Counting the cost

Jul 15, 2019

Sunday Business Post, 14 July 2019
Over half a million of us send income tax returns each year into the Revenue.  That's almost one quarter of all individual taxpayers, which is very high considering that most of us pay all of our income tax through the PAYE system.  Furthermore, of the half a million of us who do file the lengthy and complicated income tax Form 11 as it is known, well over 200,000 report self-employment income of €10,000 or less. 

It is clear that earnings that are not taxed via PAYE should be declared by the earner in some way.  But the Form 11 process seems to involve a lot of effort to capture relatively small amounts.  Is an official anxiety to capture statistics becoming too prevalent?

There are technical reasons why many people get caught in the Form 11 tax return net, mainly down to Revenue’s inherent suspicion of anything to do with companies.  Proprietary directors, that is, company directors with a shareholding, are obliged by default to file tax returns, even though they may have no additional liabilities. 

Last year Revenue ran a survey looking specifically at those tax returns where the declared income was less than €10,000 over anything earned through PAYE.  That might include perhaps some part-time self-employment income or some rental income. It's clear from the results of the Revenue survey that a significant proportion of taxpayers might not have to have a legal obligation to send in a tax return at all, yet still they do.

The Revenue survey was conducted at the back end of 2018 and was limited in scope to a sample of 6,000 taxpayers; a sample probably large enough to provide credible findings from creditable response rates without troubling too many taxpayers.  I’ve seen comparable taxpayer analysis carried out by other tax authorities and I think Revenue are better at it than most.  Studies of this type clearly have merit if the findings lead to some improvement in tax administration.  For instance the number of people filing income tax returns who do not actually have to do so should give Revenue some pause for thought, and should prompt better ways of taking people out of filing obligations, to the benefit of the taxpayer and the tax inspector alike. 

There are other ways in which Revenue can use the information they have on hand to improve public administration, and there is a long standing association dating back some 70 years between Revenue and the Central Statistics Office.  But while such an approach might seem sensible, it often isn't a great idea.  The job of Revenue is to collect taxes, not statistics. 

There must be a temptation to ask questions because you're interested in the answers, but the demands of information by Revenue from taxpayers should be prompted solely by the nature of the tax being collected.  Otherwise officials could become indifferent to the impact of additional compliance burdens on citizens.

This year, employers became obliged to run new payroll systems to keep on the right side of Revenue's PAYE modernisation project.  PAYE modernisation provides real-time information on the comings and goings of employees and their wages they receive from their employer.  That's a valuable source of public policy information, particularly when the nation's finances are so reliant on the contributions of the PAYE sector.  However that kind of information comes at a real cost. 

I would be concerned at any assumption that the cost impact of PAYE modernisation was minuscule because it was software-based, and employers already used payroll software.  This is nonsense.  At the very least, many employers had to upgrade and update their systems with no business benefit to themselves.  Some small employers had to start using payroll software for the first time.  Furthermore, when the PAYE legislation was being amended to provide for the new method of accounting for tax, there were cynical changes to the sanctions placed on employers were anything to go wrong, including the charging of grossed-up tax in more situations.

If data from the tax system is to be used to inform public policy, there has to be payback for taxpayers.  If more data is being provided by Revenue to the CSO, there has to be a demonstrable reduction in the survey obligations levied on business by the CSO.  Helping reduce compliance costs has to be a priority, and there is not much evidence this is the case.   For instance the PAYE modernisation project promised greater flexibility for employees in managing their own tax affairs, but this flexibility did not emerge until five months after the new system commenced. 

The real benefits of last year’s survey of income tax return filers will only be realised if it results in an initiative to remove filing obligations on people where they are not necessary.  Otherwise the results of survey will fall into the “nice to know” category, and the tax system will continue to grind along its merry way, increasingly asking questions.  Questions whose answers either no-one needs, or which merely feed into statistics.  Whichever the case. those answers do nothing to improve the fairness or accuracy of the tax take.

Dr Brian Keegan is Director of Public Affairs at Chartered Accountants Ireland