Revenue set to claw back bonanza in unpaid taxes

 

Bank of Ireland's £30.5 million (€38.73 million) DIRT tax settlement shows the Revenue Commissioners is well advanced in recouping hundreds of millions of pounds in unpaid taxes arising out of the inquiry of the Dail Committee of Public Accounts (PAC). Audits of the 37 deposit-taking financial institutions ordered by the PAC are close to completion and the Revenue is beginning to enter into negotiations with the various banks about how much they have to pay to discharge their liabilities.

All of the institutions will be closely examining the Bank of Ireland settlement to try to extrapolate their own position but it seems clear their bills will be bigger than expected.

The scale of the underlying tax liability at Bank of Ireland is surprising. Its own best estimates to the PAC suggested the figure was around £1.5 million but after its audit the Revenue put this closer to £12.75 million.

This assessment was based on audits of samples of the bank's non-resident accounts during 1986 and 1999 to determine how many of these accounts were bogus. A Bank of Ireland spokesman described the process as akin to a "forensic examination" which was helped by the Revenue's own information on certain taxpayers.

The spokesman says the extent of the Revenue's intelligence explains much of the huge difference between the estimates formulated by the bank's internal auditors and the final outcome. Bank of Ireland's group chief executive, Mr Maurice Keane, told the DIRT Inquiry, that over the 13-year period it was investigating, the bank had identified 250 bogus non-resident accounts out of an average of 70,000 on its books. This suggested a potential DIRT tax liability of between £1 million and £1.5 million, Mr Keane said. In the event, the Revenue seems to have found many more such accounts.

On top of the £12.75 million, the Revenue applied interest on the DIRT tax owed over the 13 years and penalties, amounting to a further £17.75 million.

Interest on each account is calculated on a monthly basis and ranges from between 12 and 15 per cent annually over the 13-year period. Two further penalties are applicable in relation to DIRT. The Revenue can impose a penalty of £500 on each bank account on which a bank failed to collect DIRT. In addition a further £500 penalty is charged on each account where the bank furnishes an incorrect DIRT return to the Revenue.

In Bank of Ireland's case the Revenue "dictated" the final figure shortly after completion of its audit. The bank moved to negotiate around that amount and finally decided to make a swift settlement.

All of the financial institutions are keen to bring this embarrassing episode to a close and many others are likely to want to follow Bank of Ireland's lead in making settlements in the coming weeks and months. But there will be some instances where the wrangling could continue for a long time yet.

AIB in particular has vehemently insisted that it secured an amnesty with the Revenue in respect of DIRT arrears and denies that it has any outstanding tax liability.

AIB's next step will be determined by the size of the tax bill presented to it by the Revenue. The scale of the Bank of Ireland settlement would seem to suggest AIB is now facing a potentially huge DIRT bill. Like Bank of Ireland, AIB will take a pragmatic decision when it gets the final tax demand. Most observers believe there is a figure at which the bank will be prepared to settle but if it runs into many millions of pounds the battle will move to the courts. ACC Bank is also in a difficult position. It is currently re-focussing its operations in a bid to make it an attractive takeover target. The uncertainty in relation to DIRT is a major impediment in this regard. And while quantifying that liability will remove some of the uncertainty in the short-term, the bank's financial position may be further undermined if the tax bill is very large.

Once the Revenue is finished with the banks, it says it will be turning its attentions to the holders of bogus accounts.

The DIRT Inquiry showed that this next stage of investigation could prove to be highly lucrative for the Revenue. An audit of the Bank of Ireland branch at Miltown Malbay in 1992 recovered £200,000 in unpaid DIRT arising from bogus non-resident accounts held there. But the Revenue subsequently netted a further £1.8 million by pursuing the account-holders for untaxed income. PAC chairman, Mr Jim Mitchell, is satisfied these events fully vindicate the DIRT Inquiry and is happy to see the Revenue starting to collect the hundreds of millions of pounds of taxes due.