The Importance of Being Certain
Author:
Kerri O'Connell
‘Eleven millionaires paid no tax in 2001!’ It's a great headline but in the context of the current debate regarding the various tax reliefs available to 'high earning' individuals, what does it tell us? The answer has got to be, “Not a lot”. Unfortunately much of the recent commentary, both political and otherwise, has amounted to little more than ill-informed scaremongering, or encouraging the PAYE taxpayer to 'get angry.'
RELIEFS FROM TAX
There are many tax reliefs specifically legislated for, which are available to a majority of taxpayers, in some form or another. These include; the use of corporation tax losses, depreciation, mortgage interest relief, medical expenses relief and pension contributions. It is the so-called 'tax incentive schemes' which are now attracting negative publicity and these can be divided into two major categories:
1) Property incentives - to encourage redevelopment of certain areas or to encourage the development of specific types of accommodation.
2) Industry specific - to encourage the development of certain industries, e.g. horse breeding, artists and the film industry.
These schemes involve a balancing act between the amount of tax foregone and the long- term policy objectives of, for example, job creation or rejuvenation of a particular area. By way of illustration, the Revenue Commissioners has informed the Oireachtas Committee on Finance and the Public Service that less than 2% (less than €200 million) of the total cost of tax reliefs of €8.4 billion relates to property-based incentives. Observers will recall that a report of the economic consultants, Indecon, published in July 2004, concluded that the tax exemption for profits on stallion stud fees cost the Exchequer €3 million a year, while the racehorse breeding industry as a whole contributes €37.5 million a year.
POLITICAL COMMENT
So, what have the Government actually said in relation to these matters ?
The Minister for Finance, Mr Cowen, commented extensively on tax incentives in his December 2004 Budget Day speech: "Despite supporting many of these reliefs, there are those who seem unhappy when people with the capacity to use them have in fact done so, which is not a consistent stance to take. My aim is to seek to improve the equity of the tax system taking into account the social and economic benefit of reliefs in delivering investment in housing, enterprise, urban and rural renewal, tourism, films and health facilities ... For the successful operation of such schemes and to achieve the common good, we need to ensure the right balance is achieved between the benefit to the investor and the good of the community."
The Tánaiste, Ms Harney, has been particularly bullish in her attitude to the use of tax incentives - commenting at the time, she said: "I have been unhappy for some time with the situation where some people pay no tax at all. I believe that somebody should at a very minimum, if they are earning a couple of hundred thousand a year, pay up to 20% in tax. At a very minimum. I don't believe that somebody should be able to write off 100% of their income at that level by way of using reliefs.'
REVIEW OF INCENTIVES
At the time of writing, Minister Cowen has confirmed that the Department of Finance have requested tenders from external consultants to review certain tax incentive schemes. In particular, the Minister has invited proposals to evaluate the following incentive schemes:
- Urban Renewal
- Rural Renewal
- Town Renewal
- Living-over-the-Shop
- Multi-Storey Car parks
- Park and Ride
- Student Accommodation
- Third Level Buildings
- Hotels and Holiday Cottages
- Nursing Homes
- Private Hospitals
- Sports Injuries Clinics
- Childcare Facilities
- Countrywide Refurbishment Scheme
In summary, the stated purpose of the review is to evaluate the contribution that each relief has made and compare the “benefits or otherwise of the tax incentive approach as compared with alternative public expenditure measures which could have been used to achieve the same objectives”.
The review requires a cost/benefit analysis of each scheme and should identify what elements / changes / improvements should be considered in the context of ongoing schemes or in the design of further schemes.
COMMENTARY
The issue of a conclusive report by the external consultants within a short timeframe is the most desirable outcome for all interested parties, however, the writer wishes to highlight a number of difficulties which may arise in the context of this review.
Expiration dates
Many of the reliefs listed are due to expire in the short-term i.e. within a two-year period, which raises the question as to whether it is practical for the Minister to review the areas at all, unless it is with the intention to further extend the reliefs.
The current termination dates for the various tax incentive schemes included in the review list are as follows:
In summary, a deadline of 31 December 2004 for planning permission to be submitted, with a deadline of expenditure to be completed by 31 July 2006. These deadlines apply to the following schemes:
- Urban Renewal
- Rural Renewal
- Town Renewal
- Living-over-the-Shop
- Park and Ride
- Student Accommodation
In summary, a deadline of 31 July 2006 (along with certain other conditions) applies to the following schemes:
- Multi-Storey Car parks
- Third Level Buildings
Hotels and Holiday Cottages - In summary, the qualifying period for the more beneficial ‘old regime’ has been extended to 31 July 2006. Full planning applications must have been received in the planning authority by 31 December 2004.
There are currently no deadlines for the following schemes, which are not widely in use:
- Nursing Homes
- Private Hospitals
- Sports Injury Clinics
- Childcare Facilities
- Countrywide Refurbishment Scheme
Retrospective review?
There are, effectively, two types of schemes here; those with fixed deadlines due to expire within the coming two years, and those which are open-ended.
It is interesting to note the objectives listed in the purpose of the review, in that they refer to an assessment of what went before and an evaluation of any changes that should be made to what may yet come.
In relation to what went before, the writer submits that the consultants may reach any number of conclusions as to the cost/ benefit analysis for the Exchequer, by virtue of these reliefs, but the Ministers' hands will be tied as to what he can actually do about those schemes already completed or in the course of development.
It is worth reminding ourselves of that old adage of the right of a taxpayer to organise his affairs in a tax-effective manner.
As Lord Tomlin commented in the UK case of Duke of Westminster v Commissioners of Inland Revenue, a case affirmed in the Irish decision of O'Sullivan v P Ltd: "Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it would otherwise be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity he cannot be compelled to pay an increased tax …"
In the writer's view, the approach of the Irish courts in these matters, along with a general constitutional ban on retrospective legislation means that reliefs arising on schemes already completed or in the course of development can not be amended in any way. It is both unconstitutional and anti-business to encourage individuals to invest in certain properties, in order to achieve a specific policy objective, and then, after the monies have been invested, to reduce or amend the tax reliefs arising.
New schemes
As referred to earlier, the review is to include an assessment of elements / changes / improvements to be considered in the design of further schemes. In the writer's view, this appears to be somewhat of a red herring, implying that new property-based schemes will come available in the future. In the context of what some EU commentators like to call our 'tax haven' status and the disgruntlement often heard from higher-taxing EU members regarding our lower corporation tax rate, the prospect of the Government receiving permission, under the EU State Aid rules, to provide further property-based tax incentives must be regarded as seriously doubtful.
CONCLUSION
Recent media furore in relation to wealthy individuals paying little or no tax has been headline-grabbing but not particularly informative. The review of various tax incentive schemes recently announced by Minister Cowen is to be welcomed, as it should throw light on the actual cost of these tax incentive schemes relative to the public policy objectives achieved. In the writer's view, it can, however, merely provide assessment of what went before and can have little impact on the remaining term of the most popular existing schemes.
As for Minister Harney's assertion that all high-earners should pay at least 20% tax on their earnings, it will be very interesting to see what, if anything, can be done to achieve this aim. It is easy, with the benefit of hindsight, to say that investment in Irish property was 'obviously' the investment asset with the highest return, at an acceptable risk, but who really could have forseen the explosion in the property market over the past decade or so ? It must be remembered that many of the properties, which were the subject of specific tax incentives, were considered high-risk at the time.
High-earners investing in these properties take this investment risk but, as Terence O'Rourke, ICAI President recently stated, they are also 'acting within the system and investing in schemes in accordance with policy objectives set out by the Oireachtas.' An ill-advised witch hunt to ensure that each of these individuals pays a certain level of tax on an annual basis doesn't fit with the Government's recent 'more caring'/'socialist' leanings, ideologically it’s much farther left than that.
Kerri O'Connell BCL (Intl.), ACA, AITI is Taxation Partner with Hamill Spence O’Connell.