Building a wall

Nov 26, 2018

The Sunday Business Post, 25 November 2018

The Irish tax system is full of shortcuts.  It has to be, otherwise nothing would work because the rules are so complicated. 

The PAYE system itself is a form of shortcut.  Instead of asking individual employees to declare and account for tax on the income they earn every year, the employer is asked to do it on their behalf instead.  The good news this week that over 2.3 million people are now in employment in Ireland further justifies this kind of common sense approach.  Which is why Revenue's decision to build a wall across the PAYE shortcut of the flat rate expenses regime is at best puzzling.

This flat rate expenses regime for PAYE workers isn't a giveaway or a concession.  It is a way of reflecting the reality of the situation of workers while short-circuiting some of the paperwork involved with their tax affairs.  According to the Taxes Acts, everyone is entitled to reduce their taxable income if they have to pay money out in pursuit of their employment.  The conditions attaching to any reduction are understandably difficult to meet. 

Rather than have Revenue dealing with a myriad individual claims, a flat rate arrangement, with differing deductions for different types of worker, was brokered with various representative organisations and trade unions over the years.  Most of these deductions are modest.  A few however such as those for doctors, nurses, school principals, miners and some employed musicians are quite substantial - €600 or more.

The news, broken in this paper last week by Colette Sexton, that Revenue were undertaking a review of the flat rate expenses regime came as a surprise to almost everyone.  Revenue claim the review is in the interests of good governance, but good governance is rarely signalled by a lack of transparency.  The initial outcomes of the review suggest that “review” actually means “removal”.  Revenue are of course within their rights to review any administrative arrangement they make.  That right is reconfirmed every year within the annual Finance Act which places taxes under the care and management of the Revenue Commissioners. 

This column has in the past defended some of Revenue’s difficult administrative arrangements, for instance, when pensioners were being pursued for under declaration of their state pension entitlements, and when a mistaken understanding of an administrative arrangement formed the basis of the EU Commission's State Aid case concerning Apple. 

The blanket revision of the flat rate expenses regime isn't as easy to defend.  That's because people with legitimate entitlement to a deduction will in practice find it very hard to have it reinstated for their own particular circumstances.  Individuals can make claims, but such claims have to be accompanied by a return of income and will inevitably result in protracted correspondence with Revenue without any guarantee of success.  The removal of the fixed rate expenses for any particular category of employees will generate the kind of administrative difficulty the system was designed to avoid.

I suspect that most taxpayers affected by the change simply won't bother engaging with Revenue.  Many of the workers affected are in relatively low paid jobs in the services sector.  They aren’t used to dealing with Revenue, and won't be receptive to the niceties of tax administration changes by reason of good governance.  The first thing they will see is a reduction in take-home pay, for which the employer will most likely be blamed.

As a consequence of one of the recommendations of the Moriarty tribunal, the political system is prevented by law from interfering with Revenue decisions concerning taxpayers.  Despite the Dail debates this week there is actually nothing the political system can do about this decision to review flat rate expenses.  When the Taoiseach told the Dáil that the changes would not have effect until 2020 rather than January of next year as earlier reported, he was relaying a decision of the Revenue Commissioners to the TDs.  The consequences of this review may be deferred, but the review is still taking place.

The current debacle therefore highlights a more fundamental question about the nature of the relationship between the revenue collection agency of a country and the political system which governs it.  There are clear advantages to drawing a sharp distinction in law between the two, not least because the elected representatives of taxpayers may be the worst people to ask about how the tax system should be operated.  Nor can an Oireachtas member take their seat without a tax clearance certificate. On the other hand our political system cannot challenge administrative decisions regarding tax collection which are ill advised, or at best ill-timed as the deferral of the flat rate expenses review outcome to 2020 suggests. 

Revenue have a difficult job to do, which they generally do well and without any need for interference.  However if their goal of administrative perfection dilutes the good of fairness and equity, particularly if a vulnerable cohort of taxpayers is involved, then there should be legal safeguards and mechanisms to ensure that someone in elected government has the authority to cry halt.  It shouldn’t be left to the newspapers and radio stations to report the public outcry. 

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