Bid to flush out tax avoidance

A new punitive measure is being introduced aimed at flushing out hidden tax avoidance schemes being used by businesses and high net worth individuals.

The Finance Bill contains new powers for the Revenue to apply a 10 per cent "surcharge" in cases where a tax avoidance scheme has been successfully challenged by the Revenue or has led to a tax settlement.

It will also clear up an ambiguity that now exists over when interest on tax owed may begin to mount. Interest on tax owed will begin stacking up from the date the tax would have been due but for the use of the failed avoidance scheme.

However the Bill will also introduce the option, for taxpayers, of their notifying the Revenue of the transaction concerned and its intended tax consequences. In such cases the taxpayer will be protected against both the surcharge and the interest, should the scheme later lead to a tax liability.

In 2004 the British government introduced a measure whereby all promoters of certain types of tax avoidance schemes are obliged to notify the Inland Revenue. The new measures here place an onus on the taxpayer rather than the tax practitioner.

The measures concern cases where the Revenue attack the tax scheme under section 811, a measure introduced in 1987 and which targets transactions with no commercial reality other than the objective of avoiding tax.

The chief executive of the Irish Taxation Institute, Mark Redmond, said he believed section 811 cases had been taken "perhaps 10 times" since 1987.

The new provision in the Finance Bill is "very narrow in its scope" and will be "highly focused on extreme cases", he said.

It can potentially apply to cases where the two sides agree a settlement on a scheme that was put in place many years ago. This seemingly "retrospective" element of the scheme was the cause of some surprise yesterday.

The measures are aimed at bringing new tax schemes to the attention of the Revenue earlier than is currently the case.

"It provides a mechanism whereby Revenue might learn about tax avoidance schemes quicker than they might otherwise," said David Smyth, Head of Tax Services at Ernst & Young.