Enda Jordan Director Corporate Tax Services

The Revenue adopted a media-focused campaign in order to generate public awareness of this investigation. The media campaign was similar to previous investigations, such as the ‘Bogus non-resident deposit accounts’ and ‘Off-shore assets’. However, unlike those investigations, investors in life assurance products, perhaps more likely than not, have no tax issues to deal with in relation to the source of the funds invested. This is of particular concern to many elderly people who may have made investments back in the early 1980s and who would not have the records any more to indicate the source of investment funds. However, the Revenue has stated (in its Guidance Notes published on its website) that if no tax is due on the money invested, ‘proof is not required and no notice of intention or disclosure is required to be submitted’.

The second area of confusion related to the investment threshold for which a mandatory notice of intention was required in order to avail of the voluntary disclosure scheme. After discussions and correspondence between the professional bodies and the Revenue, the Revenue confirmed that the current investigation relates to those cases where the aggregate investments in SPIPs exceeded €20,000. The Revenue indicated that it was not its intent at this time to initiate an investigation into investments below €20,000, but it included the caveat that if new data emerged from the current phase of the investigation, then it would provide a further opportunity for persons who invested untaxed funds below the €20,000 threshold to avail of the qualifying voluntary disclosure scheme.

• Reduced penalties in accordance with the Code of Practice for Revenue Auditors;
• Avoidance of publication of the individual/company name on the quarterly list of tax defaulters;
• No investigation of the individual/company in relation to this matter with a view to a criminal prosecution.

However, it must be stressed that the option of making a qualifying voluntary disclosure in advance of this investigation was not open to certain categories of taxpayers, namely:

• Holders of bogus non-resident accounts;


• Ansbacher and NIB enquiry cases;


• Persons required previously to make a disclosure relating to an off-shore financial product;


• Persons who have come, or may come, under investigation arising from the Moriarty or Flood/Mahon Tribunals.

While persons in such categories would generally be recommended to make disclosures, in doing so they would need to be aware that the ‘benefits’ mentioned above would not apply.

The next phase of this investigation is the actual calculation, formal disclosure and payment of liability. The deadline specified by which the taxpayer must make the formal voluntary disclosure and settle the liability is 22 July 2005. The actual requirements of such a disclosure are that the taxpayer must:

• submit a statement of the amounts of tax (including duties, PRSI and levies) and of the interest and penalties due in accordance with the Revenue’s Code of Practice;
• make a full disclosure of all sources of liability to tax which have not been previously declared to the Revenue, whether invested in SPIPs or otherwise;


• include a statement as to the background information;


• make a full disclosure of all investments in SPIPs funded by monies not previously disclosed and in doing so each policy must be identified (by the policy number, life assurance company, amount invested, date of investment and date of birth)

In relation to the quantification of liabilities, the Revenue has published on its website disclosure forms and spreadsheets to assist with the calculation of tax liabilities, plus interest and penalties. Rather than comment in detail on the calculation, it is probably better to make some general comments of broader interest:

• While the investigation relates to investments of undisclosed funds in SPIPs going back to 1980, the Revenue is prepared to allow all undisclosed income arising in the years from 1980 to tax year 1990/91 to be treated as income of tax year 1990/91 and for tax and interest to be settled at the tax rates applying to the tax year 1990/91. It should, however, be stressed that it may not in every case be beneficial to adopt this approach and it is open to the taxpayer to calculate the tax based on actual tax rates applying in the year in which the income was earned. The Revenue has indicated, however, that it will apply interest only from tax year 1990/91.


• Where untaxed funds have been extracted from a company and invested in a SPIP in a director’s name, the Revenue is prepared to treat it as additional remuneration of the director. Thus the company may have a VAT liability on the untaxed funds invested and a PAYE/PRSI liability on the net of VAT amount of the undisclosed funds. The Revenue has indicated that it will not require the amount treated as remuneration of the director to be re-grossed in order to calculate the PAYE/levies due. As the company’s undisclosed income will be matched by allowable expense (i.e. director's remuneration), no additional corporation tax should arise.


• Where undisclosed income arises for tax years prior to tax year 1990/91, in certain cases the making of additional retirement annuities as a means of mitigating the liability should be considered. Because of the level of interest and penalties applying to pre-1990/91 income tax liability, a reduction in tax of €1 also saves an additional €3 (approximately) in interest and penalties


• On the question of interest, the Revenue requires interest to be calculated at statutory rates. This can be quite expensive; for example,. any income tax liability up to tax year 1990/91 will attract an interest rate of nearly 200%. It should be noted, however, that if the undisclosed funds arose from a gift or inheritance in respect of which Capital Acquisitions Tax (CAT) was due, the Revenue has indicated that ‘under CAT legislation Revenue may mitigate the interest to 100% of the tax unpaid or underpaid, depending on the circumstances of the case
.

• As regards penalties, if the liability relates to income tax for periods up to tax year 1990/91, the penalty for underpaid income tax is fixed at 100% of the additional tax liability. For liabilities in respect of later years disclosed under the terms of the voluntary disclosure scheme, the penalty on a taxpayer should be capped at 10%. Indeed, there is an argument to be made that the penalty might be reduced further depending on the actual circumstances in which the undisclosed funds arose. It is also of importance to note that different penalty regimes apply in respect of PAYE/PRSI and in respect of Capital Acquisitions Tax, which are less draconian even if the liability relates to a period prior to tax year 1990/91.

After all the disclosures are made in July of this year, the next phase of the investigation should commence. Firstly, the Revenue will need to review the submissions received and select cases where any auditing is required. Independently of this, the Revenue should commence the process of seeking information from life assurance companies about details of investments in SPIPs. The legislation to enable the Revenue to do this was included in the Finance Act 2005: it allows the Revenue to sample the records relating to SPIPs sold by life assurance companies for the purposes of obtaining information to ground an application to the High Court compelling the life assurance companies to provide details of investments in these policies.

It is expected that it will take some time to carry out this process, so it may be later in the year before the Revenue obtains the information to enable it to investigate investors who have not made disclosures. It will be interesting to see whether the Revenue will adopt a different approach in carrying out this later investigation than what was applied in respect of ‘bogus non-resident deposit account holders’ (i.e. the issue of registered letters). In this case, many of the investors who will not have come forward will be those who have no tax liabilities and who have simply followed the Revenue’s instructions in not making a disclosure. Are they to suffer the ignominy of receiving a registered letter from the Revenue next Christmas?

All in all, this particular saga will run for some time yet.