Committee Reports::Second Interim Report - Appropriation Accounts 1996::15 October, 1998::MIONTUAIRISC NA FINNEACHTA / Minutes of Evidence



Déardaoin, 13 Samhain 1997.

Thursday, 13 November 1997.

The Committee met at 11 a.m.



S. Ardagh,


T. Gildea,

B. Cooper-Flynn,

C. Lenihan,

J. Dennehy,

P. McCormack,

S. Doherty,

P. Rabbitte.

D. Foley,




Also in attendance Mr. J. Purcell (An tArd Reachtaire Cuntas agus Ciste).

Chairman: Members have the agenda before them. The minutes of the previous meeting have been circulated to Members. Are the minutes agreed to? Agreed. Are there any matters arising from the minutes? Does the Committee wish to take correspondence now?

Deputy Foley: Yes.

Chairman: The Committee will go into Private Session to deal with correspondence.

Public Session.

Mr. Cathal MacDomhnaill (Chairman, Office of the Revenue Commissioners) called and examined.

Chairman: We will now commence hearings on the 1996 Annual Report of the Comptroller and Auditor General and Appropriations Accounts. Today we will deal with Vote 9, Office of the Revenue Commissioners. I welcome the Chairman and Accounting Officer of the Revenue Commissioner, Mr. Cathal MacDomhnaill.

Mr. MacDomhnaill: I am accompanied by the Accountant General of Revenue, Ms Josephine Feehily, Mr. Dennis Power, Principal Officer in the Corporate Management Division dealing with the Committee of Public Accounts among other things and Assistant Principal, Mr. Paddy O’Shaughnessy.

Chairman: I propose we have a preliminary general discussion and then deal with paragraphs 6 and 7 of the Comptroller and Auditor General’s report together, paragraphs 8, 9 and 10 together, paragraph 11, paragraphs 12, 13 and 14 together, paragraph 15, paragraph 16 and paragraphs 17 and 18 together. Is that agreed? Agreed. How long have you been Accounting Officer at the Office of the Revenue Commissioners?

Mr. MacDomhnaill: This is my eighth year.

Chairman: I note in the paragraphs several references to the fact that new computer systems are being developed. I have been a Member of the Dáil for 20 years and continue to hear that. Is this an ongoing process or an excuse?

Mr. MacDomhnaill: The Chairman is right in that this is an ongoing process. The current update has been taking place since 1990. As you will appreciate, the work must continue and we must use the existing system and bring it up to date for budget reasons and in terms of available technology. This enhancement is at a different level to previous ones. As a result of professional advice in 1989, we decided continuous changing of existing systems would not give us the flexibility and the power we needed and that we had to rewrite almost from the start 3 million lines of custom built code to give us that and to keep existing systems up to date at the same time. We might have taken action elsewhere were we not doing that. This was done purely for value for money reasons. Updating an old system when a new system is coming on stream is unproductive but we had to try to manage it so it would carry out essential functions. We are a long way down the road towards a new system.

The central registration part is completed which has taken a huge effort. This is where all the information relating to the various tax systems such as income tax and corporation tax have been combined in one system, whereas previously they were separate.

We have also brought some of the productivity tools such as active intervention management on stream. In early 1999 we hope to introduce integrated taxpayer processing, where calculation of various taxes can be brought together. This should be ready for user-testing by the end of 1998 and in spring 1999 we will have our first tax head locked onto that which is the PREM, the biggest tax head which brings in several billion pounds every year. At six month intervals we will lock on other tax heads until some time in 2001 when this will be completed.

One of the advantages of this system is that any new tax which comes in will only need a six month development process. The system is capable of taking on new taxes at short notice or disposing of old taxes. This is a huge ongoing investment. A substantial number of staff is involved and we are also paying millions of pounds annually for technical expertise from a leading consultancy company who have done work in Singapore, New Zealand and New Jersey and advise many tax administrations. We are at the cutting edge of technology. However, when this is completed, there will still be ongoing developments beyond 2002.

Chairman: I studied computer science and I am always amazed at the capacity of officialdom to use computers as an explanation for current failure - the computer is down or a new system is being installed. It does not impress me. Is the Revenue Commissioner’s computer system co-ordinated with those of other Government Departments, notably the Department of Social Welfare?

Mr. MacDomhnaill: This computer produces a lot of information for the Department of Social Welfare but it is a separate and independent development. We operate on a different basis. We have a central enterprise server or mainframe which does all the central processing. We have output for other Departments. There are other minor systems which we are active in developing. These are common to other Departments, but do not involve the tax processing system.

Chairman: Is the Revenue Commissioner’s computer system now compatible with the Department of Social Welfare system? For years I was told I could not do necessary cross-checking because the two systems were not compatible, but that compatible systems would be introduced.

Mr. MacDomhnaill: Technically, we are on open systems. We provide a substantial part of the Department of Social Welfare register from the employer returns we receive. This has been improved immensely and we have had a number of letters from the Department commending us on the achievement of higher targets each year. When one talks about compatibility on a wider scale with Social Welfare, which would include non-taxpayers, one is back to the old chestnut of a single identifier which can be used across Departments. This is where problems are encountered with the Data Commissioner. Some balance will have to be struck between data protection on the one hand and the efficiency of public administration on the other. That is the ongoing agenda.

Chairman: The Committee will return to that subject later.

Deputy Foley: On the write-off procedures and the £587 million arrears which are more than 10 years old, was a stop placed on records at some point or have the taxpayers involved been subject to continuous pursuit?

Mr. MacDomhnaill: That residue of ten year old tax has gone through every process - from sheriff to revenue solicitor - without effect. We do not have a category for post-enforcements although there will be one in the new system. They appear under different headings in the list of tax outstanding, but they have all been through a collection process and are now under one stop or another to indicate the process was not successful.

Deputy Foley: What records are kept of ongoing debts? When an individual is identified as a defaulter in another company, what action is taken?

Mr. MacDomhnaill: The procedure for write-off has been very strict up to now. Every case is submitted to me and then passed on to the Comptroller and Auditor General. There has been a restrictive approach to the writing off of taxes. However, the last meeting of this Committee, under Deputy Foley’s chairmanship, indicated we were perhaps too strict in that regard.

When we write off a tax, we still retain it on record. It can be retrieved if circumstances change. We do not come across this often, but theoretically if it did change we could restore the charge and seek to recover it. The prospects of recouping taxes from the categories of ceased business, gone abroad, company liquidated or wound up are not very strong. Theoretically, the possibility does exist.

When we write off a tax, it is usually in relation to a business which has ceased. It is fair to point out that all these categories - whether PAYE or VAT - usually relate to the business sector. All tax is paid to us by the business sector, even though it is deducted from employees and customers. When a business ceases, these taxes are included in the write-off category. This is an unfortunate part of economic life.

Deputy Ardagh: It appears that the system of controls and reconciliation is in a total mess. The Comptroller and Auditor General has asked specific questions of the Accounting Officer and the answers have been general - similar to the answers TDs receive to parliamentary questions.

Under the heading of taxpayer remittances on page 5, it states that the carrying out of a reconciliation would impede productivity and seriously delay lodgements to the Exchequer. As far as I can see, the Comptroller and Auditor General has received no impirical evidence that this is so. It also states that procedures had recently been revised. I wonder whether the Comptroller and Auditor General received a copy of those procedures. If he had, would this have been included in the report?

There was a significant increase in the number of post-dated cheques yet no figures have been given. It is also stated that the format of the records has now been revised.

Evidence should be given to the Comptroller and Auditor General that the revised records format will make a difference. It is too fluffy at present. There is also the question that the Collector General’s and the Accountant General’s records are not reconciled. I am concerned that money payable to the Revenue Commissioners could be misappropriated, as happened in the past. It seems the system of control and reconciliation depends on the honesty, integrity and dedication of the civil servants under your control. They and the inspectors with whom I have dealt are excellent. However, a system should be put in place to ensure that controls are not breached so that civil servants and the people are protected.

Chairman: These matters arise in paragraphs 6 and 7. We should have a general discussion before we debate specific paragraphs because we must enable the Comptroller and Auditor General to introduce the paragraphs first. That might answer some of the questions raised.

Deputy Ardagh: My general remarks relate to control and reconciliation in the Revenue Commissioners.

Mr. MacDomhnaill: Revenue is under perpetual audit. We could have three of the Comptroller and Auditor General’s auditors doing audits during any working day. This is only the tip of the iceberg. Everything the Deputy mentioned is put before the auditors, including the specifications for the computer design change. There is tremendous support and views are exchanged between the Comptroller and Auditor General and my staff. A rigorous audit of Revenue records and reconciliations is also carried out. If anything was misappropriated, it would be detailed in this Report. The media’s impression about the reconciliations does not reflect what is happening.

I invite any Member of the Committee to visit our cash office - we have one in Apollo House in Dublin as well as in Limerick - to see the system at first hand because it is impressive. Financial people come from other countries to see it. It is the leading edge of technology for cheque handling. There is also the possibility of a physical count of cheques to match what the machine shows. Every cheque is accounted for. The system in the cash office is designed to ensure that incoming post goes to the cash office so that every cheque finds its way into the system. Not only does the machine count the cheques, but they are sorted into lodgement bundles and a machine code is written on them for sorting purposes. Every cheque gets individual attention and they go through the system twice. I have no hesitation in saying the system is secure. We are talking about audit trails for the purposes of checking certain transactions against primary documentation, not the actual control of the cash process. I hope the Comptroller and Auditor General endorses what I have said.

Deputy Doherty: Perhaps Mr. MacDomhnaill should invite the new Committee, as he did the old one, to view the state of the art technology and the efficient and effective way the Revenue Commissioners operate their systems. One would have to see it and have it explained thoroughly to fully appreciate what has been achieved and the difficulties which have been eliminated.

Personal cheques with stamp duty liabilities are being returned to persons who submit them with the request that they resubmit them through their solicitors. This has often resulted in penalties being imposed. It is difficult to understand why this is the case because nobody, including the Revenue Commissioners, would be wise to refuse money. Why do the Revenue Commissioners return personal cheques and then penalise the person because they were not sent in through the specified channels?

Mr. MacDomhnaill: We have moved a long way towards implementing the wishes of the Committee. We now accept cheques throughout our offices. There was a time when we insisted that cheques had to be sent to the Collector General. There was much debate here over the years about cheques being sent back because the interest was not added on. We have changed our position in that regard.

Stamp duty is slightly different because we give immediate value in many such cases. It is like selling a stamp over the counter in that immediate value is given once the stamp is appended to the document. The difficulty is that once that document is stamped, cheques can bounce. We try as far as possible to accept cheques when they are presented to us by the legal profession. We have an arrangement so that if they give us a cheque we do not have to match it against documents. It is like an over the counter service. However, we ran into trouble with that in the past year or two.

Reference is made in the Report to new technology but this is an ongoing situation. The crooks are improving their technology all the time and systems which were valid for 100 years are no longer adequate. If the person can guarantee the cheque, it will be accepted straight away. Otherwise we must wait until the cheque is presented. However, sometimes people cannot wait for that to happen as they want to take the documents with them.

Deputy Doherty: You will look at the situation in the context of a legitimate presentation.

Mr. MacDomhnaill: Yes.

Deputy Cooper-Flynn: The report states that post-dated cheques put a considerable strain on existing manual systems. Why do the Revenue Commissioners accept post-dated cheques? Are they always honoured? Given that there is no reconciliation between cheques which come in through the post room and those which go through the accounting system, how can you be sure that cheques are not lost in the system?

Mr. MacDomhnaill: I do not accept that we do not reconcile cheques. The post room and the cash office is a self-contained secure area. If someone opens the letters and gets the cheques, they do not count them before passing them on to the next stage. They all go through the system and are accounted for.

Post-dated cheques were used in the past for instalment arrangements. This method has mushroomed in recent years because the tax clearance system has been widened. The thresholds have dropped and licences and grants-originally confined to contracts - have been brought into the clearance system. Many people need certificates and licences to continue in business, such as subcontractors and publicans, and the system catches up with them. There was so much pressure in that regard that we agreed that if people gave us a satisfactory instalment arrangement we would give them the tax clearance certificates. This was urged upon us by the Committee.

The second question was whether all those cheques are honoured. As might be expected, many of them are not honoured. It is a huge chore to keep track of those post-dated cheques. For that reason, about two years ago we made a definite policy decision to insist in those cases on payment by direct debit. However, it is a long process. We have had systems in operation for several years for disc exchange and so on, but getting people to avail of them is a slow process. We have found in recent years that people who did not make any arrangements have been sending in bundles of post-dated cheques.

Deputy Doherty asked about the refusal of cheques. In such cases, we try to get the interest on the instalment arrangement but we do not turn down the post-dated cheques. We are trying, as far as possible, to move away from post-dated cheques to direct debits. Bounced cheques really mess up the system. If a person forgets they have given us a post-dated cheque, when we try to cash it there might not be any money in the account and the cheque could bounce. However, we would have already put that cheque through the exchequer account.

Deputy Ardagh referred to the reconciliation between the Accountant General and the Collector General. It comes down to bounced cheques and refunds. The system has to cater for a deluge of cheques, including bounced cheques, refunds and set offs.

Another bugbear for us is that many practitioners put Tippex on the accounting documentation we send out and resubmit it for another client. However, they overlook the fact that there are machine codes on those documents and the machine reads the document as relating to the original client. This is causing a great deal of trouble for us. We depend on those who open the post to recognise the documents which are unsuitable for the automatic system and to put them into the ORP system. Irrespective of which systems we implement, at the end of they day we must rely on the integrity of the staff.

Chairman: I call on the Comptroller and Auditor General to introduce paragraphs 6 and 7 of his report.

Mr. Purcell: Paragraphs 6 and 7 of the Report of the Comptroller and Auditor General read:

Paragraph 6 is merely for the information of the Committee. It sets out the basis for my audit of the Revenue Commissioners and summarises the tax yield for 1996 under the various tax headings.

Paragraph 7, some of which has been covered already, outlines the finding of an audit of the system for receiving tax remittances in the Office of the Collector General. Members will appreciate that there is an enormous throughput of cheques, as the accounting officer stated, and that there is a complex set of procedures designed to ensure all moneys are properly brought to account. In general, the controls and operations seem adequate to meet the demands imposed.

I should explain that matters tend to be summarised in my report and, by its very nature, it is almost a report of exceptions. I have often been criticised by accounting officers and others for not listing the good with the bad. However, if I were to do so the report would be the size of a telephone directory, for which I would not be thanked either. The paragraph sets out a number of areas where I felt the system could be tightened up and improved.

Some of the points raised concern matters which can be put right immediately, such as the control over the unallocated cheques and the opening of all post at the point of receipt. I am glad to note the accounting officer has taken remedial action in those areas. The other matters are not conducive to a quick fix, such as audit trails and overall accounting reconciliations, particularly in the environment in which the Revenue operates. Perhaps these can best be addressed by better and more sophisticated computer systems. I know that is the intention of the Revenue Commissioners.

In this context, the Committee will note that a major new computer system is being developed. Working groups, with a consultancy input, have been reviewing the accounting and reporting arrangements during 1997, with a view to establishing best practice. I understand they recently completed their work but, as far as I know, no decisions have yet been taken in relation to their recommendations.

Chairman: Is it a practical objective to phase out post-dated cheques? Will we ever get to the stage where post-dated cheques are not accepted?

Mr. MacDomhnaill: You are right to bring up the issue of practicality. Ideally, we would not need many of these systems if everybody responded to our demands. The old systems would work perfectly if that were the case. The reason they do not is that we must bring it all together in a customer friendly way. It is very complex for people to have to deal with VAT every two months, PAYE and PRSI every month, preliminary corporation tax and capital taxes. We are trying to develop a consolidated billing system which would be more straightforward.

We take the view at the moment that good businesses which are solvent but which have cashflow problems should be given an instalment arrangement. If such businesses cannot get a direct debit should we deny them the instalment arrangement or should we give them a chance to send in post-dated cheques? We have been trying to insist on direct debits for two years but the post-dated cheques keep arriving.

Chairman: Is there any penalty if a post-dated cheque bounces?

Mr. MacDomhnaill: The penalty is that the payment is late and the instalment has not been met. Two things can happen. If we were satisfied with the explanation that it was a mistake we would not collapse the instalment arrangement. However, if we thought they were failing to meet the instalment we would collapse the arrangement and return to the enforcement area. Every instalment arrangement will carry a certain amount of interest because of the delay element.

Chairman: However, it is not a specific offence to bounce a post-dated cheque. There is, in reality, no additional penalty for someone who deliberately bounces a post-dated cheque.

Mr. MacDomhnaill: In such situations there has been a failure to meet the payment date, the usual penalty for which is interest.

Chairman: However, would Mr. MacDomhnaill not agree there is a strong case to make the deliberate bouncing of post-dated cheques an offence in itself which is subject to additional penalties, in order to make the system more practical and effective?

Mr. MacDomhnaill: There might be if it were possible to prove the cheque was deliberately bounced. However, in most of the cases we deal with we have people pleading with us to still accept the cheque and giving us millions of reasons. The necessary mens rea would be absent in terms of bringing a prosecution.

Chairman: Consideration should be given to making it a specific offence. There is no reminder system to notify people in advance that their post-dated cheque is about to be cashed.

Mr. MacDomhnaill: You are correct that there is no reminder system. Perhaps that should be considered.

Chairman: Sending out reminders might overcome the problems caused by such cheques for the system, especially where cheques are bounced inadvertently.

Deputy Ardagh: The post-dated cheque facility helps many taxpayers. For example, without that facility the Revenue Commissioners would receive no payment at all from a taxpayer who received a bill for £5,000 but had no money in the bank. That would then become a bad debt in five or six years’ time. It is a very necessary facility and without the facility of post dated cheques the Revenue would get nothing at all. That would then become a bad debt in five or six years time so it is a very necessary item. On the question of the bouncing of the cheques, the people who give post dated cheques are, of their nature, not in a position to afford extra penalties and interest and a caring attitude should be adopted to that whole situation. The attitude that the Revenue is at present adopting is very good and is appreciated.

I am sorry that the Comptroller and Auditor General had not already included in Item 7, the statement that he felt that present system was, in general, good and satisfactory because the impression comes over that it is a can of worms and that the whole system is weak. I accept what the Comptroller and Auditor General has said in his report and also what the Chairman of the Revenue Commissioners has stated.

On the question of practitioners who come along and Tippex over the magnetic coding, this is a practice that occurred in the past and I have seen even tax inspectors, in the past, use forms of that nature. This is being addressed and every tax briefing that comes out contains a paragraph advising against using other people’s tax forms. That would happen only in a very small number of cases. It is not fair to brand practitioners as inept and non-compliant with the requirements of the Revenue Commissioners.

Finally, Item 6, which deals with the question of Preliminary Tax. I wonder if the economy is still in a healthy state and is the amount of Preliminary Tax paid up to the due date which is November, equal to, or higher or lower than, the amount paid in 1996?

Mr. MacDomhnaill: I would agree totally with Deputy Ardagh in relation to practitioners. Only practitioners do this because a single tax payer gets only one document. I only mention it in that context. The vast bulk of the money comes in through the ARP system without any requirement to put it through the system personally. There is a small residue of these cases which gives us trouble because of that and, of course, it works its way through the system.

As regards the Preliminary Tax for 1997, I am glad to report that it is well ahead of the Budget estimate at this point. We had an advertising campaign because there was a query last year about a slight rolling back on Preliminary Tax but not only is that rolling back completely caught up with, because we had a lot of money coming in in October, but we are well ahead at this stage.

Mr. McCormack: I note that the Comptroller and Auditor General notes that the control of post dated cheques was weak and that no record was maintained of the receipt and subsequent possession of such cheques. If that matter was corrected so that there was a record of post dated cheques would it help in forming this register of when post dated cheques would be coming up? Is there a limit on the length for which you can post date a cheque? Is it a fixed period? When a person’s car tax or television license is due he gets a letter the week before giving warning that this bill is coming up and he makes provision for it in his next week’s finances. Could a similar system be put in place for post dated cheques. Would it not be very helpful if taxpayers were notified that the date on their post dated cheques was coming. If that register was established when post dated cheques are received could that system be put in place?

Mr. MacDomhnaill: This is close to the same point made by you, Chairman, about notifications for post dated cheques. We do have a system where the instalment arrangement is marked out by the case worker on a computer so that it can be checked and a date will come up to us. What you are saying is that we should anticipate that and send out a note to the taxpayer. It is a point that we will take on board. As regards notification we do give a number of days notice. Our demands are not peremptory. You have a certain length of time in which to pay. We send out demands well ahead of due dates so that they do have advance notice of the amount being due. For the instalment arrangement cases I take your point.

Mr. McCormack: You did not answer the point about the length of time that a cheque can be post dated. What period of time do you allow in a post dated cheque?

Mr MacDomhnaill: As regards the timing for an instalment arrangement this is one of the very difficult areas for a collection organization like us. We have to get the revenue in within the year. It is not like a business. If 1996 revenue does not come in in 1996 it falls out of the 1996 budget. We have that constraint on us all the time. Within that constraint we will give instalment arrangements but each case is looked at on its merits. What we have to look at is this. Is there a basic solvency in the business? If, for example, our people - looking at the balance sheet and the cash flow - come to the conclusion that this company is already insolvent we would be failing in our duty if we gave an instalment arrangement in that case. There are other cases where we can say yes, there is a viability here. There is a cash flow problem and we look at the size of the cash flow problem but if we entertain the idea that this business is viable we must, at least, give a year or maybe even two years in exceptional cases. We have to look at each case and see what is justified to enable the business to survive and meet tax obligations. There is also an interest element in the instalment arrangement.

Deputy McCormack: Do you mean that at the beginning of the period you set out what is owed and take post dated cheques for all of that amount coming in at different times?

Mr. MacDomhnaill: The post dated cheques will cover all the instalments plus the interest. We do not compound the interest. If you look at the tax law you will see that it says “simple interest”. We respect what is in the legislation. We bring the earlier instalments against tax and then the interest is not compounding. That is the only easement that we have in the instalment arrangements. Otherwise the cheques match the dates of the instalments.

Deputy McCormack: I presume that post dated cheques cause a perpetual problem because if you post date cheques for a year or two years to clear a £5,000 liability by the time that period is up there will be another recurring liability for the two years in between. Are we not only postponing the bad day of decision.

Mr. MacDomhnaill: Part of any instalment arrangement is that current liabilities have to be paid on an ongoing basis. The instalments come in addition to current liabilities. You are quite right. It is a huge chore to manage these post dated cheques. At the risk of annoying the Chairman again we are developing a case management computer programme for this particular area to try to reduce the huge clerical input in managing post dated cheques. Our policy would be, if at all possible, to move over to direct debits.

Deputy Cooper-Flynn: I wish to ask how post dated cheques are treated. Do you do up a computer listing to remind you that a post dated cheque has to go through the system? It is not attached to an individual file which has to be gone through manually? Secondly I want to comment on something mentioned by Deputy Ardagh. While I appreciate that the post dated cheque system is a great facility for someone who owes a large amount of tax. I think it should be ruled out altogether, given the time consumed and the burden it places on the Revenue Commissioners. It is as easy for someone to sign a direct debit as to sign post dated cheques. Why can we not just rule them out of order altogether.

Mr. MacDomhnaill: I could agree with you 100 per cent from a theoretical point of view. However it is different when one comes up against the actual cases, as any practitioner will describe. There are jobs at stake. We treat this as part of our customer service. In some of these cases, the State is doing too well because we charge a rate of interest of 15 per cent which is non-deductible in the computing of profits and is the equivalent of 28 per cent. No-one in business is paying this penal rate of interest. In some of these instalment arrangements, commercial restitution would probably be a better approach. There has to be a penal rate of interest otherwise no-one would pay on time. There are and could be based on the ongoing rate of interest otherwise no-one would pay on time. There are circumstances where commercial restitution is justifiable and could be based on the ongoing rate of gilts. At the moment, someone entering an instalment arrangement pays penal interest.

Chairman: We should not give the impression that the Committee says this should be abolished. A practical approach is necessary and a judgment has to be applied. We are concerned that it is applied properly with a follow-up.

Deputy Rabbitte: Will Mr. MacDomhnaill comment on the Comptroller and Auditor General’s remarks that a visible policy of prosecuting of under criminal law. should be an effective deterrent to those who evade tax? He made these remarks in the context of the fact that no criminal proceedings were initiated by the Revenue Commissioners against individuals who failed to make their returns from 1992 to 1996.

Chairman: We are discussing paragraphs 6 and 7. Deputy Rabbitte is referring to a later paragraph.

Deputy Rabbitte: I am on a tight schedule.

Mr. MacDomhnaill: We agree with the Comptroller and Auditor General that there should be a visible sign of prosecution to demonstrate that this ultimate deterrent will be used. I will elaborate further when we get to the relevant paragraph.

Chairman: Now you are vexing me. I represent a working class constituency where it is the widespread feeling that prisons are working class institutions. No white collar criminals are ever imprisoned in this country.

Deputy Rabbitte: I will not abuse the Chairman’s indulgence on this but I hold similar views. It is difficult for the ordinary compliant taxpayer to appreciate that from 1992 to 1996 no-one was prosecuted.

Part VII of the Finance Act, 1994, relates to foreign residents. Is there any reason why the Revenue Commissioners cannot provide simple figures for the number of individuals availing of that provision?

Mr. MacDomhnaill: I am not aware this question has been raised.

Deputy Rabbitte: I raised it by way of a parliamentary question on 4 November and I was told the Revenue Commissioners do not keep records to quantify either the number of persons who may have been affected by the provisions of Part VII of the Finance Act, 1994. We are entitled to know how many wealthy individuals use this facility. I am not asking how much they pay. Can Mr. MacDomhnaill examine this and come back to the clerk of the Committee?

Deputy Foley: The method of paying by post-dated cheques and direct debit is a good one. How many individuals avail of this system? Has the number increased in the last number of years?

Mr. MacDomhnaill: Yes, it has increased considerably because of the need to give tax clearance to those who could not meet payments. People have presented post-dated cheques, without any agreement from us. We are faced with the problem of whether we should accept them and look for the interest or send them back. While we would like to do this and request payment up front, the general impression we get from the Committee is that cheques should not be refused for these reasons when a remedy exists to collect the interest subsequently.

Deputy Foley: Where a sole trader seeks a C2 certificate, will a post-dated cheque be accepted?

Mr. MacDomhnaill: Many instalment arrangements apply to sole traders. We have to look at the viability of the business. We can come in for criticism if a debt is allowed to accumulate and we have not been quick enough off the mark. It is a judgment call when one moves from facilitating the taxpayer to heavy enforcement and liquidation.

Deputy Foley: I accept that. Where it benefits a sole trader or self-employed person to seek the renewal of a C2 certificate, will he be given the benefit of the doubt if his business is capable of honouring post-dated cheques?

Chairman: Working groups and ongoing reviews are mentioned in this paragraph? When will they report on the issues raised in this paragraph?

Mr. MacDomhnaill: One report is focussing on the Collector General and the other on the Accountant General. The working groups have finished the reports but they have to be endorsed. I have not seen them yet, but their publication is imminent.

Chairman: Who must endorse them?

Mr. MacDomhnaill: The steering committee. The groups looked at the ways we can change procedures relating to our new integrated taxpayer processing system and thus avail of the technology.

Chairman: The points raised by the Comptroller and Auditor General in this paragraph are significant. I hope the Revenue Commissioners can satisfy his concerns quickly. There is an implicit excuse that cross-checking cannot be done because of the scale of the number of cheques coming in. What do the British or American revenue do? There must be some advanced systems of cross-checking and tabulation.

Mr. MacDomhnaill: When we installed the automatic system, the deputy Collector General visited the Cumbernauld collection centre in the UK. He also visited Manhattan to examine the American system, which we have. The people from Cumbernauld visited Dublin to look at our system. Nothing in our system is behind the times.

The counting of cheques must be seen in the context of a person handing in a bundle of cheques in a bank. The teller does not count the number of those cheques; they pass into the system. Every cheque we get is accounted for. It is a question of when they are counted as they pass through the system.

Chairman: That may be so and one can eventually check whether any have gone missing. What about the audit trail to which the Comptroller and Auditor General refers?

Mr. MacDomhnaill: If a cheque goes missing, the chances are it will not be counted either. If a cheque does not get into the system, it is missing. Even if cheques received are counted, it will not show a cheque is missing.

Chairman: How many cheques go missing each year?

Mr. MacDomhnaill: We are not aware of any cheques going missing because the taxpayer gets a receipt. If they did not get one, they would wonder what happened to their cheque. Stolen cheques were intercepted in the past but it was never established they were stolen after they reached Revenue. It is likely it happened before that.

Chairman: Did you tell me that 16,000 cheques are received per week or per day?

Mr. MacDomhnaill: Per day. We receive some 1.4 million payments per year.

Chairman: Are you saying there is absolutely no fraud in the system? How can you be satisfied no cheques ever go missing?

Mr. MacDomhnaill: That is the system and it works. In past meetings with the Committee there were detailed discussions about stolen cheques which were intercepted and the names changed on them. We cannot account for how the taxpayer draws up his cheque. If he puts down VAT, for example, that is a dangerous thing to do. He should put down Collector General or Revenue Commissioners because VAT can easily be changed. Those cheques came to light when we sent out demands and taxpayers replied by saying they had sent in their cheques and were surprised we did not receive them. It is a self-proving system.

Deputy Ardagh: It is a self-proving system if the Accountant General issues a receipt and, if within his office the tax demand to which it refers can be shown to have been paid. The paragraph states there is not a full reconciliation between the Collector General’s office and the Accountant General’s office. Is there a possibility that cheques may have been sent to the Collector General, that the Accountant General would have been informed of the amount and the payer, that a receipt would have been issued and yet the cheque went missing because of the lack of reconciliation?

Mr. MacDomhnaill: It is totally wrong to say there is no reconciliation between the Accountant General and the Collector General. There are daily balances. At the end of the year there must be a reconciliation between what the Accountant General has transferred to the Exchequer and what the Collector General has collected. There is a time lag when cheques, which should be in the Exchequer receipt according to the Collector General, are bounced by the Central Bank and are therefore not in the Accountant General’s bank account. That is where reconciliation comes into play.

Mr. Purcell: I accept Deputy Ardagh’s point but, while the system is good, there are problems. Some of them do not rate as highly important but there is a risk involved in cheques addressed to individuals such as tax inspectors being sent to them unopened. I do not want to overstate the problem and I would not refer to it as a can of worms as the Deputy did, but there are some serious problems within a complex system.

Mr. MacDomhnaill: The cheques were sent to a secure area, the post room-cash office, and some were not allowed to be opened where they were addressed to managers. The reason for that is that most post going to managers does not contain cheques but some does contain sensitive information about staff. The cash office is mainly staffed by junior personnel and we did not want sensitive documents being opened. We have made arrangements that the envelopes can now be opened while still preserving the confidentiality of other correspondence.

Chairman: We have given ample time to these paragraphs and they are duly noted. Paragraphs 8, 9 and 10 of the report of the Comptroller and Auditor General read:

8.Write-Offs in 1996

The Revenue Commissioners have furnished me with details of taxes written off during the year ended 31 December 1996. The total amount £90,733,258 is made up as follows





No. of Items

Amount £’000

No. of Items

Amount £’000.











Corporation Tax





Income Tax





Other Taxes










The distribution according to the grounds of write-off is :-





No. of Items

Amount £’000

No. of Items

Amount £’000.






Ceased Trading - No Assets





Cannot be traced/Outside Jurisdiction





Compassionate Grounds















I have made a test examination of the cases and I am satisfied with the action taken.

It should be noted that the amount written off may overstate the actual liability as some of the items included in the arrears represent estimated assessments.

9. Proposed Change in Write-Off Procedures

Outstanding tax (including PRSI) in respect of all tax years up to 1994/95 amounted to £1,431m at 31 December 1996. The collectability of this tax is affected by a number of factors viz.

£587m of the arrears relates to periods prior to the introduction of self assessment for Income Tax, is now more than 10 years old and has been the subject of the collection and enforcement cycle but nevertheless remains uncollected. The lapse in time, the reliability of the records and the basis on which assessments were raised can give rise to doubts as to its collectability.

The rate of recovery from post-self assessment arrears of £246m for the period 1988-1991 is extremely low. The response to the post-1993 amnesty campaign shows that only some £30m has been discharged from the record as a result of that amnesty. With the very favourable terms on offer in the 1993 amnesty, this response suggests to the Revenue Commissioners that the possibilities for collecting tax for these years have been more or less exhausted.

Estimated tax included in the overall arrears is £488m. Owing to the unsound nature of many of the pre-1991 VAT estimates raised, estimates raised for these years are regarded by the Revenue Commissioners as speculative rather than as quantified assessments. Similarly, they are of the view that pre-self assessment estimates for Income Tax may be overestimated.

£401m is due from cases which have been cancelled by Inspectors of Taxes. A major share of this element of the arrears is uncollectable as the bulk of cancelled cases will have ceased trading.

The outstanding tax shown in the books of the Revenue Commissioners is therefore much greater than that which will be ultimately recovered. The Commissioners’ very strict guidelines on the write-off of tax debts, which necessitates arrears being individually reviewed and other criteria being satisfied before amounts can be deleted from the records, also contribute to the high level of outstanding tax on the books.

As the Commissioners felt that there was no realistic chance of recovering much of the outstanding tax, they decided in early 1997 that the commitment of the level of resources necessary to pursue this tax would not be justified. They therefore proposed to revise their write-off procedures so that much of these old uncollectable arrears would be deleted from the records. The main changes included the use of automation to write off small amounts, enhanced efforts to be put into the task of reviewing doubtful debt, and the write-off of cases involving company liquidations at the beginning rather than at the end of the liquidation process.

The Commissioners informed me that they are hopeful that these measures will result in a significant reduction in the level of old book arrears and will provide a greater focus on the collection of current taxes and collectable arrears and lead to a more planned approach to debt management.

In response to a request by the Accounting Officer for my views on the Commissioners’ proposals I stated that I was in broad agreement with the action proposed but pointed out the following

The key risk associated with any widening of the write-off policy is that tax which is capable of being collected may be written off and therefore be lost to the State. The obvious aim should be to minimise if not eliminate that risk by designing control procedures for the different categories of arrears. There are a number of ways of classifying arrears. At one level a distinction should be made between arrears which arise as a result of unsubstantiated estimated assessments and those which represent real liabilities. In the latter category a distinction would have to be drawn between tax which is uncollectable by virtue of the financial status of the individual or company and tax which is uneconomical to pursue.

Having regard to the sharp initial increase in write-offs, internal audit be given a role in reviewing a defined percentage of cases for adherence to procedures and the increase will also call for a more extensive examination of write-offs by my staff.

The Revenue policy of reinstituting collection action on written-off tax arrears should continue where circumstances change to an extent that the debt can be satisfied.

It is important that the write-off procedures are not seen as giving the message that if Revenue demands are ignored for long enough they will go away. It will therefore be necessary to devise new headings under which write-offs can be classified to ensure that Revenue’s actions are, and are seen to be, fair, equitable and reasonable. These are to be agreed with my Office with a view to facilitating their inclusion in my Report.

I noted that the proposals provided for the documentation of write-off procedures and the keeping of records for audit examination.

10. Outstanding Taxes and Levies

Table 1 was prepared on the basis of information furnished by the Revenue Commissioners and reflects the activities and transactions in the twelve month period ended 31 May 1997 - the latest date for which data was available at the time of finalising my Report.

Table 1 - Outstanding Taxes and Levies


Balance at 31 May 1996a

Charges/ Estimates Raisedb



Balance at 31 May 1997

Estimate of amount likely to be collected








Income Tax (Excluding PAYE)c







VAT (Declared Liabilities Net of Repayments)







VAT (Estimates)d







PAYE (Declared Liabilities)







PAYE (Estimates)d







PRSI (Declared Liabilities)







PRSI (Estimates)d







Corporation Tax







Capital Gains Tax







Residential Property Tax







Capital Acquisitions Tax







Abolished Taxes
















The increase of £28m between the closing balance in the 1995 report and the opening balance for 1996, is accounted for by the inadvertent omission of outstanding balances due from certain VAT traders who operated the direct debit payment system or the annual remitter scheme


Net of write-offs.


Includes Deposit Interest Retention Tax, Withholding Tax, PRSI for the self-employed, Health Contributions and Levies.


Net of discharged estimates.


The estimate of the amount likely to be collected takes into account factors such as:


anticipated reductions of estimated amounts included in balances brought forward from previous years.


the level of liquidations and business closures.


historical collection patterns.

Mr. Purcell: The amount of tax outstanding which can be classified as arrears stands at around £1.5 billion today. Although a huge figure in its own right, it should be viewed in the context of the £3.5 billion shown as outstanding some ten years ago; credit where credit is due. The tax outstanding figure provokes a voluble reaction from both public and media each year when my report is published. The focus it provides helps to give an impetus to the need to reduce the arrears on the books even further.

Revenue has been analysing the make-up of this figure to establish the nature of the underlying arrears so that the most appropriate ways of addressing them can be determined. My office has been carrying out its own similar research and its findings correspond with those of Revenue. The results are summarised in the first part of paragraph 9. They show the amount of tax outstanding in Revenue’s books is much greater than that which will be ultimately collected. There is a combination of reasons why this is so, the main ones being the age of much of the debt, the fact that many of the cases involved will have ceased trading and the unsound nature of many of the old VAT and income tax assessments. Revenue reckons it will eventually collect £500 million of the amount nominally outstanding and the details are in paragraph 10.

The Accounting Officer consulted with me during the year about proposals to change the procedures for writing off uncollectable arrears. His objective was to enable resources to be concentrated on pursuing collectable arrears by automating the write-off for small amounts of arrears, and by writing off tax due in cases involving company liquidations at the beginning rather than at the end of the liquidation process. These moves would also have the effect of significantly reducing the amount of tax arrears in Revenue’s books. The Committee will see in paragraph 9 that I was in broad agreement with the proposals provided the revised procedures were operated in a fair, equitable and transparent way. My office is currently in discussion with Revenue about how best this might be achieved. The new procedures will not in any way absolve the Revenue Commissioners of the responsibility of devoting sufficient resources and effort to the task of collecting arrears, however old, which are properly due as a matter of equity and to ensure that revenue is not lost to the State. Compliant taxpayers deserve no less. Paragraph 8 shows that £90 million in outstanding taxes were written off in 1996 under the old procedures, although it should be noted that some of this would represent estimated assessments which would tend to overstate the real tax liability.

Deputy Ardagh: It is important to realise and accept that four out of five businesses fail.

Chairman: Four out of five fail?

Deputy Ardagh: That is a generally accepted statistic. All the resources of the State are used to collect VAT and PAYE from these business people. Although they may be due, any available money to pay it has probably gone with the business. The rewards for the entrepreneur in such cases are minimal.

In most cases they have lost money and have overdrafts from the banks. At the same time the Revenue Commissioners continue to pursue them for moneys due in VAT and PAYE.

There must be an overall examination of when to write off debts. Much of the £1.431 million which is outstanding from 1994-1995 is probably made up of these taxes. They are not collectible and the people who incurred them lost huge amounts of money in doing so. However, these are the people who have built up the enterprises. One in five of them have built the economy to today’s level. They have created employment. A kinder attitude should be adopted to those who are in dire financial circumstances with regard to the taxes for which they are being pursued. I am not suggesting that people who have an above average standard of living should not be pursued. If they have spent the money, they have done wrong and should be pursued. However, those who have a normal or subsistence standard of living are still being pursued for these moneys and action should be taken to ensure the debts are written off as soon as possible.

The Comptroller and Auditor General said one of the main changes will be the use of automation to write off small amounts. That is a good idea. He also referred to enhanced efforts to be put into the task of reviewing doubtful debts. This is the type of general answer Deputies receive to a parliamentary question and I do not understand what it means. The suggestion that in the case of company liquidations write offs will take place at the start rather than at the end is good.

Liquidators are controlled and regulated and it is to be expected that if there are funds available for the Revenue Commissioners as preferential creditors the money will be forthcoming.

In the same paragraph the Comptroller and Auditor General suggests the internal audit be given a role in reviewing a defined percentage of cases. It is important that there be a strong internal audit team within the Revenue Commissioners. Apart from the Comptroller and Auditor General, the audit team should report directly to the Revenue Commissioners. That is a most important staff function. What is its position in the Revenue Commissioners and how can it be strengthened and improved?

There is also the issue of how the Revenue Commissioners deal with cases in general. It would be useful if an inspector or collector got to know the people in the various businesses and organisations with whom he or she is dealing. If inspector A and his staff regularly deal with 5,000 cases he can phone the person concerned and say: “Your preliminary tax is due; I need it now or I will send a sheriff’s letter”. A personal approach could be adopted to the collection of taxes. It is important that such a system be established.

The penultimate paragraph deals with the methods of write off. The Comptroller and Auditor General says they must be agreed with his office with a view to facilitating their inclusion in his report. The tone of that comment is quite strong and at variance with the fluffier approach to the questions and answers of the previous paragraph. I hope there is the trust and cooperation between the Comptroller and Auditor General and the Revenue Commissioners which is essential to the efficient and effective examination of these reports.

Chairman: Deputy Ardagh has raised the crucial issue of how to reconcile the need to avoid the creation of loopholes with the need to avoid the Revenue Commissioners becoming the cause of liquidations or business failures.

Mr. MacDomhnaill: That is a judgment call in every case. Our mandate is the care and management of the taxes and we are subject to the audit and to the scrutiny of the Committee of Public Accounts on behalf of the Oireachtas. The audit is thorough and the content of the Report is only the tip of the iceberg in terms of the examinations the Comptroller and Auditor General undertakes every year.

I must express my deep appreciation of the Comptroller and Auditor General for taking a positive view and giving us helpful directions as to how we can improve the system. The Report might appear to be negative but we received a great deal of positive input from the Comptroller and Auditor General and his staff. There was a great deal of communication and exchange.

With regard to what is called the soft talk about reviewing cases, we have assigned this task to about 50 inspectors who have experience with the old system. Much of the debt dates from before the self assessment system. Eighty thousand cases have been reviewed.

Sometimes that involves visiting the business premises and re-evaluating the matter. Estimates were churned out by the computer and we are trying to move from a processing system to a case working system. We let what can be done by process be done by process but try to have a case working intervention in the area of collection. It involves a shift of resources and is a slow process but it is ongoing. We are keeping pressure on the process to achieve a case working environment in relation to collection. Much of the technology is required to assist that approach and make it more efficient.

A question was asked about post-dated cheques. They come up automatically as the system points out at the relevant time that a cheque needs attention. With regard to the review, it is a positive case working review of cases in the light of their history and their current position. In many cases the businesses involved have folded. There is a traditional write off policy with regard to ceased businesses. Other people might have left the country or might even be dead. That is the information yielded by the review. Even though we have carried out reviews over a long period we still find that when we select cases for enforcement and they go back into the process the scene has changed again. A business that existed a year before, for example, might have ceased. There is no end to it.

We have a policy, as the Comptroller and Auditor General said, of identifying cases where there is liability which we should pursue. The problem is that in the midst of the numbers there is perhaps one in 20 cases where there is productive yield and an efficient means must be found to get at that case and collect the tax. That conveys the message which the Comptroller and Auditor General has given with regard to compliant taxpayers. In 1996 we collected over £12 billion. Only £270 million of the figure for charges has gone into the arrears category. We collected over 97 per cent of the taxes due in 1996 during 1996. The vast bulk of the revenue is paid in a compliant manner. What is not paid requires the attention. As the Comptroller and Auditor General said, if there is a debt of £300 million one might be lucky to collect £20 million. That is the process we must go through and it means reviewing and writing off of the rest.

I note the Deputy’s point about liquidations. In a liquidation case the ability of the Revenue Commissioners to do anything is suspended because the liquidator takes command of the case. It is negative to include these amounts in the books of arrears because very little will ever be collected and we cannot take positive, immediate action about them. That is one of the main reasons for advocating that policy and we have had positive indicators from the Comptroller and Auditor General that this will be acceptable.

Deputy Ardagh: Is it a question of strengthening the internal audit?

Mr. MacDomhnaill: The internal audit is conducted at a very high level. It is headed by a Principal Officer, which is the third highest post in the Revenue Commissioners. The internal audit Principal Officer reports directly to me, the Accounting Officer. We draw up a schedule of audits each year on the basis of inputs from the Assistant Secretaries, who are the divisional managers. The internal audit can add items to the programme in addition to the mandatory items.

I can assure the Committee that it will be made mandatory in the internal audit to carry out an audit of the write-offs. They report directly to me and the year’s agenda is agreed with the Board of the Revenue Commissioners. The audits are then carried out with the Board’s authority.

Deputy Ardagh: Is there close liaison between the Comptroller and Auditor General and the internal audit section on the programme for the year?

Mr. MacDomhnaill: All our internal audit reports are sent to the Comptroller and Auditor General. He is on the circulation list.

Deputy Ardagh: Does the Comptroller and Auditor General sit down with the head of the internal audit section to agree on the most important areas where weaknesses may occur or where funds may go missing?

Mr. MacDomhnaill: I do not know if that happens on an ongoing basis but we are open to any suggestions.

Mr. Purcell: We would not try to influence the areas to be covered by the internal audit. However, we study the internal audit programme in carrying out our own tests because, due to our limited resources. We have to rely to a certain extent on the work of the internal audit. Of course, we get all their reports. We allow a reasonable period for the accepted recommendations to be taken on board. If they are not acted upon within that period they are referred to in the annual report. That has happened on a few occasions but the recommendations are generally put into effect promptly.

Chairman: I will suspend the sitting for ten minutes as soon as the division bells stop ringing.

The report states “The main changes included… enhanced efforts to be put into the task of reviewing doubtful debt, and the write-off of cases involving company liquidations at the beginning rather than at the end of the liquidation process”. Have any advances been made in that regard?

Mr. MacDomhnaill: Yes, we are working on that. It involves about £200 million. We have about 5,400 cases of liquidations and receiverships on record at the moment. As I explained, that money is not really collectible and if it could be removed from the record we would get a more realistic view of what is collectible. A great deal of the £500 million we expect to collect is fairly current tax. Given that we expect to collect £1,000 million in any three week period, £500 million represents only a week and a half’s tax income.

Chairman: Would the write-off of tax liabilities ever be motivated by a desire to save the company?

Mr. MacDomhnaill: There is a dividend at the end of a liquidation. Whatever dividend we get is done in accordance with the rules of liquidation. We have preference for some taxes such as one year’s value added tax, PAYE and PRSI but we do not have preference for the others. We come into the preferential category for those taxes which I mentioned and into the category of ordinary creditors for the balance. Secured creditors are ahead of us. However, if we get a dividend it is brought in and accounted for.

Chairman: We must suspend the sitting until after the division in the House. I ask members to return immediately.

Sitting suspended at 12.25 p.m. and resumed at 12.40 p.m.

Chairman: What does it mean to say that company liquidations are written off at the beginning rather than at the end of the liquidation process?

Mr. MacDomhnaill: When a liquidator is appointed, it can take one, two or three years for the liquidation process to go through. One of the first things a liquidator will do is set up a statement of the assets and liabilities. It will be clear from early on that it is a totally insolvent situation and that the dividend for Revenue will be small or non-existent. In the vast bulk of liquidation cases we would not recover anything. When the liquidator is appointed, there is every justification for writing it off the books because no action can be taken in the intervening two or three years, after which time nothing may be recovered. There is no point waiting for three years to write off something which is already a dead duck. There are voluntary liquidations and liquidations in situations of solvency where that rule would not be applied because a full recovery would be expected.

Chairman: If, in the case of bankruptcy where debts exceed assets and a company or person is not in a position to pay liabilities as they arise, Revenue wrote off its liability, would that company move from being bankrupt to being viable?

Mr. MacDomhnaill: That is most unlikely. Perhaps the Chairman is talking about examinership. There is an intermediary step which holds us up because sometimes we are on the point of getting a liquidation when the management looks for an examinership. There is then a period of three to six months to see if the business can be salvaged. During that period all creditors must stay their hand. We would not be allowed to take enforcement action and other creditors, including secured ones, would have to hold off. That would be the type of situation where an arrangement would be agreed. We have been in situations where less than the full tax has been accepted as part of the arrangement to help the company. That would be an examinership, not a liquidation.

Chairman: As regards companies which cease to trade, how many of these are fly by nights? Deputy Ardagh said that four out of five companies fail. I presume they are genuine failures. What percentage are fraudulent failures where people disown liabilities, including tax liabilities?

Mr. MacDomhnaill: The Chairman is right. In the midst of all these companies there are those with no assets which are wound up on a serial type basis. We call it the phoenix syndrome. The same principals, buildings and sometimes the same vehicles emerge in the name of a new company which begins trading. When company law was being passed we tried to make a case for tightening up the area of limited liability.

However, a balance must be struck between generating and creating business and protecting creditors.

We have embarked on a different policy in the past year and a half. We now have a dedicated resource unit looking at these companies and identifying new ones which employ the same people who worked in those which were wound up. We have a quick response attitude to those companies. In other words, our system will be on red alert to ensure there is no opportunity for a tax debt to accumulate. We will be in quickly with enforcement action. This is a separate initiative we have set up in the past few years.

Other liquidation cases are genuine, such as those where people have lost their assets and their creditors are losing out. We would write off the vast bulk of straightforward liquidations up front. We have a unit installed with access to our register. Part of the facility we have developed with the new computer system allows us to link directors and principals to companies so that we are able to spot those cases more quickly and take the appropriate action.

Chairman: What percentage of the businesses which cease to trade are fraudulent?

Mr. MacDomhnaill: One of the questions which arises from time to time is why the Revenue Commissioners go to court and look for a liquidation separate from any other creditors. This would happen in a situation where we suspect fraudulent trading. We want to break through the veil of limited liability and secure court orders so we can recover the tax from the principals. The Revenue Commissioners might have to go out on a limb in such cases. There might be no assets in the company and we might have to underwrite the liquidator’s costs to do that. It is an expensive and time consuming business, but we do not have a large number of such cases. That is one type of situation where we would pursue a company which is trading while insolvent. The other fraudulent trading is where the principals are abusing limited liability to take full advantage of all the credit they can get and then reopening under a new name.

Chairman: They would also be able to walk away from their responsibilities under the tax laws, consumer protection laws, etc. Are the Revenue Commissioners authorised to pursue prosecutions in such cases?

Mr. MacDomhnaill: The company could be prosecuted but it would have no assets. It is a futile business. The company has not paid tax so it is in debt. We must try to get through the company and secure a court order to recover the tax plus interest from the principals.

Chairman: Is that done?

Mr. MacDomhnaill: Yes.

Chairman: What percentage of companies which cease to trade are fraudulent?

Mr. MacDomhnaill: This unit is not yet fully established so we do not know the total volume. We are probably catching up on the past. The numbers are not significant when one considers that approximately 10,000 to 15,000 companies move on and off the company register each year. We are talking about a relatively small number of companies but the amount of money they generate can be substantial as PAYE and PRSI accumulates every month and VAT accumulates every two months.

It does not take long for such an operation to accumulate a significant tax debt. The amount being evaded may be hundreds of thousands of pounds. The Deputy will see from the write-off analysis that occasionally there are companies with £200,000 being written off. Some of those would be phoenix type companies.

Chairman: Are we talking about 10, 20, 25 or 50 per cent of these failures?

Mr. MacDomhnaill: No, possibly a fraction of 1 per cent.

Chairman: It is stated that a distinction should be made between arrears which arise as a result of unsubstantiated estimated assessments and those which represent real liabilities. This is an area about which I have been concerned for some time. When Revenue’s report comes out each year, there figure of unpaid taxes is considerable and, of course, it makes headlines. In reality, however, these are estimates and the actual amount is much less. How can we address that problem? What steps are being taken to try to ensure the estimate is more in line with reality?

Mr. MacDomhnaill: That has been a huge problem over the years. One of the main mechanisms for dealing with it has been the switch to self-assessment. The problem with the old assessing system was that we had to estimate the profits, the capital allowances and each element. If, at the end of the day, a person did not appeal the assessment and the profit figure was allowed to stand but he/she then put in a claim for capital allowance and other deductions, it could reduce the tax and unless we had a discovery of new evidence, we could not increase the profits. The result was that the profit figure had to be made sufficiently high to protect Revenue against that happening.

Even with the benefit of hindsight, we were not able to get a satisfactory estimate under that system which did not produce a multiple of tax about three times the end result. With the introduction of self-assessment for income tax and then for other taxes, we are now in a position to estimate the tax only. We have narrowed it down considerably.

If one looks at the amount of debt and the proportion which we say will be collected, it has gone up from about 10 per cent to over one third. When we get rid of this legacy of debt from the old system, I hope the collectable element will be up around the 60 or 70 per cent. That is three to four weeks tax take which one would normally have as a working debt. We will always have that type of figure. If we collect £1.6 billion gross, we must clock it up as a tax charge even though the demands have only gone out. When we do the sum in May, some of those charges have only been created in the last day or two or week. By the time we come here, there would still be £500 or £600 million outstanding. It would be a different £500 or £600 million because the original tax would largely have been paid.

Deputy C. Lenihan: There is a feeling in my constituency that small companies are treated differently to larger ones when it comes to settlements or write offs from Revenue. What procedures do you apply to distinguish between a small owner managed company with a small turner and with a £20,000 to £30,000 tax liability which it wants to work out? I get the impression people are opting back into employment rather than stay in business in a small company because they believe they are being treated the same way, in terms of their arrears, as Jefferson Smurfit or other such companies which can reach settlements with the Revenue authorities and which bring in millions of pounds each year whereas small companies which are typically owner managed with fewer than three or four employees get no breaks from the system.

Mr. MacDomhnaill: That is a correct observation. In terms of numbers, there are more small companies in this category because undercapitalisation is a significant factor. People setting up in business do not have capital or access to it. It is an unfortunate fact that if a person is successful, people will throw money at him/her in terms of loans, equity, etc. If, however, a person is starting off, he/she does not have access to such funds and it is more difficult to survive. Schemes which have been introduced by successive Governments to help small businesses and various enterprise schemes provide assistance. As Deputy Ardagh mentioned, a large number of businesses do not even survive the first few years and that is evident from the figures. Larger companies attract more attention and when they fail, the sums are very large. People ask how they can accumulate such debts. Large companies can run up £100,000 in tax quickly because of and the frequency of the cycle for PAYE and VAT. There are two sides to this. In terms of numbers, it is my experience that more small than large companies end up in a write off situation.

Deputy C. Lenihan: Do you have any ideas or procedures whereby you can distinguish between companies with low turnovers and those who greater turnovers such as giving them more time to work out the problem and to trade because it is often tax liabilities which cause the problems in the first few years of a start up company?

Mr. MacDomhnaill: We have a tax at risk policy which means all large companies are targeted systematically. If a large company is a few days late with a payment, it can expect to hear from us. Our resource works on the basis of tax at risk. Larger companies, which bring in a huge amount of revenue, receive a lot of attention from us. We send demands in the same timely fashion to other companies, but the enforcement process will not be reached as soon. It tends to have accumulated by that time. We pay more attention to larger companies but at the same time we try to preserve equity in that when we reach other companies, there is a catch up process.

Deputy C. Lenihan: You do not have a specific targeted procedure for smaller companies that might have liquidity problems through trading.

Mr. MacDomhnaill: The targeting of small companies is by default. We are targeting larger companies and the big money. We are, however, targeting the smaller companies by default. This question has arisen in relation to returns compliance as well. We have a policy in relation to small employers in that we send people out to help them. For example, as soon as a new company, which wants advice from Revenue, is registered, we tell them we have staff available to go over the PAYE and the VAT systems and the compliance obligations. That service is available for small companies.

Deputy C. Lenihan: How large is that unit? I met many people who set up businesses but who found years later, not because they wanted to defraud the system, that they owed tax.

Mr. MacDomhnaill: This is a positive policy for new companies and that expertise is available. We are available at all times to give advice and would like to get this message across to companies. We are moving to a stage where we may be able to give pre-transaction rulings, assuming we get all the facts. This is a difficult area for us but we are moving towards it.

Deputy Foley: It was mentioned that ten to 12 years ago there was approximately £3.5 billion due in outstanding taxes. This has now been reduced to £1.5 billion. A further point was made by the Comptroller and Auditor General that the outstanding tax shown in the books of the Revenue Commissioners is, therefore, much greater than that which will be ultimately recovered. I understand only £0.5 billion of this figure will be recouped. To show a realistic figure, would it be possible to reduce the £1.5 billion by knocking off areas which are uncollectible. The Chairman mentioned that in 1996 approximately 97 per cent of tax due was collectable.

That is a tremendous record and I compliment the Revenue Commissioners. Is this a record?

Mr. Mac Domhnaill: I would not say it is a record. I have not looked at it from that point of view but it is the sort of figure we aim at. There have been a number of innovations regarding write offs. There is a local collection dimension to our collection which gives us a more positive idea of the scale of the business. Many estimates were made by people in offices working on documentation rather than by face to face analysis of the operation. Local collection involves approximately 100 staff in the provinces and another 30 or so in Dublin. In addition there are approximately 50 staff dedicated to returns compliance and the re-evaluation of the arrears. They can also go out and look at businesses. The three year strategic plan has set a target of eliminating £1 billion from the entrenched arrear.

Chairman: Is that by wind up, collection or a combination of both?

Mr. Mac Domhnaill: Through all the processes review, to get the sum down to the correct amount, write off and collection.

Deputy Foley: In fairness to the Revenue Commissioners, there is a perception that only half the people pay their tax. However, 97 per cent of the collection due for 1996 has been collected. This is a tremendous record and it should be highlighted by the media.

Chairman: Do you have a breakdown of the revenue yield per county?

Mr. Mac Domhnaill: We work on the basis of bailiwicks. Sometimes the bailiwicks coincide with county boundaries. A bailiwick is related to the judicial process and enforcement is carried out by sheriffs. However, there is a complication. There are organisations such as the ESB and the Civil Service where the entire tax due will be attributable to Dublin even though staff work throughout the country. There are even groups of companies where the entire PAYE operation is in Dublin even though there are thousands of staff countrywide. These would include banks, large supermarkets and so on. We can produce the tax per bailiwick but the committee might read too much into that.

Chairman: I can see the difficulties but let us have the details anyway. We note those paragraphs and if the committee is agreeable we will take paragraph 11.

Mr. Purcell: Paragraph 11 gives details of the enforcement measures used by the Revenue Commissioners to collect moneys from defaulting taxpayers during 1996. As usual, the bulk of the moneys collected came through the activities of the sheriffs. They collected £60 million as against £76 million in the previous year. There has been a downward trend in the returns from sheriffs in recent years from a high of £92 million in 1993. Revenue does not attribute the reduction to any lack of zeal on the part of the sheriffs, rather it is a consequence of the increasing number of taxpayers who respond to contact from the sheriff by paying the Collector General directly. The reinstitution of local collection in recent years is also a factor.

Two firms of solicitors are also used to pursue collection where it is felt that this approach is likely to be more successful than referral to sheriffs. This resulted in the collection of £8.6 million. A certain amount is also collected through the Revenue solicitor. The power of attachment was successfully used in 148 cases in 1996, yielding £1.4 million.

Chairman: Do the two firms of solicitors used have tax clearance certificates?

Mr. Mac Domhnaill: Yes.

Chairman: I am glad to hear that. Is the practice to only hire people with tax clearance certificates?

Mr. Mac Domhnaill: Yes.

Chairman: What happens to the deposit interest on amounts collected by sheriffs?

Mr. Mac Domhnaill: All the arrangements are under sheriff law not revenue law. Funds are held for a certain period of time pending claims from those concerned. There is a period during which they may have to unwind the action if there is a successful claim. There is a retention period. The Revenue Commissioners were allowed to introduce guidelines when the new revenue sheriffs were appointed. Sheriffs were allowed to retain the moneys. Moneys collected this month would be paid in the following month. Deposit interest was earned by sheriffs during that time and this was part of their remuneration package. They were paid only £400 by the Department of Justice, Equality and Law Reform. One cannot run a sheriff’s operation including staff, postage and so on without incurring costs. We estimate that the running costs of a small operation could be up to £100,000. Part of the financing of the arrangement was that the deposit interest went towards those costs.

The Committee went into this matter in detail over a number of sessions. As a result, the Department of Justice, Equality and Law Reform, in conjunction with the Revenue Commissioners and the Department of Finance, introduced a new arrangement under which the sheriffs will not retain the deposit interest but there will be a more meaningful retainer paid and a more meaningful fee per item. We have signed off on this arrangement. The sheriffs and the Minister for Finance are satisfied and it is now a matter for the Department of Justice, Equality and Law Reform to introduce the necessary legislation and make the necessary statutory orders.

Chairman: Does this require an order or primary legislation?

Mr. Mac Domhnaill: A statutory instrument.

Deputy Foley: Under the new arrangements how soon after receiving the money must sheriffs lodge it with the Revenue Commissioners?

Mr. Mac Domhnaill: They have to lodge the moneys to a special account for the, benefit of the Collector General.

Deputy Foley: Within what period of time?

Mr. Mac Domhnaill: Straight away. The money does not go into a sheriff’s personal account.

Deputy Foley: Has the method of payment been agreed?

Mr. Mac Domhnaill: All of the items are acceptable. Of course the sheriffs would like better terms but they are acceptable. When the necessary legislative work is carried out by the Department of Justice, Equality and Law Reform we will enter an agreement with the sheriffs. We have a draft agreement which will be formalised. We will have an agreement with each sheriff which will set out exactly what is to happen to the money, the account it goes into, how it is to be accounted for and what constitutes an item for a fee. All of these issues will be set out in detail.

Deputy Foley: It is fair to ask what the method of payment is at the moment?

Mr. MacDomhnaill: It is 35p per certificate, poundage at the rate of 5 per cent on the first £100 and 2.5 per cent on the balance. If there is travelling involved, it is 7p a mile, although that is out of date.

Deputy Foley: It is.

Mr. MacDomhnaill: That is one-way only, so it is really 3.5p per mile.

Deputy Foley: In fairness, it looks totally ridiculous.

Mr. MacDomhnaill: It is totally unrealistic.

Chairman: Is there any way of bringing that up to date?

Mr. MacDomhnaill: This is in negotiation.

Deputy C. Lenihan: Do they offer bonuses when there are extraordinarily large amounts collected?

Mr. MacDomhnaill: Do we have bonuses for staff? No. To set it out again, it is 35p per certificate, 7p per mile one way, 5 per cent of the first £100 recovered and 2.5 per cent of the remainder.

Deputy C. Lenihan: I am talking about large amounts of money. Is there any extra bonus?

Mr. MacDomhnaill: No. That is it. The bonus is that if they recover a large amount, they have the facility to retain that money for a month to six weeks on deposit. They get a bonus that way.

Chairman: What is the bonus of the one-way ticket? I can think of other things we might use that for.

Mr. MacDomhnaill: I think it is a reflection of the way the public sector treated itself in days gone by. This is a 1926 provision.

Chairman: And it has not been updated since. We note the paragraph. I thank the Accounting Officer and his staff as well as the officials of the Department of Finance. We will resume on the remainder of the paragraphs on the Revenue Vote. If the Committee is agreeable, in future we will take private business first, including housekeeping matters and correspondence.

The witnesses withdrew

The Committee adjourned at 1.15 p.m. until 11 a.m. on Thursday 20 November 1997.