Appealable Penalties and the Audit Code of Practice

As analysis of the Finance (No.2) Bill 2008 continues, it has become evident that the differences between the approach in the existing Code of Practice and the legislation as introduced are significant. We have written to the Minister for Finance, asking him to defer introduction of the new legislation.

The existing Code of Practice cannot, in our view, be satisfactorily replaced by a hybrid Code and legislative approach in the time available before the passing of the Bill. Neither ICAI nor the other CCAB-I members with whom we wrote to the Minister have any difficulty with the intent of the legislation. But the existing Audit Code of Practice will have to be revised to accommodate the new legislation. At the time of writing, consultations with Revenue on this had not commenced.

Unless we get this new approach to handling Revenue Audits, investigations and qualifying disclosures right, existing cases will be more time consuming and costly to resolve, new cases will have a higher burden of disclosure, and taxpayers will be less likely to come forward voluntarily to resolve outstanding tax issues.

The letter to the Minister is reproduced below:

Mr Brian Lenihan T.D.

Minister for Finance

Government Buildings

Merrion Square

Dublin 2

27 November 2008

Dear Minister

Finance (No.2) Bill 2008, S91 and Schedule 5

Dear Minister

I write to you on behalf of CCAB-I, the Consultative Committee of Accountancy Bodies – Ireland, to highlight in particular the above provisions in the Bill which, inter alia, codify in legislation many of the procedures in the 2002 Code of Practice – Revenue Auditors (“the Code”) in the context of the introduction of an “appealable penalties” regime.

Let me say at the outset that CCAB-I has no difficulty with the intention of the legislation, expressed well in the Explanatory Memorandum to the Bill:

to legislate to implement the conclusion in the Law Reform Commission's Report A Fiscal Prosecutor and a Revenue Court that, having regard to the provisions of the European Convention on Human Rights, a person should be given an opportunity to have an independent tribunal examine whether that person is liable to a civil penalty for contravention of tax or duty legislation.

Further, we appreciate that to do so requires the statement in statute law of aspects of the settlement of tax audits, investigations, enquiries and self corrections currently provided for in the Code,

Now that the professions and the Revenue Commissioners have had six years experience in operating settlements under the Code, there is general recognition that its provisions constitute one of the better aspects of the Irish Tax System. It has underpinned the successful conclusion of Revenue Investigations such as the Single Premium Insurance Polices project and the Offshore Assets project, it underpins the current Revenue investigation into undeclared funds in certain bank deposit accounts. The Code has been praised by the OECD, and its approach adopted by other Revenue Authorities, notably in the United Kingdom. It has reduced Revenue time spent in pursuing undeclared or overlooked liabilities while at the same time providing a coherent structure for taxpayers and their advisers in resolving outstanding tax issues. Its success is measured by the recovery, over the years since its inception, of well over €lbn in back taxes in tandem with a reduction of more than 60% in the number of Revenue audits.

The issue of potential incompatibilities of aspects of the Code with the European Convention on Human Rights is not a new one. The Explanatory Memorandum refers to the work of the Law Reform Commission; their work dates back to 2004, yet the legislation as proposed in the Bill seems to overlook key considerations by the LRC, for example the appeal of penalties in the first instance to the Appeal Commissioners. It could also materially alter aspects of the Code as it currently operates. The new legislation does not match all the features of the Code, for example in terms of the definition of the type of disclosure which may attract reduced penalties.

The current Code was drafted with an extended period of consultation between Revenue and other stakeholders, not just accountants. Revenue tell us that the new legislation is not intended to operate without revisions to the Code. We believe it is not possible to replace a well established and successful process in the timescale available as the Bill passes through the Oireachtas. A flawed process would have two main consequences – a reduction in the number of taxpayers coming forward voluntarily to disclose tax shorfalls, and delays in the resolution and settlement of cases under investigation by the Revenue Commissioners. Both consequences would have Exchequer cost and diminish the coherence of the Self Assessment system.

We ask, Minister, that at Committee Stage, you would modify Section 91 to provide for its commencement by Order. This will allow time for matters to be teased out to ensure we are not losing the benefits of the existing Code procedures. Ideally, it would also allow referral of the impact of the legislation for consideration by the Commission on Taxation.

Yours sincerely,

Brian Keegan

Director of Taxation, Institute of Chartered Accountants in Ireland