By Daisy Downes
Josephine Feehily was appointed Chairman of the Revenue Commissioners in 2008 and has more recently been elected as Chair of the World Customs Organisation. In an extended interview, she told Accountancy Ireland’s Daisy Downes about the challenges Revenue is facing as a result of the austerity programme and the steps being taken to help businesses who are struggling as a result of recession.
It was the day after Black Thursday and the airwaves were buzzing with talk of the Revenue Commissioners’ letter to some 150,000 pensioners informing them that they might owe tax. The issue affected individuals in receipt of private pensions who also receive pensions from the State. Revenue had received information from the Department of Social Protection in November 2011 as a result of which well over half a million individual cases were matched to Revenue records. The exercise resulted in the identification of more than 150,000 ‘mismatched’ cases. Letters were duly issued and dealing with the fallout from public reaction to those letters was just one item on the busy agenda of Josephine Feehily when I met her in the Revenue Offices at Dublin Castle in the first week in January.
A native of Clarina, Co. Limerick, and a career civil servant, Ms Feehily was appointed Chairman of the Revenue Commissioners by Brian Cowen in March 2008. Prior to joining Revenue in 1993, she had worked in the Department of Social and Family Affairs and the Pensions Board, and had also served as a member of the Labour Relations Commission.
In June last year, Ms Feehily was elected Chairperson of the World Customs Organisation (WCO), the third biggest international organisation after the UN and Interpol. Essentially, a standard-setting and capacity-building organisation, the WCO is also the global voice of customs. Its membership currently stands at 177 countries who are responsible for customs controls on more than 98% of all international trade.
The appointment is a considerable honour for Ireland and fits well with the Government’s policy of positive engagement internationally. Ms Feehily anticipates serving at least two years and says that for a small open economy like Ireland – and particularly with the emphasis we now have on exports – membership of the WCO is very important.
Her role with WCO gives Ms Feehily a good insight into international opinion of Ireland which she believes has improved recently. There is a growing understanding that while Ireland is in a bailout we are managing to do the right things, she says.
Ireland’s Revenue Commissioners are charged with collecting more than 93% of all of the revenues due to the state. The organisation employs almost 6,000 individuals and is responsible for Ireland’s tax and customs administration. In common with other Government departments, the Revenue Commissioners are feeling the impact of austerity through budget cuts, payroll cuts and loss of headcount.
“Clearly that has an impact on services we provide,” says Ms Feehily, pointing out that it cost 20% less to run the organisation in 2011 than it did when she was appointed as Chairman in 2008. She is quick to acknowledge the important role that Chartered Accountants play in the operation of the tax system, particularly in relation to self-assessed taxes. “We also value the participation of the CCAB-I in the ongoing dialogue conducted through the Tax Administration Liaison Committee (TALC). This participation is very helpful in addressing administrative issues that can arise in connection with the annual cycle of developments in tax law and practice,” Ms Feehily adds.
Ireland’s overall tax take is down from a net figure of over €47bn in the good times to a net of about €34bn last year. The amount of effort involved in collecting this, however, is increasing and Revenue is devoting a bigger proportion of its resources than ever to collection and debt management.
Enforcement and the Shadow Economy
A major focus of activity for the Revenue Commissioners is the shadow economy which includes the white collar cash economy, blue collar cash economy, cigarette smuggling, and oil laundering. While the amount of effort required in this area should go up during a recession, it is difficult to maintain that level of activity with a reduced headcount.
“You can only police that low end of the labour market by visible presence on the high street so all over the country our compliance teams do what they call ‘streetscapes’. They call in to all the businesses, they check their books and records. It is labour intensive but it is light as opposed to heavy technical work. It doesn’t require engaging with auditors or accountants. You’re just checking books and records, checking the stocks to see have they counterfeit cigarettes in their stockroom. It is very labour intensive but it has to be done so we keep looking for smarter, less labour intensive ways to do the back office function. In the last two to three years we haven’t applied any staff reductions to the debt management side of the house or any reductions to the numbers of staff we have involved in tobacco and oil enforcement. It is really important that we have visibility across those sectors.”
Tackling the shadow economy is an essential element in ensuring a level playing field for businesses. It goes without saying that many legitimate businesses are struggling at the moment and, for the Revenue Commissioners, that has meant an increase in the numbers struggling to keep up with their tax payments.
“There are people who owe us money who are very viable businesses but have cashflow and liquidity problems, partly because they can’t get their normal tolerances from banks. We are doing business with those and we have about 16,000 cases on instalment arrangements. Then we have another cohort who don’t want to engage at all and for those people we have quite strong enforcement powers that we will use,” Ms Feehily explains.
Those enforcement powers include referring the debt to the sheriff and using attachment orders. In 2011, attachment orders were used in about 4,500 cases and some €30m was collected as a result.
“We have to do those things because it is not fair to viable businesses or to compliant businesses if we are not challenging the noncompliant. It is as simple as that. There are businesses out there with hard luck stories. Some of them are viable, some of them are engaging with us. We can do business with them and give them time to pay. Some are not engaging or they are not viable, they might have a tax debt that goes back many years. If they are not able to pay their current tax – i.e. they can’t pay this year’s tax on this year’s profit – then there is something wrong with the viability of that business. So the first test will always be whether they can pay their current taxes. We are not doing anyone any favours by giving non-viable businesses time to pay because it is unfair to the guy next door.”
Ms Feehily stresses that businesses must take account of the fact that tax is part of their business model: “Apart from being the law, to build a business on current terms with current costs without taking account of tax is just a flawed concept. Businesses had to adjust quite suddenly in 2008/9 but we are now in 2012 and the fundamentals have been much the same for the last two years so if you have a business now and it is not earning enough to pay its current liabilities then there is something wrong. Our biggest mantra to business is, if you are in difficulty, come in and talk to us.”
Businesses who take up the invitation to talk will be expected to put their cards on the table and explain their business plan and, not surprisingly, a key issue for Revenue will be ensuring that the business is in a position to pay its current tax.
Information resources for businesses and individuals experiencing tax payment difficulties is available on the Revenue website and Ms Feehily says Revenue are actively encouraging businesses and individuals experiencing particular payment difficulties to work proactively with them when difficulties start to arise so as to find an agreed way through those difficulties and quickly restore voluntary timely compliance.
“We have put in place a streamlined approach for a business or individual to apply to Revenue for a phased payment arrangement. This involves the completion of a form and the provision of essential supporting evidence and documentation that will enable us to speedily consider whether a debt can be cleared by way of a phased payment arrangement. Interest will always be part of an approved phased payment arrangement,” Ms Feehily adds.
Where businesses are non-viable they may end up in receivership, creditors’ voluntary liquidation, the owners may simply stop trading and walk away or Revenue may itself initiate liquidation. While Revenue will pursue tax due, the amount of tax being written off as a result of business failure has increased significantly in recent times.
“About 80% of all the tax we write off is in cases where the businesses were liquidated, went into receivership or ceased trading. The legal position is that we can write it back in again if it turns out that we were misinformed and that the business didn’t cease. We have an active phoenix programme in place so if a business appears again with the same directors in the same shop selling the same things, we monitor them from the very beginning very tightly.
We don’t have anything like the same tolerances in phoenix companies. If the directors have walked away owing us a tax debt and they reappear then we monitor them very tightly to make sure that we don’t get caught again.”
On a more positive note, Ms Feehily says that tax compliance levels in Ireland are considered good, particularly amongst larger businesses.
“Last year, in the largest cases, we had 98% compliance rate at due month +1. For medium cases, it is 95%, and for all other cases it is 80%. For me, this is a really positive figure because it means that the vast majority of businesses, and certainly businesses of any size, are sending us in a tax return and they are paying us a self-assessed amount in accordance with the return.”
Revenue’s audit and compliance programmes aim to police whether the right amount is included on the return. The tax clearance system under which anyone who conducts business with a public sector organisation requires a tax clearance certificate plays an important role in securing compliance and, increasingly, other Government agencies, financial services institutions and third-party organisations such as Sustainable Energy Ireland, the Road Safety Authority and the Private Rented Tenancies Board are providing information that can be analysed by Revenue using technology.
“Revenue is now receiving information from other Government departments and agencies including welfare, agriculture, and grants for education. We have the European Savings Directive giving us information if you have foreign deposit accounts within the European Union that generate interest. We are getting information from insurance companies in relation to single premium policies. We also get thousands of suspicious transactions reports every year. For example, if you go into your bank and want to withdraw a large amount of money in cash in order to pay your builder in cash that will trigger a suspicious transaction report and that goes into our machine. It tells us you had money we didn’t know you had.”
The information is analysed by Revenue to identify mismatches and the focus is then on the areas considered to be of greatest risk.
Given its growing reliance on third-party information, data protection is at the top of Revenue’s internal governance list. The organisation was audited by the Data Protection Commissioner in 2009 and the results published.
“I am pleased to say that they didn’t find any mortal sins. They made certain recommendations which we have implemented or are implementing but we didn’t fail under any heading. For us, there are two principles: when we get data or when we exchange data with another public sector organisation we do it in accordance with the law. Internally we have very strong rules for staff because the first concern is that we get it properly and the second concern is that we use it properly in accordance with the Data Protection Act and internal codes of practice.
Once you are alive to those two principles – getting the information properly and using the information properly – then you can manage in this Data Protection space quite safely. The Data Commissioner doesn’t unnecessarily want to impede our work. He wants to raise valid questions and get assurances from us on those two points.”
By the end of February, the Revenue Commissioners will have lost a further 200 staff members including one of its three Commissioners who is retiring and, with a moratorium on public sector recruitment, there is no prospect of seeing them replaced any time soon. At the same time, as Government continues to seek additional sources of revenue, it seems inevitable that demands on the Revenue Commissioners will continue to grow. For the next two years, Ms Feehily’s leadership of the WCO, notwithstanding the importance of that role, will put additional pressures on her time. Throughout our conversation, it is clear that the challenges of managing with significantly reduced resources is to the forefront of her mind. It is also clear that these pressures will have a knock-on impact on the Revenue’s engagement with taxpayers and with Chartered Accountants. “It’s going to be a challenge for me personally but I will have very good support from my colleagues,” she says. “And it’s great fun!” This positive, upbeat approach will be a definite advantage in the current climate because as the dust settles on Black Thursday, you can’t help but think there will be more days like this for Revenue before this recession ends.
Daisy Downes edits Accountancy Ireland
This article was originally published in the February 2012 issue of Accountancy Ireland.