By email to: taxpolicy@finance.gov.ie

5 November 2013

Dear Sir,

Consultation on Pay and File dates in the context of a Budget Day on or before the 15th October

We refer to the consultation paper published on 11 October 2013.

At the outset we would like to state that CCAB-I acknowledges Ireland's commitments under the so-called “Two Pack” regulations. We wish to support the fulfilment of our National obligations in this regard. Accordingly, we recognise the necessity of earlier Budget Days than heretofore, and equally the necessity of adequate preparations being made in the framing of the annual Budget.

Your consultation paper requests views on five items, which we will now address in turn. In brief summary, our position is that there should be no immediate change either to the Pay or File dates. This can later be reassessed in light of a review of the accuracy of the Budget 2014 projections (made without any change), and perhaps a further consultation process in 2015. At that stage all of the relevant information will be at hand, which should result in a better informed view being taken on the balance between the benefits to be obtained from moving both dates, as against the logistical challenges and economic disruption that such changes will cause.

It has been clear for some time that there has been some intention to change at least the filing date for income tax returns. We have already flagged that:

• Any change in the preliminary tax payment date would have a significant detrimental effect on many self-employed businesspeople, and
• Any change in the filing date would cause practical difficulties for our members who are involved in the preparation of a significant majority of self-assessed income tax returns. There are significant matters to be considered such as existing work schedules, clashes with corporation tax return deadlines and exam schedules for trainees. Dealing with any of these would require a lead-in time over a number of years.

We recall that when the preliminary Corporation Tax payment rules were being changed some years ago, the changes were phased in over several years. Similarly this is a far more fundamental change than the move, for example, to a full system of Self Assessment for which there was a two-year lead-in period. Nevertheless this current consultation process is to be completed in just four weeks, with the proposed choices restricted to some very narrow options which are apparently to be implemented for 2014. In the light of these precedents, and the importance of the issue, the short timescale being afforded to the consultation is regretted. It may therefore be necessary for us to offer further public comment on the issue and we reserve the right to do so, especially following the publication of any proposed Committee Stage amendments as signalled in the consultation document.

1. In Relation to the Income Tax Options Set Out above, Please Indicate Which Option You Prefer and Why

The options being offered within the consultation paper are:

• Moving the Pay and File date to 30 June
• Moving the Pay and File date to a date in September, or
• Moving the Pay and File date to September but with modified payment arrangements for farmers and others receiving State payments

As we hope to show, none of these options are realistic. This is because as posited in the consultation paper, any changes to the Pay and File deadlines will not only necessitate the filing of Income Tax returns earlier, but also the earlier payment of Preliminary Tax. This will create significant cash flow difficulties for self-assessed taxpayers, which typically are small indigenous service businesses.

2. Please Indicate Any Particular Issues Which You See in Relation to the Other Income Tax Options, I.E. Those You Do Not Favour

The issue with cash flow

While the consultation paper acknowledges that there can be cash flow impacts, none of these options give sufficient consideration to them. A cash flow difficulty resulting in there being no cash means that a business is dead. It is not simply a timing matter. Earlier tax payment dates will increase cash flow pressure massively on businesses, especially in a market where there is little lending to the SME sector.

Self-employed taxpayers pay approximately a1bn annually in mid November. For every week the payment date is brought forward, there would be a funding cost to them. According to the Department of Finance (Medium Term Fiscal Statement November 2012) SMEs make up the substantial proportion of the enterprise economy, with over 99% of businesses in this sector and almost 70% of people employed by them. This is the category of Irish business which will be worst affected by the proposed options.

The Irish tax system under all tax heads, including income tax, operates on a current year profit and current year tax payment basis. It is one of the most “current year based” systems in the world, if not the most so. It is certainly the most compliant of those current year systems of which we are aware.

Government policy, as implemented by the Department of Finance and Revenue, has been successful in moving the Irish tax system onto an entirely current year basis. One outcome of this successful policy is that it is necessary to estimate the outcome for the year in advance of the year being concluded. This is in contrast to the system in many countries, including many of our EU neighbours, who have a certain lag in their systems with at least some taxes based on prior year outcomes. While in those countries, a prior year outcome approach may lead to more accurate budgeting, actual tax amounts are not collected as early as under the Irish system.

That the current year basis for assessing and paying tax works is not merely testament to the efforts of the relevant Irish authorities, but is also to the credit of our members to whom most of the tax compliance work falls. Broadly speaking, tax collection is now synchronous with the time that income is earned. Therefore it is hard to understand a logic that suggests the only way to improve the Budgetary process is to have taxpayers pay tax before they have earned the income which gives rise to the tax.

The June Pay and File Option

We should not swap a functioning basis for tax payments for an economically risky prepayment basis. It must be remembered that the current Pay and File system for self-assessed taxpayers has evolved over more than a decade and works very well as a compliance and tax collection mechanism. There are inherent risks attached to changing it for any reason.

A June Preliminary Tax payment date would require businesses, especially more seasonal businesses, to pay tax on profits significantly in advance of earning those profits. It was surely not an objective of the “Two Pack” agreement to force governments into the position of having to ask their citizens to raise finance to pay tax on profits they have not yet earned. It is not clear that it is possible for citizens to accede to that request.

There is a suggestion in the consultation document that practitioners might prefer the earlier payment date because it would spread their work better. While that would be the case for some accountancy practices we would like to clarify that this would not be the universal view within the profession. None of our members contributing to this process supports a June payment date for preliminary tax.

Because some business sectors will not be as badly affected as others by a payment date change, the principle of equitable treatment of taxpayers is breached.

In relation to the practicalities of filing income tax returns in June, it would be necessary for a number of coordinated changes to take place:

• Each of our constituent bodies of CCAB-I would need to radically overhaul their examination timetables over a few years in order to fit in with the new schedule. It is therefore regrettable that implementation is flagged for 2014.
• Taxpayers and their agents alike will need to revisit their scheduling and workflow arrangements – annual leave, study leave, training etc - to meet the new deadlines. It would be unfortunate if this resulted in a reversal of the progress which has been made in recent years towards reducing tax compliance costs.

Ideally further research is needed on the capacity of self-assessed taxpayers and accounting firms to cope with a front-loading of tax filing. The current consultation process does not allow adequate time to fully research this issue.

The September Pay and File Option

The same arguments, albeit that the lack of proportionality persists but is not as extreme, would pertain to a September preliminary tax payment date. However, the difficulties for our members in fulfilling both corporation tax and income tax compliance as early as September 2014 should not be underestimated.

The Option to Mandate Certain State Payments

The suggestion that certain State payments might be mandated to Revenue in circumstances where the taxpayer was in receipt of a State payment between the pay and file date and the end of the year creates inequity between different categories of taxpayer. It is not immediately clear to us how such an arrangement could be compatible with EU State Aid rules. It is also not clear why there appears to be an attempt to segregate and treat one section of taxpayers differently to others.

3. If There are Other Options in Relation to Income Tax Which You Feel Should be Considered Please Set These Out Briefly

It does not follow that the bringing forward of Budget Day should necessitate the bringing forward of the Pay and File date. Studies such as those produced by the Government's own Tax Forecasting Methodology Group suggest that the key component in tax forecasting is the macroeconomic forecast – the accuracy of a tax forecast depends on the accuracy of the economic forecast upon which it is based. It is notable that in recent years, forecasted tax receipts for Budgetary purposes have been very accurate.

It would be useful to understand in the context of this consultation the practical value of having income data for the self-employed for the pre-preceding year of the Budget year to hand when preparing Budget figures. As already observed, we do not understand the insistence on linking the prepayment of tax with filing dates in the context of improving forecasting. There is no filing associated with the payment of preliminary income tax. Rather, the filing relates to supporting the payment of the final liability for the previous year.

Section 18 Finance Bill 2011 as initiated proposed to bring forward the Pay and File date to 30 September. In his Second Stage speech, the then Minister for Finance described the measure as a means “to ensure that the accuracy of forecasts in my Department can be enhanced by an earlier receipt of this particularly volatile section of the income tax receipts base.” While Section 18 was ultimately not enacted, its absence does not seem to have prejudiced the capacity of the Department of Finance to get its figures right. The income tax (including USC) outcome for 2012 was a mere 0.8% below profile. The margin of error was a mere one third of 1% of the total tax take.

The options as presented in the consultation in effect devolve responsibility for estimating tax receipts from the Department of Finance to the private sector by moving to an accelerated tax prepayment basis. It is not immediately clear to us what policy objective this serves, or whether this can even result in better Budget forecasting.

There is therefore a real risk that all of the cash flow difficulty and disruption being imposed on the SME sector by changing the Pay and File date will be towards solving a problem which does not actually exist. We can assert this with some confidence because of the high level of compliance by self-assessed taxpayers. The Annual Report of the Revenue Commissioners for 2012 notes that 98% of Preliminary Income Tax is collected within one month of the due date. This amount is small in the overall context of the budgetary figures, but very large for the self employed individuals involved.

At the very least, no changes should be made until we are in a position to assess the accuracy of the tax projections underpinning the 2014 Budget. If these projections are accurate, and as illustrated we would expect that they should be, there can be no justification for changing the Pay and File date.

We are mindful of the statement by the Minister for Finance, published in an interview with the Irish independent on 15 April last. We clarified the Ministers comments with the Department of Finance. It was conveyed to us in writing that “the Minister was referring to the filing of tax returns only in 2015 when he said that the Pay and File would be brought forward to accommodate the October Budget. The payment date remains as is”. This suggests to us that an interval to consider the outcome of the 2014 Budget is entirely appropriate.

4. Please Advise Any Views You May Have in Relation to CGT and CAT

The Pay and File arrangements for both Capital Gains Tax and Capital Acquisitions Tax have been modified on several occasions over the past few years. The yield from both of these taxes is driven primarily by asset value, volume and personal circumstance. The changes to the payment regime in particular had been designed to more closely align the time of payment with the time of the taxable event.

The 2013 Budget forecast for CGT is €420 million; for CAT it is €375 million. While these amounts are not insignificant, in the aggregate they account for approximately 2% of the total tax take forecasted for 2013. As a matter of pragmatism, it would be difficult to see how any changes to the Pay and File regimes could meaningfully improve the capacity of the Department of Finance to make accurate forecasts.

5. Finally, We Would Like to Hear Any Other Comments You May Have on the Issue of Pay & File Dates

Because the compliance level among self-assessed income tax payers is so high, any variances between tax payments and the tax due as reported in subsequent returns will not be material. While we accept the assertion in the consultation paper that the accuracy of systems for forecasting potential revenue yield is a critical element, we do not agree that the accuracy of forecasting might be prejudiced by not having actually received the monies in advance of the forecasting season. The emphasis on earlier payment might lead some observers to think that the goal of simply getting Exchequer receipts in earlier is part of the overall objective of this exercise.

It is also relevant that the entire tax payment and filing system is now mandatorily carried out online for the sector. Once a filing or a payment has been made to the Collector General, Revenue have the immediate ability to analyse and process what they have received. Of course the situation would be very different if taxpayers still had recourse to a paper-based filing regime, but that is not the case. Taxpayers have already made the investment in submitting returns and payments electronically to Revenue, largely to the benefit of Revenue's processing capabilities. It is also hard to understand comments in the consultation document regarding Revenue's ability to cope with more electronically filed tax returns in September. Taxpayers should now receive some benefit themselves from electronic filing, by not being forced into untenable pay and file arrangements.

The self-assessment system in this country is quite reliant on the use of agents by self-assessed taxpayers when complying with their tax obligations. Over 70% of such taxpayers obtain assistance from firms of accountants represented by CCAB-I. These firms have contractual obligations both to their clients, but also to their staff in terms of training, study leave and professional examinations. It would not be possible to coherently implement changes to the pay and file seasons within the space of a year, or even two, and still expect these contractual obligations to be met.

The cash flow pressure on taxpayers, and the additional compliance pressures both on taxpayers and their agents which would be occasioned by a change could likely result in lower tax compliance levels. CCAB-I does not want this to happen. We mention this not as a warning but rather to urge that some consideration be given to this outcome, as the consultation paper is silent about it. The consultation paper is also silent on the interaction of earlier tax payment dates for the direct taxes, and the fiduciary taxes gathered and paid over by many of the self-employed. We do not believe that the direct income taxes and the fiduciary taxes can be regarded in isolation for the purposes of this exercise.

About CCAB-I

You asked in which capacity responses to this consultation are being offered. This response is from a representative body.

The Consultative Committee of Accountancy Bodies – Ireland is the representative committee for the main accountancy bodies in Ireland. It comprises Chartered Accountants Ireland, the Association of Chartered Certified Accountants, the Institute of Certified Public Accountants in Ireland, and the Chartered Institute of Management Accountants, which represent a combined membership of some 40,000 accountants. Brian Keegan, Director of Taxation at Chartered Accountants Ireland (brian.keegan@charteredaccountants.ie, 01-6377347) may be contacted if any further details in relation to any points made in this submission are required.

Freedom of Information

We note the scope of the Freedom of Information Act in regard to the submission. We have no difficulty with this response being published on the Tax Policy website of the Department of Finance. Indeed, this response will be published on our own website and will be available to all of our members and the general public.

Yours faithfully

Paul Dillon

Chairman, CCAB-I Tax Committee

Source: Chartered Accountants Ireland. www.charteredaccountants.ie