salary and the split of salaries in these companies.To maximise the lower rate banks the husband and wife team would have to earn €65k between them with the higher income earning spouse on approx. €41k and the other spouse on €24k. If one spouse was on a salary of €65k the balance above €41k would have all been taxed at the higher rate. So in some cases the other spouse or “non-working” director was put on a salary of €24k to maximise the lower rate. Revenue had an issue with this as that spouse was providing little or no services so the level of salary wasn’t justifiable in terms of hours worked and rates paid per hours worked.
So what are the lessons to be learned from this?
- Expense claims need to be genuine and either paid in accordance with civil service rates or vouched. Be careful on the rates and note there were some changes from 1 April 2017
- A valid expenses claim form has to be filled out. Revenue will look for these when it comes to a PAYE Audit. If you ever plan to sell your company it could be subject to a tax due diligence by a purchaser. If you don’t have these the price you will get will reduce.
- Ensure you have the correct information on the expense claim form. See Revenue leaflets IT51 and IT54
- Don’t claim travel expenses from home to your normal place of work. They are not allowable
Tax Returns
One of Revenue’s key tasks is to protect the public purse. Over the last few years it has become quite noticeable that when a taxpayer is in a tax refund position, it can sometimes be slow and painful to get the money back, especially when it is a larger amount. This is quite difficult to take and can cause a lot of stress and cashflow difficulties for clients and has to be compared with how quickly Revenue look for payment of tax liabilities.There has been an increasing number of requests for additional information to verify the refund and this is what we experienced in the following areas;
- For Vat refunds there would be a request for a breakdown of sales and purchases and a copy of some of the vat invoices that resulted in a refund. If this was a newly vat registered customer a Revenue official could call to the business premises of the taxpayer
- For Income Tax and Corporation tax cases, especially around dentists, doctors and pharmacists they would request original withholding tax forms
- Where there was a larger than usual medical expense claim they would look for receipts as back up
- Where there was a claim for additional pension payments they have looked for the Retirement Annuity certificate ,showing the amount paid and the payment date
Other Revenue Queries
We have had other Revenue correspondence seeking information in relation to Tax returns submitted but not in terms of issuing a refund to the taxpayer. These would include the following;
- Social welfare income not being included or being understatedon the tax return – Revenue and the Department of Social welfare are now linked
- Enquiry into the amount of farm and forestry payments in the accounts – Revenue will have access to the Department of Agriculture payments
- Rental income – looking for a copy of the rental computations with back-up for expenses over a number of years and asking for a review of any inaccuracies. This is a tricky one for accountants as, in some cases, we effectively type the figures that the client gives to us. The client needs to ensure they have the painting receipt for €1200 or they don’t put in €500 for their own labour or that they have a qualifying lease if renting farmland.
- Closing tax creditor figures in the accounts. These appear on the extracts from the accounts in the Income Tax or Corporation Tax return and we have had letters requesting an explanation as to the differences arising between the closing tax figures and subsequent tax payments
At a tax conference a number of years ago one of the speaking slots was been given by a Revenue official and he mentioned a case where an enquiry went out to the accountant regarding a client who had a very low level of drawings in the accounts and an explanation around this. He got back a reply that the client “enjoyed a very low standard of living” to which the speaker remarked that “not only had he a very low standard of living but that he enjoyed it”
Hot Topics
We seem to move from one Hot Topic to the next with the deadline for the most recent Revenue Enquiry into Offshore Assets finishing last Thursday. Just a flavour of some of the current issues;
- Construction Industry. Correct operation of payroll taxes and expenses such as country money. Correct operation of Relevant Contracts Taxes [RCT] for principal and subcontractors. Revenue liaise with the Department of Social Welfare to arrange site visits to ensure employees are registered for taxes and not claiming benefits
- Cash businesses such as pubs, retail, street traders, cafes etc –there will always be a focus where large amounts of cash are changing hands. There is a focus on e-audits and Revenue can look for information from a retailers EPOS system
- On-line businesses will get more focus into the future. These businesses need to be aware of the Vat implications of selling to different countries once their turnover level exceeds registration thresholds. Revenue will review Facebook and other social media sites to see if business is being transacted so those businesses need to ensure they are registered with Revenue as a starting point.
- Professions incorporating and tax issues arising around that. You will see from the published Tax defaulters lists over the last number of periods that there has been a lot of large settlements with medical professionals.
See an extract below from the 2016 Revenue Annual Report
“The overall yield from Revenue audit and compliance interventions in 2016 was €555.6 million. We continued our national programme in the construction sector, conducted a significant number of interventions in sectors where cash transactions are the norm, and prioritised our interventions on certain professions. In 2016, the yield from such sectoral interventions was €210 million, as set out in Table 19 of our Annual Report.”
In future Revenue will take a more targeted approach to Revenue Audit as they will concentrate their efforts to areas where they will get most bang for their buck. Just remember that the current Revenue Chairman is a man called Niall Cody brother of Kilkenny Manager Brian. If he is as serious about collecting taxes as his brother is about winning hurling matches then we are all in trouble!
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