Every quarter Revenue release a tax defaulters list. We will look at sectors that appear on the list and what the interest rates and penalties are. Plus tips to keep you off the list. The latest one was on the 14th of June last for the first 3 months of this year. Following on from our blog last week Is Revenue Watching You? we will take a closer look at the taxes and areas that are a focus for Revenue.
We will look at the following
- Setting the Scene
- Important numbers
Setting the Scene
If you go to the end of the page on the Revenue defaulters list, you will see the heading “Revenue Compliance Yield”. It states that “these published settlements reflect only a portion of all Revenue audits and investigations. It goes on to confirm that in the 3 months to 31 March 2022 there was a total of
- 331 Revenue audit and investigations and
- 13567 Aspect queries and profile interviews were settled
- resulting in a yield of €2.218 billion in tax, interest, and penalties
My eyes are watering here, and I am not beside a bucket of raw onions. That is €2218000000. If we divide that number by the total amount of Revenue interventions of 13898 it comes to €159591. The amount of tax in the published list of tax defaulters was €11.6 million which is very small compared to the total. Revenue’s main focus in 2021 was compliance with the wage subsidy schemes. Overpayments likely formed a chunk of the €2.218 billion.
It was the professions that had the highest yield per Revenue audit in 2021 at an average of €151786. On the list for the first 3 months of this year 5 out of the 9 settlements are professions and these are
- Medical Practitioner – under declaration of Income Tax
- Quantity Surveyor – under declaration of Vat
- Medical Service Provider – under declaration of PAYE/PRSI/USC
- Orthodontic Surgeon – under declaration of Income Tax
- Dentist – under declaration of Income Tax
3 out of the 5 cases had under declared Income Tax. On the face of it, that looks like the profits in their accounts were lower than they should be. The under declaration of PAYE/PRSI/USC by medical service providers has been common in the tax defaulter lists in recent years.
In many of these cases, the medical practitioner or consultant has set up a company to trade through. In some cases, when transferring the business to a company they sold the “goodwill” of the business. The idea behind this is to sell the asset at Capital Gains Tax rates and claim CGT reliefs. It would create an amount owing to the director which he/she could take out tax-free from the company. Revenue have challenged these cases on the basis that there was no goodwill in the first place. And the amounts taken out were net salary. As a result, the company would owe payroll taxes.
The second highest yield per audit in 2021 was in the rental sector with an average settlement of €106383. In the latest defaulter list, 2 out of the 9 settlements are
- Former company director/landlord/Paye employee – under declaration of Income Tax and
- Landlord – under declaration of Vat
The first case is either undeclaring income or over-declaring expenses. In the second case it must be about the letting of commercial property. No vat applies to the letting of residential property, as that is exempt from Vat, in most cases.
Revenue have so much information in this space. They know how many properties you have through the property register. They could know the exact rent you get from either HAP or your letting agent. If you are claiming a deduction for mortgage interest, you must register the tenancy with the RTB. Remember the first few questions on the rental section of your tax return are
- Have you complied with the Residential Tenancies Act? This is registering the tenancy with the RTB
- Number of properties let and
- Gross rent receivable
There are many other areas of contention here too. Like putting in a cost for your own labour, claiming a mileage rate to visit the property, and repairs. It is an area where advisors need to be careful too and ensure their clients have a trail to backup expenses.
Vat is another hot topic when it comes to commercial property transactions. This is a complex area, and you need to make sure you get specific advice when buying a commercial property.
“Over the past number of years, the construction sector has posed significant risks to the tax system.” Quote from Revenue 2021 Annual report
The average yield per Audit in the construction sector in 2021 was €59664. There was no case in the latest list and two out of 23 cases in the 3 months to the end of December 2021. These were
- Construction Contractor – Under-declaration of Income Tax
- Plant Hire Contractor – Under declaration of Corporation Tax, PAYE/PRSI/USC and VAT
The perception is that there is a lot of cash floating around in the construction industry. Getting paid in cash and then paying workers in cash while they could be getting other benefits like PUP.
Revenue will have a lot of information in this space from payroll records, RCT returns, and site visits. They conduct such visits with the Department of Social Protection. They get details of those working at a particular site and will cross reference those to
- Payroll records
- Social welfare recipients
- Subcontractor payments
- Tax registrations
Relevant Contracts Tax
If we look at Relevant Contracts Tax [RCT] only as a source of information. Every time a principal contractor makes a payment to a subcontractor, they must inform Revenue. Revenue will then confirm if the principal contractor should deduct tax at 0%, 20% or 35% on that payment. So, Revenue know
- What subcontractor payments a principal made in the year
- What subcontractors got payments from principal contractors in the year
They will cross-check these payments against accounts in the tax returns of both. Say Johnny Dooley is a principal contractor. He claims a deduction for subcontractor payments in his accounts of €300000. But per Revenue records he only made payments to subcontractors of €200000. Either he hasn’t done his RCT returns correctly, or he has overclaimed the payments in his tax return. Easy for Revenue to see and painful, time-consuming, and could be costly for Johnny to fix.
If Johnny was a subcontractor and Revenue could see he got gross payments from principal contractors of €300000 in a year. But on Johnny’s tax return for that year his income is €250000. Where did the €50k go Johnny? This could be an under declaration of Income Tax case.
Looking at the last two defaulters lists you will see that there are four columns. These are for the tax, interest, and penalties. If you still owe Revenue money the fourth column confirms the amount you still owe. Some important numbers that you should be aware of are
- The interest rate for underpayment of Income Tax and Corporation Tax is 8% per annum
- The rate for underpayment of Vat & PAYE is 10% per annum
If you go back 3 or 4 years these numbers can get big fast. In nearly all cases the penalty was 30% of the outstanding tax. In one case of serious tax evasion the penalty was 100%. That was a Revenue investigation case involving a fuel wholesaler that owed €3.3 million in Vat.
Publication doesn’t happen where the taxpayer
- has made a qualifying disclosure to Revenue
- the settlement amount doesn’t exceed €50000 or
- the penalty amount doesn’t exceed 15% of the tax owed
Lessons to Learn
You need to ensure you pay Revenue what you owe when you owe it, but no more. Revenue are carrying out fewer audits but the tax take from each audit is increasing. As you see from the above the figures can get very high very fast, especially if you are going back a few years. You can protect yourself and minimise the amount you pay by
- Tidying up any outstanding tax liabilities
- Do a regular review of current taxes so you are not exposed
- Invest in your finance function with a quality bookkeeping process
- Ensure your tax compliance is strong with correct tax returns on time, every time
Is your bookkeeping a bit messy and you worry about taxes? Take the first step to ease that worry by Starting here