Handle with care

Jan 14, 2019

Sunday Business Post, 14 January 2019, This week saw a continuation of the shutdown in government across the US.  It isn’t terribly unusual for US government offices, services and facilities to be suspended, curtailed or even temporarily shut down from time to time because Congress couldn't agree funding.  However, in the past, the political conflicts giving rise to the shutdown got resolved relatively quickly.  The building, or not building, of a wall on the southern US border which is the root cause of the current impasse may take a little while longer to sort out.

A government shutdown at this time of the year also involves the shutdown of the US revenue authority, the IRS.  Shutting down a revenue authority, however gleefully the idea might be received by some taxpayers, ultimately suits no one.  That's particularly the case in the US.  Because of the vagaries of the US income tax-withholding system for employees, many workers find themselves having overpaid tax in the tax year.  My colleagues in the US tell me that about 70% of the 150 million or so income taxpayers in that country end up due a refund, and most US taxpayers get an annual rebate in the order of some $3,000. 

That’s a substantial sum and refusing citizens that kind of money, or even delaying its repayment, tends to get governments into a lot of trouble.  So the system, as it does so often, heals itself.  There is a special rule which allows for the permanent appropriation of funds to ensure that tax refunds can be made by the IRS, even if other branches of government have been shut down.  As a result, the tax-refund process continues to operate as per normal even though many other government functions fall victim to the dearth of government funding.

Perhaps it’s because of the coercive nature of tax that the governments of democracies, across the world, tend to tread carefully both in its administration and enforcement.  Unexpected tax changes rarely end well.  A hike in fuel oil tax in France provoked the reaction of the Gilets Jaunes in the past several weeks which resulted in rioting, tragic deaths and disruption and ultimately a policy volte-face from the French president Emmanuel Macron. 

In the light of that experience, the French authorities would have grounds to be concerned at how the new PAYE system in France, introduced on 1 January last, might be received.  From this month French tax payers will, for the first time, be paying much of their tax via a PAYE system comparable to the one in operation in this country, rather than via a lump sum payment in the middle of the year. 

It helps that due to a vagary in timing, many French income taxpayers will end up paying slightly less during 2019 than they might otherwise have done.  But in the French case the change involves the collection of €70 billion, as estimated by some sources, in income tax.  Getting something of that scale wrong is bound to give the authorities pause for thought.

For these kinds of reasons, countries introduce new tax law gingerly.  In this country special provisions operate for Finance Bills to ensure that any new tax rules have particular checks and balances and the Minister for Finance of the day has particular control over the bill as it makes its way through the houses of the Oireachtas.  A similar system operates the UK, but as we saw this week, it is not sacrosanct.

After more than 40 years of EU participation, it's hardly surprising that UK domestic tax law is heavily influenced and reliant on European rules.  Many aspects of UK tax law rely on European regulations to operate.  Of course, when the UK leaves the European Union, those regulations will no longer be valid.  This week, campaigning MPs targeted an innocuous clause in the Finance Bill currently going through the Houses of Parliament.  The clause had proposed that the UK tax authorities could fix any holes left in the rules because of EU law ceasing to operate.  Defeating this clause ensures that this kind of ad-hoc fixing can only be done when a Brexit deal has been made between the EU and the UK.

You might say that seems, at best, to be a technical victory, but its significance derives from the fact that the amendment was made despite the protected structures of the Finance Bill process.

The change was secured without the consent of the Chancellor of the Exchequer.  If measures in an Irish Finance Bill were overturned like that, there’d probably be a general election called. 

It's yet another instance of how the orderly business of government is breaking down in contemplation of the impact of the Brexit decision.

As the Brexit deadline looms ever closer, and the windows of opportunity become more compressed, there must be some in the UK establishment who would crave the kind of government shutdown being experienced in the US.  The shutdown has nothing to recommend it except that it is commanding public attention through public hardship, thus forcing political heads being knocked together and hard decisions being taken.  That is exactly what the Brexit process now needs.

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland