Taxing interest difficult to police - Somers

If people are prepared to make false declarations it would be difficult to get full compliance in taxing interest, a former secretary for national debt management in the Department of Finance said at the inquiry.

Mr Michael Somers, currently chief executive of the National Treasury Management Agency, said he was personally sceptical "about the ease with which money - interest - can be taxed because of the ease with which money can be moved".

"There is not a lot that authorities can do about this if people are prepared to make false declarations, and the experience here seems to be that people are prepared to make false declarations.

"I would be doubtful that you will ever get full compliance because if people want to be dishonest in this area, it is probably one of the easiest areas to be dishonest on."

Mr Somers said the precedents "were not very encouraging". He pointed out that in the late 1960s the US imposed a withholding tax on interest and "it drove a large amount of money outside the United States". A similar situation applied in Germany when the authorities tried to impose a tax. There was a "fear of money flowing and, in fact, it did flow".

Mr Somers, described by the inquiry chairman, Mr Jim Mitchell as a "neutral witness" said there was "no reason, I suppose, for those who were prepared to make false declarations to do anything other than sit tight".

He told Mr Mitchell at the time "there probably could have been some flight of funds". However, he added "it was probably fairly small beer because we were dealing with billions of pounds flowing in and out of the country at that stage".

He presumed a lot of the people making false declarations were "people with relatively small amounts of cash. There would be a big inertia factor with them".

Asked by Mr Sean Doherty if he thought inertia applied to the vast majority of people at the time, Mr Somers said: "I think it is a significant factor in the way people manage their personal finances, particularly if they're not that well off."

The thing about people, he said, was "they don't manage their personal finances to the best possible advantage. I know it myself. If you leave money on a current account you get no rate of interest at all".

He said the banks "give you minuscule rates of return on your money whereas if you kick up enough fuss or if you have enough cash they will pay you a higher rate of interest".