Drifting Apart

May 27, 2019

The Sunday Business Post, 26 May 2019 
Students of the Irish tax system from overseas are often intrigued by how tightly the Irish tax system is integrated with business behaviours.  For example, Revenue verify on request that a taxpayer’s affairs as captured on their records are up to date.  This online system of tax clearance is by no means a feature in other countries, yet many Irish businesses cannot obtain the licences they require, or are barred from competing for contracts if they are unable to produce a tax clearance certificate.

Part of the reason for this level of integration is that there has been a steady delegation of tax collection responsibilities from Revenue to the private sector over many years; primarily through VAT and PAYE.  PAYE and VAT bills often dwarf the mainstream income and corporation tax liabilities of business.  Sometimes when businesses are in trouble, satisfying these bills is among the earliest casualties of poor commercial performance. 

The Public Accounts Committee investigated this point almost a decade ago, and found that businesses in failure could end up with colossal bills due to Revenue.  In their 2010 report, the PAC established that almost €1 billion of unpaid tax was in play over a 10 year period.  There were some legislative changes to beef up tax collection powers as a consequence.  Before that though a longer term weapon in the Revenue armoury has been its preferential status as a creditor in the event of a company winding up. 

However much is left in a company, Revenue will get their share first before other creditors come into the reckoning.  That might seem unfair, except that in a sense, PAYE and VAT never really belonged to the company.  They are either income tax collected from employees in the case of PAYE, or a levy on the customers of the business in the case of VAT.

Somewhat unusually (because in many respects the tax rules in our two countries are very similar), that entitlement to be a preferential creditor has not been available to the Irish Revenue's UK counterpart, HM Revenue and Customs.  They are now trying to make a claim to first dibs on the carcass of an insolvent company and the notion is currently a matter for public consultation.  What caught my eye however is that it seems this proposal will not extend to company liquidations taking place in Northern Ireland.

A recurring motif of the Brexit debate, at least on the part of some northern politicians, has been an insistence of equal treatment between Northern Ireland and the UK in the context of a Brexit withdrawal agreement.  This has been at the heart of all the trouble over various iterations of the British backstop which if ever agreed to is supposed to deal with the tricky issue of how the border on the island of Ireland is to be managed.  This insistence ignores the fact that Northern Irish and British legislation have been drifting apart over the past several years.

It's widely acknowledged that there are differences between Northern Ireland and Great Britain over social issues such as same-sex marriage.  However, this is only part of the story.  Legislation affecting commerce and trade is also impacted. The process of devolution has resulted in the Northern Ireland Assembly having legislative powers in areas including education, employment and skills, agriculture, and economic development.  There is now divergence in the laws between Northern Ireland and the UK because the Assembly has not been sitting, and some of these are not trivial differences either.  Differences in employment law for example touch issues such as gender equality, the powers of employment tribunals and civil service pay. 

Sometimes too, a divergence of law could be to the benefit of Northern Ireland.  While the various countries in the United Kingdom have devolved powers in certain areas of taxes (for instance Scotland can set its own income tax rates and the Welsh have powers over some environmental taxes). Northern Ireland is in the unique position of being able to strike its own corporation tax rate of 12.5%.  Again this has not happened because of the absence of the Stormont assembly.

Brexit aside, there is a job of work on hand for Northern politicians to ensure that Northern Ireland does not operate differently to the United Kingdom for business purposes.  The power to set a 12.5% Corporation Tax rate is an opportunity to be availed of.  Solutions to most of what is at issue lie within the power of the Stormont Assembly, once it is reconvened and Ministers are appointed. 

The best reason for the re-establishment of the Stormont executive is of course to help ensure that further violence does not well up within the political vacuum.  Alongside such a reason, tax pales into insignificance.  But as so often happens, it is the wrinkles and differences in the application of tax and business laws that are highlighting the shortcomings of the current political approach. 

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