Revenue's tax error could cost it dearly

A change in the law regarding paying interest on tax wrongly raised by the Revenue Commissioners could cost the Exchequer 10s of millions of euros.

The Department of Finance has begun a study of the implications of a change to the law after the Ombudsman, Mr Kevin Murphy, delivered an unprecedented "special report" to the Oireachtas in which he strongly criticised the Revenue. The Revenue currently charges interest on unpaid tax but does not pay interest on tax wrongly raised.

Mr Murphy said he drafted his report because the Revenue's refusal to implement previous recommendations was "an unprecedented event in the history of the Office of the Ombudsman".

"I find that the basis on which the Revenue has rejected three of my five recommendations involves such a misrepresentation of the position that I consider it a direct and unprecedented challenge to the authority vested in the Office of the Ombudsman by the Oireachtas."

In a letter to the Revenue, contained in the report, Mr Murphy wrote: "You claim inability to implement these recommendations because of the far-reaching implications these would have. . . I consider your response incomprehensible and I believe it is at best disingenuous and possibly mischievous."

The Revenue, for its part, said it regretted being unable to implement Mr Murphy's recommendations but had not got the power in law to do so.

The dispute initially concerned the widows of public-sector workers who were taxed on that portion of their pensions that related to their children. This occurred up to 1988 when the policy was successfully challenged in the High Court.

Following the court's ruling, the Revenue decided the tax rebates to the widows concerned should only go back five years to 1983. This decision was appealed to the Ombudsman by some of the widows, as was the Revenue's stance that it would not pay interest on the tax wrongly raised.

Mr Murphy ruled that the widows should be given a rebate going back 10 years, that interest should be paid on the tax raised, and that the Revenue should introduce a general scheme for paying interest on income tax repayments.

The Revenue agreed to the 10- year rebate but said it could not pay interest. "This means that the repayments now being made will be made on 1980s money values," Mr Murphy noted.

In his report, he said the Revenue should introduce a scheme of compensation such as that operated by other public bodies, such as the Department of Social, Community and Family Affairs.

Revenue yesterday said it "explored in great detail the options for implementing the recommendations on compensation but was left with the core difficulty that tax law provided for the payment of interest only in very specific circumstances".

"Implementing the recommendations would amount to Revenue introducing a general scheme of compensation 'by the back door'. This would be an incorrect intrusion by Revenue into an area which is quite properly the preserve of the Oireachtas."

A spokesman said it was not the case, as alleged by the Ombudsman, that the Revenue was not serious about its Charter of Rights. The Revenue has begun a search of its files for all widows improperly taxed before 1988.

The Revenue's report for 2001 shows that income tax repayments totalling €77 million were made. A figure for the self-assessed is not given but is understood to be of a similar if not larger magnitude. VAT repayments totalling hundreds of millions of euro are made each year.

The Revenue charges interest on tax due at a rate of 0.6 per cent per month. Back in the 1980s the rate was considerably higher.

The Minister for Finance, Mr McCreevy, said the Ombudsman's report would be studied in detail. "Indeed, the general issues raised by the Ombudsman are already being actively examined."

Mr McCreevy said he could sympathise with the individuals concerned (the widows) but that "any solution has to be on a general basis taking all of the issues into account, including the amount of revenue involved".

The full text of the Ombudsman's report is available on The Irish Times website at: www.ireland.com