`Pick-me-up' a political letdown

The "pick-me-up" system of political funding was a way for donors to contribute discreetly to party coffers, while getting a better bang for their political buck. Under the system, where companies picked up bills on behalf of the political parties, many of the donors appear to have written off the contribution as a business expense. By doing this they will have improperly reduced their corporation tax bill and also - in many cases- their VAT bill. The scheme has come to light because the Fitzwilton donation of £30,000 was originally meant to be a "pick-me-up", whereby the company paid Irish Printers for work undertaken for Fianna Fail. However, instead, the money was paid to Mr Ray Burke.

Fitzwilton will not comment on how it accounted for the transaction or whether it used an invoice for £30,000 issued by Irish Printers to write off the donation as a business expense, as would have been the normal practice at the time. A significant number of companies appear to have been invoiced in giving money through the PMU system.

Tax evasion was unlikely to have been the main goal. The sums of tax saved would in most cases have been quite small relative to the size of the companies. Instead, the main attraction was that it offered the donors a discreet method of party political contribution which would not even show up in their own accounts.

However it does appear that the system was organised in a way which gave the donor companies the opportunity to also get an improper tax advantage, lowering the net cost of their contribution to "upholding democracy."

The Revenue Commissioners are now examining documents forwarded to them by Fianna Fail in relation to the PMU system, in which the other large parties also engaged. They will be looking at a number of issues.

The central issue for the donor companies is whether they wrote off the contribution as a business expense, or paid it out of after-tax profits.

If the money was paid out of after-tax profits, then no tax issue would arise. However in most cases it appears that the PMU practice was to write off the political contribution as a business expense, using an invoice issued by the company who provided the service to the political party.

Typically the company in the middle of the deal was a printer, advertising agency or some other firm providing an election service to a major party. It would issue an invoice to the donor firm for work done on behalf of the political party and, presumably, also issue a receipt when the work was completed.

The donor companies then, typically, put the contribution in their accounts as a "business expense," or part of the cost of running their business. However they should not have done this, as a business expense is one which is incurred wholly and exclusively in the running of the business. A political donation clearly does not fall into this category.

Writing the donation off as an expense yielded two potential tax benefits. First, it reduced the level of profit declared and thus the corporation tax bill. The standard rate of corporation tax was 47 per cent in the late 1980s and is 36 per cent now. Second, it would also have reduced the donor firms VAT bill.

This is because businesses' VAT payments are calculated on the balance between the VAT-liable purchases they make and the goods they sell. So writing the donation off as a business expense increases the amount of VAT-liable purchases they are declaring and thus cuts their VAT bill.

In the late 1980s, when the practice was prevalent, the relevant VAT rates would have been 21 per cent of 12.5 per cent, depending on the item involved.

The Revenue are also likely to examine the invoices issued by the companies in the middle of the deal. At issue here will be how the invoices were made out and whether the work undertaken is correctly described. After all the invoices were being issued to people for whom the work was not carried out in the first place.

No doubt the business people involved in donating through this mechanism will feel a little hard done by if the Revenue come looking for money. After all, they were engaged in schemes dreamt up by and operated by the leading political parties who were responsible for running the State.

However given the current climate, the parties will not be defending anything improper and the companies will be left to deal with the Revenue, should our tax collectors decide that the matter is worth pursuing.