An extract from the CCAB-I Pre-Budget 2014 submission

Executive Summary

CCAB-I, in this submission, recommends changes to encourage domestic and international investment in Ireland. The most powerful means of creating certainty on tax policy is to make a definitive statement in Budget 2014 that no new taxes or tax increases will be introduced for the foreseeable future.

Domestic Investment

• The Employment and Investment Incentive Scheme relief should be removed from the High Income Earner Restriction and extended to service businesses.
• Seed Capital Relief should be amended to be more flexible for starting entrepreneurs.
• R&D tax credits should be transferrable to lower paid employees.
• A special Income Tax rate of 12.5% on bonuses paid to employees and inventors directly involved in innovation and patents should be introduced.
• A special CGT rate of 12.5% on gains made by entrepreneurs (subject to a cap) should also be introduced.
• Support marketing activities in major markets for Ireland such as the US, Switzerland and Japan by extending the Foreign Earnings Deduction.

Foreign Investment

• The Special Assignee Relief Programme should be calculated by reference to total pay, and should offer relief from USC and PRSI.
• Ireland's Corporation Tax base rules must not be changed unilaterally.

Property

• Landlords should receive full tax relief on the interest they pay on their loans.
• The seven-year CGT exemption for property purchases should be extended.

Fairness

• There must be no change to the income tax pay and file deadlines for the self employed.
• Urgent reform of the biased legal professional privilege rules and the Tax Appeals system is required.

Introduction

In our Pre-Budget Submission for Budget 2014, we call for the correction of restrictive and ineffective tax policy with the goal of establishing a highly functional, clear and certain tax system. The objective of certainty in the tax system is simple but goes to the heart of what is required to get money circulating in the Irish economy. By certainty we mean the creation of genuine and straight tax policies which allow the investor to make a confident decision to commit money in the SME sector or to locate an international operation in Ireland. The 10 Point Tax Reform Plan announced in Budget 2013 gave the initial impression that reforming tax policy was afoot; investors on taking a closer look at the plan were disappointed by its scope.

Genuine tax reform should also involve structural changes to Budgetary procedures. The EU imperative to introduce Budgets earlier in the year, coupled with the experience of the Troika programme, suggests that three year budgeting should become a reality. The tax environment over a three year period, including detailed rules, should be announced on a rolling basis to the greatest extent possible. The tax environment should be described along with the commitment that the final overall tax burden will be no worse than that already announced, and where possible will be better for business. This is fair both to businesses and citizens alike; it will offer some predictability both in the tax burden and on available funds for Government expenditure.

The timeframe for significant Foreign Direct Investment projects is measured in years and decades, not months. It is difficult for foreign direct investors to make a long-term commitment to locate in Ireland and to maintain that investment if government frequently chops and changes tax laws. The piece-meal approach to altering flagship tax incentives such as R&D credit and the SARP relief does little to help Ireland compete with other jurisdictions in the market for FDI. Therefore we call for a once and for all approach to bring these tax incentives up to the standard necessary for Ireland to compete and win much needed inward investment.

The most powerful means of creating certainty on tax policy is to make a definitive statement in Budget 2014 that no new taxes or tax increases will be introduced for the foreseeable future. This strategy has already been adopted and carried through in one crucial area – the repeated commitment in recent years to the 12.5% rate of Corporation Tax.

As we pointed out in our letter to the Minister of 30 May, change suggests there is a problem with existing tax rules. It adds another item on the list of matters to be explained in the international arena and thus complicates Ireland's message. We should continue to limit changes to fundamental tax policy issues such as rate, residency and base.

The economic crisis over the last five years required drastic tax measures, and CCAB-I for our part has taken a practical, realistic and non-populist approach to these measures in public debates even though our members, clients and employers have borne the brunt of the tax hikes. They have also been instrumental in ensuring that high levels of tax compliance are maintained in this country. Well over 80% of all taxes collected are fiduciary taxes – operated and collected on behalf of government, typically by qualified members of our Institutes. It's important to consider the sheer volume of new taxes alone which have been introduced, including the Universal Social Charge (which is far broader than the taxes it replaced), the NPPR, the Pension Levy, the Household Charge, and the Local Property Tax.

On the domestic front it's of little surprise that people are so reluctant to spend money as evidenced in the CSO figures for Quarter 1 of 2013¹ as they don't know if more tax will be foisted upon them. It is now unfortunately a cliché that many taxpayers are struggling to get by and one more percentage take on their income could tip them over the edge when it comes to their personal finances. This cliché is true.

Budget 2014 is the first Budget in many years which presents a real opportunity to introduce and implement reforming tax policy. The successes in the rescheduling of the nation's debt burden during 2013 have for the first time in many years left government with some room for manoeuvre. We urge you to maximise this opportunity by re-introducing certainty into the Irish tax system.

Certainty for Domestic Entrepreneurs

Recommendation:

• Encourage more scientific development by the people who carry out R&D work
• Move to a full volume based system
• Remove EIIS from the list of reliefs subject to the High Income Earners Restriction
• Tailor a facility for company owner/managers to invest in their company
• Extend EIIS to professional service companies and print media
• Extend the scope of Start Up Company Relief
• Extend the Foreign Earnings Deduction to other jurisdictions
• Remove tax discrimination against professional service companies
• Exclude FDI companies from close company surcharge
• Introduce effective incentives for investment in SME sector

2.1 Limitations of the R&D Relief for Employees

We acknowledge the Government's consultation “Review of R&D Tax Credit”. We hope that this consultation will result in continuity and certainty in one of Ireland's most pro-enterprise tax reliefs. We understand from the Department that the purposes of this review are to ensure that the tax credit remains best in class internationally and gives the Irish taxpayer value for money. This review will therefore include a cost benefit analysis of the current scheme and will also include a comparison of the scheme with similar models in other countries to further assess the competitiveness of the scheme internationally².

As set out in our submission to the R&D consultation, R&D relief needs to facilitate growth in the SME sector. This can be achieved by reforming the manner in which the R&D credit is allocated to employees. As the relief currently stands, it only applies to high earners and large companies and therefore has little or no relevance to the SME sector. Lifting, what is essentially a high salary condition to the relief, will assist small indigenous businesses in particular in attracting and retaining talented, innovative employees for the long term growth of the business. The condition that the R&D relief for employees can only be offered by a company in profit and paying tax is also an impediment to new companies.

A full volume based R&D relief system should also be introduced to encourage otherwise restricted companies to increase annual expenditure beyond €200,000.

2.2 An “Innovation Income Tax Rate”

It remains important to recognise the input and involvement of employees who contribute to the nation's bank of Intellectual Property, irrespective of their pay scale or position within the company. The 12.5% Corporation Tax rate is in itself a powerful brand, immediately associated with rewarding enterprise. We suggest that a special Income Tax rate of 12.5% be available on:

• income and bonuses paid to inventors, or
• bonuses paid to employees directly involved in the innovation process, and
• dividend income paid to shareholders of a company involved in innovation.

In common with the Foreign Earnings Deduction, the amount taxable at this special Income Tax rate could be set relative to overall remuneration. In this way, it could be ensured that the benefit of the reduced Income Tax rate is only available in respect of the contribution towards innovation.

The 12.5% tax should constitute the final liability inclusive of Universal Social Charge and PRSI. This is because the effective rate of Income Tax for many employees is less than 12.5% when the benefit of tax credits are taken into account. The incentive must be at the marginal rate, if it is to be fully effective.

This approach will be attractive in the commercial environment where the remuneration for an innovator and their team can be directly linked to the commercial return being made from their underlying work. However it would not be sufficient to implement this measure on its own, as this would be to the detriment of innovation within the public, and in particular, the university sector. We do not believe however that it would contravene EU State Aid rules.

2.3 Employment Investment Incentive Schemes/Seed Capital Relief

EIIS and the High Earners Restriction

CCAB-I acknowledges that the 2013 Action Plan for Jobs continues to put job creation in the SME sector to the fore. However recent CSO figures show just how dependent Ireland is on the export sector with a decrease in GDP for Quarter 1 partly due to a drop in exports causing a return to economic recession³. This highlights the urgent need to develop the SME sector in Ireland by making better use of tax incentives such as the EIIS and Seed Capital Relief.

The tax benefit of 30% under the EIIS for rewarding the investor to make a high risk investment is inadequate when coupled with the High Income Earners Restriction. There is strong competition for an investor's limited resources and a genuine Government initiative to encourage investment in Irish companies must be matched with a worthwhile tax relief.

The shortcomings of the EIIS as currently in place were borne out in a survey we conducted among our members. We shared these findings in our letter dated 22 October 2012 to the Department of Finance, which is enclosed in Appendix I for reference. The issues identified in the survey and the recommendations set out above are vital if the EIIS/Seed Capital Relief is to have any realistic chance of assisting and encouraging sustainable domestic investment in the SME sector.

Funding outside of Share Capital

EIIS and Seed Capital Relief are predicated on the requirement for the investor to purchase shares in the company and hold those shares for a three year period. While this requirement is commercially appropriate for investments aimed at third party investors, it is not a tax efficient or a commercially appropriate means for the owner/manager to invest in his company. The exit mechanism of share sale, which is the only mechanism currently permissible, does not support his/her long term involvement with the business.

In general, owner/managers of SMEs make a personal investment in the business by way of a loan to the company. If a share investment is made then he/she must either liquidate or sell the shares in order to realise a return on the investment. The Seed Capital Relief rules for owner/managers of SMEs requires such individuals to dispose of the business they have worked hard to build up in order to get a return on their investment.

EIIS and Seed Capital Relief are the only tax relief options open to the owner/manager since the income tax relief for loans used to invest in companies was abolished. We strongly recommend that the Seed Capital Relief scheme in particular should allow for investment by way of loan to facilitate the long term development of the business and involvement of the entrepreneur.

This could be structured by extending the definition of a relevant investment to a 15% investment made up of both equity and loan capital. Concerns on safe guarding genuine use of the relief could be addressed perhaps by linking the holding period to the loan/capital ratio. For example a 15% investment made up of 5% equity and 10% loan might require a holding period of 5 years. Correspondingly, a 15% investment made up of 10% equity and 5% loan might require a holding period of 1 year. It may also be necessary to introduce a preclearance mechanism to any refinancing of the loan capital, to ensure that the original funding purpose is adhered to. A clawback of relief would apply if the loan is repaid before the requisite holding period or the refinancing arrangement covers personal loans etc.

Professional Service Companies

(a) EIIS

Professional service companies are equally capable of providing job opportunities but are excluded from the EIIS. The financial model of professional service companies is currently based on running the business on an overdraft or loan. These companies have many uses for outside investment which would be used for equally worthy purposes as with other trading companies who can benefit from the EIIS. The EIIS should be expanded to allow for investment in professional service companies.

(b) Tax Motivated Incorporation

We take this opportunity to point out that there are valid and legitimate commercial reasons for individuals using a company as a vehicle through which to provide their service offerings. These include, but are not limited to:

• Limitation of Liability
• Succession Planning
• Competitiveness Issues – some contracting businesses, particularly in the IT sector, insist on engaging companies rather than individuals

We have pointed out in previous Pre-Budget submissions how rigorous the Close Company rules are. Indeed this has been recognised by the Minister in the partial relaxation of the Professional Service Company rules in his 10 Point Plan for SMEs last year. The appropriate use of incorporation is not costly to the Exchequer; the inappropriate scrutiny of incorporation is costly to the Exchequer in terms of driving up compliance costs.

Further points in relation to the Close company rules are included below.

Print Media and EIIS

The print media sector in Ireland is in commercial turmoil primarily because of changes in how consumers access news. Tax policy can be a worthwhile way of addressing such a market failure.

We consider that the broadsheet print media provides a very important public service. The reduction in the VAT rate to 9% as it applies to many areas within the sector is helpful. However, there remains an argument for some additional incentive to drive investment in the sector.

The EIIS is designed to encourage ordinary taxpayers to become shareholders. Since the Credit Crunch, tax based investment schemes serve an even more critical purpose than merely fostering industry – they can address a market failure to provide funds to support enterprises coping with a transition in technology such as print media.

We suggest that just as the definition of relevant trading activities was modified to specifically include tourist traffic undertakings, the definition should be modified to specifically include print media activities.

2.4 Three-year Corporation Tax Holiday

CCAB-I is pleased to note the adaption of our Pre-Budget 2013 proposal to apply the Three Year Corporation Tax Relief from the date a company starts to make a profit in Finance Act 2013.

We have already highlighted other short comings of this relief and solutions to make it work in our previous Pre-Budget submissions.

2.5 Foreign Earnings Deduction

The Foreign Earnings Deduction is a useful relief for encouraging trade and has no doubt contributed to 2012 being the IDA and Enterprise Ireland's most successful year in job creation since 2006⁴. This relief was introduced with the stated intension of expanding its application to other countries and was duly extended in Budget 2013 from BRICS states to eight African states. However, the Foreign Earnings Deduction is an example of a tax incentive looking attractive as a headline but coming up short as a genuine tax incentive because it has such a narrow application. The Foreign Earnings Deduction has the potential to encourage greater development of trade if it is extended to far more lucrative locations such as the US, Switzerland and Japan.

2.6 Close Company Surcharge

Impact of the Surcharge

CCAB-I has long been a proponent of the removal of the surcharge applied to professional service companies. The Commission on Taxation supports this view in its 2009 report:

• “Our investigation of ways to support economic activity and grow employment is based on a pro-business ethos. The close company surcharge on professional services companies inhibits such companies from re-investing their trading income. Similar restrictions do not apply to other trading companies. We cannot see an objective rationale for distinguishing between professional services companies and other trading companies and we therefore recommend the abolition of the surcharge for professional services companies.”⁵

Professionals, including member firms of CCAB-I, are incorporating for the purposes of limited liability and debt structuring. The sole trader/partner will expect (and need) to draw down the same level of income out of an incorporated business as he/she took out of the sole trade/partnership. Therefore, income tax will be paid on the same income levels and corporation tax will also be applied on net corporate profits. The imposition of another layer of tax on professional service companies constitutes discrimination.

The Surcharge and FDI

For the purposes of increasing the attractiveness of inward investment, we recommend that existing and new foreign owned companies establishing a presence in Ireland should be excluded from close company legislation, including professional service companies which create employment here. In essence, the surcharge should only apply when it is an effective mechanism to prevent the avoidance of Irish income tax.

The exemption should apply to a foreign company which is controlled by non-Irish resident shareholders. The conditions for qualifying for this exemption could be modelled on the criteria in place for exemption from Dividend Withholding Tax i.e. it could apply to companies resident in a relevant territory (the EU or in a state with which Ireland holds a double taxation agreement) or when the company is ultimately owned by persons resident in a relevant territory.

The close company anti-avoidance laws act as a disincentive to FDI considering locating to Ireland as such restrictions are not in place in competing jurisdictions. Introducing such an exemption would also encourage foreign trading companies to leave surplus cash in Ireland rather than repatriating the funds and would therefore facilitate the re-investment of those funds here in Ireland. Taking foreign-owned companies out of the definition of a close company would also remove much confusion surrounding companies currently or considering locating in the IFSC.

2.7 Tax Incentives Targeted at Investment in SME Sector

The stated objective of the 10 Point Plan as announced in Budget 2013 was to assist the SME sector by⁶:

• Helping their cash flow position
• Helping them access funding more easily
• Reducing the costs associated with the administrative burden of tax compliance
• Boosting demand for their products in new markets abroad
• Incentivising them to create jobs

As the accountants and tax advisors to the SME sector, we can confirm that the 10 Point Plan did little to assist this sector with accessing funds or incentivising job creation. There is a preference for holding cash on deposit and tax policy could be used more pointedly in re-directing this cash into the SME sector to increase funding and job creation. We recommend the following as essential to getting money back into the SME sector.

Lower Tax on Interest on Loans to SME Sector

A special lower tax rate should apply on interest earned by a non-institutional lender to a SME business. The objective is that investment in the SME sector would be seen as a viable alternative to holding funds on deposit. The non-institutional lender would be subject to tax at 33% on interest earned on loans to a SME company which would align this with DIRT applied on savings and should not be subject to the USC or PRSI.

Incentive for investment in SME sector

One of the main barriers to growth in the SME sector is access to finance. We recommend the introduction of a tax credit for equity investment made by an entrepreneur into his/her business. This credit would operate on a similar basis to section 253 TCA 1997 which provides for a deduction for interest on loans used to invest in a partnership. The tax credit for the equity investment would be based on the commercial interest rate applicable if the investment had been borrowed from a bank. For example if the entrepreneur commits €20,000 of his own savings to his business, a tax credit equal to €20,000 x the appropriate commercial interest rate (say 6%) = €1,200 is available against the entrepreneur's income tax liability for each year his funds remain committed to the business. We support the introduction of a tax relief for equity investment as identified by Forfás⁷ to introduce neutrality in tax reliefs for debt and equity investments.

Lower CGT Rate For Shareholder/Owner of SMEs

Tax on a capital gain made by an SME entrepreneur at 33% is penal given the difficult economic conditions that these businesses face. Investments in this sector could be further encouraged by introducing a CGT rate of 12.5% on share disposals by an individual actively involved or with a 10% interest in a company. The reduced rate would be subject to a cap based on an amount of gains. Other jurisdictions, for example the United Kingdom, already operate similar regimes.

• Certainty for Foreign Direct Investors

Recommendation:

• Increase the SARP threshold
• Do not tamper with corporate residency rules

3.1 Special Assignee Relief Programme (SARP)

The SARP is not a tax expenditure item. It actually contributes to the national Income Tax take because it generates income tax from individuals who otherwise would be outside the charge to Irish income tax. The regime introduced in FA 2012 is not an unalloyed improvement on the SARP in place previously. This is because:

• The emphasis on basic pay as a qualifying criterion for entitlement is contrary to the tax equalisation arrangements in place with many multinationals,
• Over a certain threshold, less tax relief is available than was available in the pre-2012 scheme, and
• No relief is offered either from the USC or PRSI.

The SARP regime in Ireland is still uncompetitive in comparison with other jurisdictions with whom Ireland competes with for FDI. Employer returns received for 2012 indicated that there were only 6 individuals who qualified for the relief⁸ which indicates that this relief is not functioning as it should. An unsuccessful relief does more harm than good because:

• It sends a signal that there is no official commitment to the operation of the relief
• Its presence blocks the introduction of a more worthwhile relief
• It presents a political football for those opposed to the use of the tax system as a stimulus, but with no gain

The SARP could be a means of attracting highly skilled workers to Ireland who in turn will act as magnets in bringing more business and investment into the country but only if SARP can hold its own against competing jurisdictions.

3.2 Corporate Residency Rules

In May of this year, an international debate on Ireland's Corporation Tax status was prompted by a US Senate subcommittee citation of the tax arrangements of multinational companies. There was widespread concern within the business community that our international reputation could have been prejudiced.

It is very important to ensure, both at home and abroad, that Ireland's position as a straightforward broker in the network of international tax rules is fully explained. Equally however, we feel that the defence of our reputation should be limited to clarification and explanation. It is not immediately evident to us how any unilateral change to our corporate residency tax rules would repair any reputational damage which may have been done.

Certainty for Taxpayers

Recommendation:

• Extend the seven-year CGT property incentive to shares in property companies
• Remove restriction on Case V tax deductible interest for residential property
• Do not remove capital tax reliefs on transfer of a trade
• Extend pension fund encashment to RACs and PRSAs
• Address inequities in VAT law

4.1 Tax Incentives to Stimulate the Property Sector

CGT Exemption on Property

The seven-year CGT exemption on property was introduced as part of Minister Noonan's sector-specific measures and he noted in his 2012 Budget speech that this measure was aimed at reviving the Property, Construction and Development sector. We suggest that this measure be amended to include shares which derive their value from property if the purpose for which the CGT exemption was introduced is to be achieved. Corporate structures are the preferred investment option for foreign shareholders and Irish investors when making substantial investments. This would greatly simplify the operation of the relief in practice, without diluting the policy objective.

Restriction on the Deductibility of Interest

The 75% restriction on the Schedule D, Case V deduction for interest on mortgages on residential property is also deserving of revision. The restriction can have the effect of translating what would otherwise be a loss to a taxable profit and is inequitable given the fact that residential property investors are faced with negative equity and downward rent reviews in response to the substantial economic adjustments arising since the property market crash. Applying an artificial curtailment to the calculation of rental profits for residential properties contradicts any Government policy aimed at property sector revival.

4.2 Capital Tax Reliefs on Transfers of Trade

The tax system should support the sale and purchase of businesses. Business transfers are the basis upon which commerce progresses e.g. it provides a reward to the seller for entrepreneurism and allows the continued profitable development of the business by the purchaser. Therefore proposals in the public domain to abolish capital tax reliefs on transfers of trade must be rejected. CGT retirement relief and CAT business/agricultural relief are important reliefs for lifetime transfers of a family business or farm, where the potential liability would otherwise be substantial. Any move to abolish these reliefs would be regressive and would discourage the transfer of assets to potentially more efficient uses.

The high rate of tax on capital transactions, particularly Capital Acquisition Tax is stopping long term investment of personal wealth in Ireland. High net worth individuals are moving abroad and they are taking their wealth and business with them as a result of the high rates of Capital Acquisition Tax in operation. A sensible balance needs to be struck between short term revenue raising measures and the long term damage caused by excessive Capital Acquisition Tax rates.

4.3 Pension Fund Encashment Should be Extended to RAC and PRSAs

The plan to allow access to pre-retirement funded Additional Voluntary Contributions as set out in FA 2013 is worthwhile, though we see little evidence of its take-up. However, for the purpose of giving as many taxpayers as possible the necessary flexibility in accessing their pension funds, we believe that the withdrawal option should also extend to PRSA and RAC contributions.

4.4 Inequity in VAT Law

VAT Rate Treatment Mismatch

The increase in the rate of VAT from 21% to 23% has been complied with but has also highlighted an anomaly in the VAT legislation. Section 67(3) of the Value-Added Taxes Consolidation Act 2010 (VATCA 2010) provides for the necessary remedy to deal with a case of where the VAT charged on the original invoice is higher than the applicable rate. Currently there is no provision in the legislation to rectify a situation where the VAT originally invoiced was at a rate which was lower than the rate of VAT applicable. This means that the accountable person who has made the supply must account for VAT at the incorrect rate but does not have the right to recover the difference from the recipient.

We request that a mirror provision to that in place under section 67(3) VATCA 2010 be introduced to deal with the situation where the VAT originally charged was lower than the applicable rate.

Taxpayers with a History of Business Failure

It should be acknowledged that despite the downturn, Irish business has sustained remarkably high levels of tax compliance, as confirmed in the Revenue Results for 2012.

However numerous concerns have been raised by our members over the last year in respect of Revenue's right to require surety in the form of a bank guarantee or cash payment before allowing VAT refunds or VAT registrations to take effect (section 99(3) and 109 VATCA 2010). Under both sections, Revenue has the power to decide when and how to apply these sanctions with little or no recourse open to the taxpayer to appeal such a decision. These bonding requirements may be disproportionate.

It is proper that the tax system should protect against so called “phoenix companies” or taxpayers who manipulate insolvency laws to avoid paying their taxes. However, transparent and balanced criteria to determine when and how the highlighted sections of the VATCA 2010 should be invoked must be introduced. The recession has put countless taxpayers out of business and the tax system should not prevent entrepreneurs with a recorded bona fide business failure from starting up a new business venture.

The area could be improved by following the recommendations of the First Interim Report on the Loss of Fiduciary Taxes arising from abuse of Limited Liability by the Committee of Public Accounts in 2010. In particular we point to its recognition of the importance of limited liability, and the inherent risks which will be associated with making the fiduciary tax system too restrictive. The report sets out hallmarks for Phoenix companies, which might form the basis of fairer criteria for invoking legislation such as section 99(3) and 109 VATCA 2010.

Compliance Reform

Recommendation:

Option of 31 December 1991 or 5 April 1974 as base cost for CGT purposes

Remove disproportionate penalties for incorrectly reporting offshore fund events

5.1 Base Cost

There are enormous administration difficulties both for Revenue and for taxpayers in determining 40 year old values as well as addressing the signification inflation problem in taxing gains derived from the disposal of such assets. The need to re-base becomes more acute with each passing year. We recommend that there be an option to determine market value for assets held long term by reference to 5 April 1974 or 31 December 1991, the latter date being the commencement date for CAT aggregation purposes.

5.2 Penalty for Incorrectly Reporting Offshore Fund Events

The acquisition of an interest in an offshore fund must be reported in the tax return for the year of acquisition. Tax events such as payments, transfers, disposals, etc., must be correctly included in an investor's Irish tax return and must be filed on time in order to benefit from the favourable tax rates of 30% or 33%. Where the reporting requirements in the tax return of the investor are not correctly completed then the tax rate becomes 55%. The additional tax penalty of up to 22% is excessive and unfair particularly given the fact that the taxpayer may not have technical knowledge to understand the exact nature of the fund. On top of this, penalties and interest can also be pursued by Revenue which results in a disproportionate and inequitable cost to the taxpayer for making, what are in many cases, technical errors rather than an intension to defraud the tax system.

Certainty in a Fair and Transparent Tax System

Recommendation:

• Public debate on the appropriateness of LPP exemptions within the tax system
• Consultation is urgently required to modernise the Tax Appeals process
• Income tax pay and file deadline should not change

6.1 Legal Professional Privilege

Significant powers of information gathering have been granted to Revenue through the Mandatory Reporting Regime. We have no issue in regard to Revenue being granted powers provided that any such powers are proportionate and subject to appropriate checks and balances.

However specific exclusions from compliance are specified in the legislation where the information which Revenue might request is subject to Legal Professional Privilege (LPP). This provides an unacceptable commercial advantage to law firms providing tax services.

In the UK court case, Prudential PLC & Anor v Special Commissioner of Income Tax & Anor [2009] EWHC 2494, LPP was described as “where legal advice is sought in confidence from a qualified legal adviser in his professional capacity, privilege may be claimed for the communications made for that purpose.”

The idea behind LPP was to ensure that any person can feel confident in seeking advice about their legal rights and obligations and in particular advice about litigation or potential litigation. Equally, Revenue need information about taxpayers to ensure that they are paying the right amount of tax. It is quite right that there should be a balance between the right of Revenue to know and the right of the taxpayer to privacy. It is not right that this balance can be skewed when the taxpayer uses a legal adviser to deal with his tax affairs.

Firms of accountants and law firms are not treated equally when it comes to providing information to Revenue. While providing for the Mandatory Disclosure of Certain Transactions Chapter within TCA97, s817J states that “Nothing in this Chapter shall be construed as requiring a promoter to disclose to the Revenue Commissioners information with respect to which a claim to legal professional privilege could be maintained by that promoter in legal proceedings.” Case law has established that only legal firms can avail of this protection.

It is clearly in the public interest to have a fair, robust tax system within which taxpayers can know with certainty how they will be taxed. We suggest that Legal Professional Privilege (LPP) exemptions within the Taxes Acts will result in their sufficient prevalence as to be discriminatory – affording some taxpayers greater protection under the law by virtue of the kind of firm they choose to handle their affairs.

By extension this leads to an inference that advisors who qualify for the LPP exemption are preferred from an official policy perspective, even though they provide exactly the same service as those that do not qualify for the exception. This is clearly anti-competitive and of extreme concern to our members. Equally, the appearance of specific LPP provisions in the legislation is new, and can only be interpreted as an enhancement of the LPP already claimed by legal firms in respect of all advice that they provide and a recognition that this is accepted and will not be challenged by the State.

We believe that a public debate needs to be conducted on the appropriateness of LPP exemptions within the tax system, the enshrining of such exemptions in the legislation itself as an enhancement of the fundamental legal principle and the preferential treatment of one set of advisers in this regard even where they provide the same service as those with the officially preferred qualification. Until this can be resolved we would suggest that the existing exclusions in the legislation be suspended and allowed to rest on the basic legal principle, and that no further legal enhancements to the LPP principle as it applies to those with a legal qualification be introduced until the basis for the preference being conferred is fully aired and understood.

The Australian Government issued a discussion paper entitled Privilege in relation to Tax Advice to consider whether legal professional privilege ought to be extended to accountants and other tax advisers. Whilst no decision has yet been taken in the Australian context, interestingly the recent Supreme Court decision R (on the application of Prudential plc) v Special Commissioner of Income Tax on the subject of LPP, references the Australian Law Reform Commission's 2007 recommendation supporting the New Zealand model of creating a separate ‘tax advice privilege’. Australia also operates a common law system, comparable to Ireland and the United Kingdom.

Concerns in relation to how the mandatory disclosure regime operates in the Irish context surround legal professional privilege. Revenue apparently felt constrained, because of their interpretation of the LLP requirement, to operate carve-outs for legal firms offering tax advice which might otherwise be subject to mandatory reporting. Such a distortion of the agent market, where its unbiased operation is essential in a modern self-assessed tax regime, is not appropriate.

6.2 Reform of Appeals Process

CCAB-I met with Minister of State Brian Hayes TD in late 2011. The Minister noted concerns we expressed over the need to modernise the Tax Appeals process. In our Pre-Budget 2013 submission we made a further call for the commencement of a consultation process among stakeholders for the purpose of modernising the Tax Appeal process with the objective of setting out the legislative and administrative changes required. It is inexplicable why reform of the Appeal Process is not forthcoming. A robust Tax Appeals mechanism must underpin any tax system to ensure its probity and fairness. Any such reform is proportionate and timely considering the year on year increase in the scope of Revenue powers.

6.3 No Change to Income Tax Return and Tax Payment Deadlines

This is the most difficult time in living memory for Irish business. Many businesses are just holding on week by week, struggling to pay bills, struggling to ensure that even current employment levels are maintained. The proposal to bring forward the pay and file date for income tax purposes to complement the earlier Budgetary process will cost jobs, close businesses and prolong the domestic recession because businesses are being asked to pay tax on money they have yet to earn.

It would be simply impossible for indigenous Irish business to comply with earlier payment and filing arrangements. However, if necessary, CCAB-I will work with Government to devise ways of providing necessary information for a Budgetary process which happens earlier in the year.

Source: Chartered Accountants Ireland. www.charteredaccountants.ie

¹. CSO, Quarterly National Accounts, Quarter 1 2013

². Per correspondence with the Department of Finance dated 1 July 2013

³. CSO, Quarterly National Accounts, Quarter 1 2013

⁴. Programme for Government Annual Report March 2013.

⁵. At page 198.

⁶. Department of Finance “Assistance for Small and Medium Enterprise (SME) Sector” Budget 2013

⁷. P.9 “A Review of the Equity Investment Landscape in Ireland” Forfás, 31 January 2013.

⁸. Data provided by Minister for Finance (Deputy Michael Noonan) during Parliamentary Questions on 9^th May 2013