You Think You're Tax Compliant but...
Author:
Lyn Lawlor
Consider the unenviable plight of Patrick P, a hardworking and conscientious accountant in a prominent distribution company. Last year, he lost a lot of sleep worrying about three major problems - prosecution by the Revenue Commissioners, publication of his employers' name in Iris Oifigiúil and payment to the Revenue Commissioners of a six-figure sum in tax, with interest and penalties on top of that.
On a personal level, Patrick had his own concerns; his promotional opportunities in the distribution company (or indeed within any other company in that sector) weren't looking too promising.
The good news, from the distribution company's point of view, is that it avoided prosecution by the Revenue Commissioners; it also avoided having its name published in Iris Oifigiúil.
The bad news is that the company had to hand over in excess of €200,000 in interest and penalties. Worse, for Patrick, is that so 'underwhelmed' were the company's directors by these developments that they encouraged him to seek job promotion prospects elsewhere.
So, how did this unfortunate chain of events come about?
FIRST, A LITTLE BACKGROUND ...
Patrick had nine years’ industry experience under his belt; he was well respected within the profession. Like many in-house accountants, he thought he was doing a good job; believed that he was up to date with current tax legislation, believed that his company was tax compliant.
Unfortunately, however, it wasn’t tax compliant. Over a six-month period, beginning in January 2005, Patrick had been distracted by a series of domestic upheavals - major house renovations, a construction project which had gone seriously over budget and dragged on months longer than it should have, acrimonious battles with the builder. As a result of the stress and the mess, he failed to notice that the company’s VAT returns were not ship shape. Some four sales invoices (with a VAT element of €1.1 million) had been returned in three incorrect VAT periods. When he finally discovered the error in July 2005, he simply adjusted the VAT return submitted for the July/August period.
In October 2005, he received a Revenue Audit Notification - just part of a random inspection, nothing to fear, or so he believed. As it turned out, the good news was that with the exception of the incorrect January to June 2005 VAT return filings the company’s tax status was fine. The bad news, however, was that the Revenue Commissioners did not entertain Patrick’s argument that there was no loss to them as a result of the late payment of the January to May 2005 VAT returns. As a result of their deliberations, the directors were presented with a bill for €49,459 in interest and €165,000 in penalties. Grand total: €214,459.
I first heard this terrible tale of woe earlier this year when the company’s newly appointed in-house accountant called us in to carry out a ‘health check’. Our review highlighted the following problems:
- The company’s accounting system was not picking up certain VAT liabilities.
- VAT was not being calculated correctly in certain instances.
- Intra-EU acquisitions of goods were not being included on returns
- PAYE was not being operated on all employee benefits e.g. wedding gifts, health insurance and staff loans.
SELF-CORRECTION
Many readers of Accountancy Ireland will be aware that, in September 2002, the Revenue Commissioners introduced a facility whereby taxpayers could notify them of any errors discovered after the submission of a tax return; this facility was introduced in order to encourage taxpayers to carry out regular reviews of their compliance position. Ever since September 2002, the Revenue Commissioners have allowed taxpayers to "self-correct" returns, without any penalty being applied; this was permitted as long as certain conditions were fulfilled. The conditions are as follows:
- The taxpayer must notify the Revenue Commissioners in writing of the adjustments to be made.
- The taxpayer must include a computation of the correct tax and interest payable.
- A settlement payment must accompany the submission.
The taxpayer cannot avail of the self-correction procedure if they have already received notification of an audit by the Revenue Commissioners, or if they have been contacted about an investigation relating to their tax affairs.
While the Revenue Commissioners have advised that use of the self-correction procedures will not lead to a full-scale Revenue audit, an audit of the self-correction may take place.
Consider the following, for example. If you file your VAT returns on a bi-monthly basis and subsequently discover an error which gives rise to a VAT underpayment of less than €5,000, then the tax may be included as an adjustment on your next VAT return. This adjustment may be made without incurring any interest payments and without being obliged to submit an official self-correction type notification to the Revenue Commissioners. (There is one caveat: some time limits apply to using the self-correction procedure, but, as these vary from tax head to tax head, I do not propose to deal with them here.)
REVENUE AUDITS
If for some reason you have exceeded the time limit in which to make a self-correction, or if you were unaware of a VAT filing error until you began the process of preparing for a Revenue audit, it would still be possible to minimise the penalty applied by the Revenue Commissioners - simply by availing of the disclosure provisions in the Revenue Audit Code of Practice. In order to mitigate any penalties arising, however, it would be essential to bring any issues that needed to be resolved to the attention of the Revenue Commissioners before they began the actual audit. The disclosure process may present a number of other challenges also; the onus is on you the taxpayer is to identify every single relevant issue and also to quantify the relevant tax liability in each case.
This is all very well in so far as it goes, but the problem is that while you may believe that you are a fully compliant taxpayer you may actually be liable for penalties ranging from 10% to 100% of the tax owed should the Revenue Commissioners’ auditors uncover a liability about which you were previously unaware. You may also be subject to publication by the Revenue Commissioners in their list of tax defaulters.
The only good news in all of this is that the Revenue Commissioners do allow for situations where a taxpayer has made an ‘innocent error’. Unfortunately, however, the amount of tax involved has to be less than €3,000. For those who exceed the €3,000 threshold, it might be possible to mitigate the penalty levels to between 15% and 75% of the total amount due if you declare at the outset of the audit that you wish to make a voluntary disclosure; that you will outline the various tax issues involved, and that you will provide the Revenue Commissioners with a calculation of both the tax and the interest due. (It is not essential to make this disclosure in writing).
HORROR STORIES
Recently, during a Revenue Commissioners’ audit of one of our clients (a self-employed IT consultant), the auditor focused on the private use of the car which the client used for travelling between two specific business locations.
At the initial meeting, the Revenue Commissioners’ auditor posed a number of questions in relation to the distance travelled between the client’s home and his first business location, and the distance between that business location and the second one. Based on his responses, the auditor then calculated the annual business mileage that our client could have clocked up and then compared that with the petrol expenses claimed. The auditor concluded that the proportion of petrol expenses allocated for business use was
too high.
Following our intervention, we negotiated a significant compromise with the Revenue. Nevertheless, our client had to pay additional tax, interest and penalties totalling €2,366.
VAT, PAYE and RCT ‘health checks’
To conclude: the Revenue Commissioners now expect taxpayers to self-audit on a regular basis. In order to comply with all tax head requirements, it is essential to carry out tax ‘health checks’ on a regular basis. In my role as tax partner I frequently direct health checks for all types of businesses ranging from large companies to self-employed individuals; these are designed to identify potential errors in the calculation of tax or preparation of returns and, if necessary, to assist them in the preparation of self-correction submissions.
Unfortunately, Patrick P found himself on the wrong side of a Revenue auditor. A simple health check might have helped him avoid the problem.
Lyn Lawlor is a Tax Partner with Baker Tilly O'Hare.