An Honest Mistake, Your Honour ...
Author:
Kerri O'Connell
In the first of this two-part series on Revenue powers, Kerri O’Connell discusses the Finance Act 2005 changes in relation to Revenue offences and considers how developments in the Republic of Ireland compare with the experiences of Canada and the United Kingdom.
This article will focus on the technical amendments to Section 1078 TCA 1997 and the potential impact on Irish tax practitioners. I am drawing comparisons with similar existing legislation in Canada and the United Kingdom to illustrate the extent to which Irish legislators have gone further than others in drafting this legislation.
The reader may recall a comment in a recent publication of the Irish Tax Review about the use of the death penalty as punishment for tax evasion in China! We may thank our legislature for protecting the Irish public from such severe remedies, even if sometimes, it seems clients would rather take their chance with the guillotine over paying taxes. However, in recent years the Irish Revenue has begun to make its mark on the nation's tax evaders.
The concept of ‘Revenue offences’ was first introduced in the Finance Act 1983, in what is now Section 1078 of the TCA 1997. The main concept behind the legislation remained unchanged for many years until the Finance Act 2002 saw considerable expansion to subsection 2. This was among the first indicators of the shift in Revenue focus towards the old nemesis of intentional tax evasion. On the back of recent successes, Revenue has now added another barrier to its defence against tax evasion with the recent amendments to Section 1078, introduced by Section 142 of Finance Act 2005.
RECENT CHANGES IN IRELAND
The 2005 Finance Act introduces a number of new concepts to the tax code which significantly increase Revenue's power to penalise and prosecute tax evaders and, more worryingly, facilitators of tax evasion.
The newly-introduced subsection 4A includes two new Revenue offences; where a person is
knowingly concerned in the fraudulent evasion of tax’
and where a person is
‘knowingly concerned in, or is reckless as to whether or not he or she is concerned in facilitating the fraudulent evasion of tax by a person, being another person, or the commission of an offence under subsection (2) by a person, being another person’.
The subsection further defines a person who is 'reckless' for the purposes of this subsection as disregarding a
‘substantial risk that he or she is so concerned’
in facilitating tax evasion, being
‘a risk of such a nature and degree that, having regard to all the circumstances and the extent of the information available to the first-mentioned person, its disregard by that person involves culpability of a high degree.’
So, you may ask, why all the fuss?
For tax practitioners, the primary concern here is the introduction of the notion of indirectly facilitating tax evasion through reckless advice. Up to this point, Section 1078 stipulated that an adviser was guilty of an offence under this section where that person ‘knowingly aids, abets, assists, incites or induces another person to make or deliver knowingly or wilfully any incorrect return, statement or accounts in connection with any tax.’
There is a very real difference between knowingly 'aiding or abetting tax evasion' and recklessness as to whether or not one is facilitating tax evasion.
By virtue of the new subsection 4A, where a tax practitioner fails to investigate any doubts over information provided by a client, they themselves may be culpable for any resultant tax evasion. Due to the broad scope of the language used in the amendment, this subsection can apply to the smallest case of recklessness by a practitioner.
After reading the above, do you still feel comfortable that this legislation will not apply to you as tax practitioner?
Take, for example, the client who drops in his VAT return information. The client may have a number of receipts; however, he does not have receipts for all the expenses he tells you he incurred in the period. You may be tempted to take your client's word for it and include an input credit for the total amount of expenses as advised by the client. If it is the case that the VAT credit is overstated in the VAT return, you may have aided your client in committing a Revenue offence by being reckless as to whether or not tax evasion was taking place.
What about less 'obvious' situations, where, for example, there is uncertainty regarding the 'correct' approach?
Tax practitioners may find themselves in a predicament - best practice would suggest that any doubts regarding correct tax treatment should be verified with Revenue; so that the practitioner can be satisfied they are not engaging in culpable conduct for the purposes of Section 1078.
However, in the current environment, due to time delays and a shortage of staff with technical expertise within the Revenue, access to technical Revenue opinion has become increasing difficult to secure. On this basis, how can tax practitioners exercise prudence by liaising with Revenue on technical matters when there appears to be no plans for Revenue to increase their technical support to practitioners?
CANADA
The Canadian tax administration, the Canada Customs and Revenue Agency (CCRA) introduced legislation in 1999 to deter third parties from making false statements or omissions in relation to income tax, VAT or customs matters. This became known as Third Party Civil Penalties (Section 163 of the Income Tax Act), and the penalties are divided into two types:
- ‘planner’ penalties (subsection 3 - to cover promoters, etc. who disseminate information to a wide group, such that the user does not need to be identified for the penalty to apply); and
- ‘preparer’ penalties (subsection 4 of section 163 provides for a ‘preparer’ penalty to be applied to any person who ‘makes, or participates in, assents to, or acquiesces in the making of a statement to, by or on behalf of another person that the person knows, or would reasonably be expected to know but for circumstances amounting to culpable conduct, is a false statement that could be used by or on behalf of the other person’ for the purposes of the tax acts.)
As in Ireland now, the Canadian professional taxation community greeted the introduction of Section 163 with apprehension.
They have their own problems with the loose terminology used in drafting their legislation and, in particular, the use of the word ‘could’ in both subsections. This infers that the penalties would be so far reaching as to apply to advice, not actually followed or implemented by a client, but merely provided as part of a presentation or report to the client.
Following much lobbying and discussion, representatives from the CCRA have indicated that they would apply this law only to the most egregious cases. The Canadian authorities issued an Information Circular in 2001 in an attempt to clarify the open questions raised by the legislation. Interestingly, the introduction section of the Circular states that,
‘the CCRA recognizes that tax professionals have a responsibility to act in the best interests of their clients and this includes the right to minimize their tax liability within the law.’
The Circular lists situations where the legislation is not intended to apply. These include tax-planning arrangements that comply with the law, honest mistakes or oversights, differences of interpretation or opinion where there is bona fide uncertainty and activities that are administratively acceptable to the CCRA.
The Canadian authorities look to whether a false statement was made knowingly, or whether ‘culpable conduct’ is involved in the case and base their conclusion on factors including whether the person is obviously wrong, unreasonable and/or contrary to well established case law. They will also consider the tax practitioner's experience with the relevant subject matter, the degree to which the conduct represents the most aggressive and blatantly abusive behaviour, the extent to which there is a pattern of repeated abuse and whether there is a widespread impact of the construct. In the absence of actual knowledge of a false statement, ‘culpable conduct’ must be present in order for the Third Party Civil Penalties to apply.
Good faith
Critically, the Information Circular sets out instances where the Third Party Civil Penalties will not apply.
A practitioner will not be regarded as being guilty of ‘culpable conduct’ where they act in ‘good faith’ in relation to their client.
A practitioner who acts in good faith is not considered to have acted in a manner amounting to ‘culpable conduct’, relating to a false statement, in the absence of a reason that a reasonable and prudent person may believe that the information could be incorrect.
‘Good faith’ is taken to mean ‘the presence of honesty of intention, and freedom from knowledge of circumstances which ought to put the holder on inquiry.’
Outside of the specific exceptions listed in the Information Circular, resort must be had to the appeal procedures and courts to establish the criteria for the ‘good faith’ exception where the circumstances are not clear cut.
There is an internal review process for determining the application of the penalties and ensuring that they are only applied to egregious cases as originally intended. The process is designed to ensure the consistent application of the penalties across the country so that tax practitioners can take some comfort in the knowledge that everyday transactions and planning should not attract penalties.
UNITED KINGDOM
Section 144 of the Finance Act 2000 details the offence of ‘fraudulent evasion of income tax’. This offence relates to a person who is knowingly concerned in fraudulently evading income tax by him or any other person.
The new legislation is intended to make it easier for Inland Revenue to prosecute cases of tax fraud.
The reader will note, however, that there is an the obvious distinction between the Irish and Canadian legislation, and the UK as the UK legislation does not include an offence of aiding or abetting tax evasion through recklessness on the part of a third party. The scope of the UK legislation is, therefore, not as broad as the Irish or Canadian versions, as it is restricted to cases of direct knowledge of assisting in tax evasion.
The main offences that the Inland Revenue may prosecute are the making of false returns, theft, false accounting, and forgery. A person who directly incites, aids, abets, counsels or procures such an offence is liable to the same punishment as the taxpayer. The Inland Revenue have published various guidelines in dealing with penalties in the case of a Revenue offence. One such guide, for internal use by Inland Revenue officials, sets out that even where an agent is employed to prepare a return, the Inland Revenue will always first look to attach responsibility for the error to the tax payer.
All of the above applies to the fraudulent evasion of income tax, which was administered by the Inland Revenue. The UK VAT Acts were administered by HM Customs & Excise, however, with effect from April 2005, these two bodies merged to form ‘HM Revenue & Customs.’ A major review is currently underway in relation to the powers, deterrents and safeguards to be available to the new body, given that there are substantial differences between the powers relating to direct and indirect taxes. Some commentators have assumed that the tougher powers applying to the administration of indirect taxes will spread across all taxes administered by the new body.
CONCLUSION
The Irish Revenue is expected to issue a Statement of Practice providing guidelines for practitioners in relation to the legislation set out in Section 142, Finance Act 2005.
As it stands, Irish legislators have left tax practitioners exposed to falling foul of the Revenue offences legislation without setting out the scope and extent of this threat to the everyday operations of the tax practitioner profession.
We await further comment on this issue and this author hopes that the Revenue will show due consideration to the potentially far-reaching impact of the current legislation and its practical implication for all tax practitioners.
Note:
The author gratefully acknowledges the assistance of Stephanie McGuinness, Tax Manager, HSOC and the offices of the Canadian and UK members of TIAG, the international network of independent accounting firms, of which HSOC is the Irish member.