Annual Conference 2019

11-13 April 2019

An Update on the Revenue Realignment and Compliance Activity

Aidan Lucey, PwC

  • Revenue realignment

In November 2018, Revenue formally announced changes to its organisational structure. You will all be familiar with the pre-existing structure that was in place for the past 15 years, but to better understand the rationale for the changes that have ensued, I will briefly recap on the key features of this model.

A recap

Since 2003, Revenue primarily operated through a geographic structure broken down into four regions; Border Midlands West Region, Dublin Region, East & South East Region and South West Region. Each region was responsible for all personal and corporate taxpayers within its geographic remit regardless of their tax profile, size or the sector in which they operated.

Upon its introduction, Revenue said that this structure would ensure that resources were “aligned to profile and manage our customers on a more coherent and logical basis.

There were some exceptions to this model:

  • Large Cases Division operated on a national basis and was responsible for the largest corporate and personal taxpayers in the State.
  • In 2016, Revenue established seven Second Tier Districts to manage the compliance of those large corporate taxpayers that did not meet the entry criteria for Large Cases Division (the customer service for these taxpayers continued to be dealt with by the relevant region). While these districts mainly dealt with taxpayers in their regions, four of the districts were responsible for certain industry sectors at a national level; construction (Dublin), motor distribution (East & South East), accountancy and legal firms (South West) and government/public bodies (Border Midlands West).

The sectoral approach adopted by Large Cases Division and the Second Tier Districts lent itself to a more effective segregation of taxpayers, something Revenue viewed as key for its risk profiling activities:

“A critical part of actively managing the compliance function is to ensure that we match our resources to those segments or sectors of the economy where the tax compliance risks are greatest”

This level of segregation wasn’t possible in the regions given the variety in the size and profile of taxpayers they were dealing with. This was one of the catalysts for the changes made to Revenue’s structure.

The new structure

Revenue has now moved away from a model based on geographic regions to a new structure which is comprised of five national divisions that are segmented by reference to taxpayer type:

  • Large Corporates Division
  • High Wealth Individuals Division
  • Medium Enterprises Division
  • Business Division
  • Personal Division

Every taxpayer is now managed from both a customer service and compliance standpoint by a single division. I discuss the remit of each of these divisions further below.

As part of the realignment, there has been a complete reallocation of resources across these divisions with a significant shifting of headcount to manage the affairs of larger taxpayers.

The reallocation statistics are telling.

Under the old model, those divisions dealing with the largest taxpayers (Large Cases Division and the Second Tier Districts) were responsible for 70.7% of Revenue’s total net tax collections, yet they only had 13.2% of the resources. Under the new model, the total headcount allocated to the equivalent divisions (Large Corporates Division, High Wealth Individuals Division and Medium Enterprises Division) has increased to 23.5%
(See Appendix I).

This would suggest that Revenue perceives that the greatest risk of tax leakage lies at the level of the larger taxpayers and it has shifted its resources accordingly. That in itself is one of the stated objectives of the realignment, to ensure “a greater match of resources to risk”.

One of the other main objectives is to ensure greater consistency in the treatment of taxpayers, a key pillar in Revenue’s Customer Service Charter and its Statement of Strategy. By moving to a sectoral model, it should help to ensure that say, a pharma company in Cork is treated the same as a pharma company in Galway.

Overview of the national divisions

Large Corporates Division

Large Corporates Division (“LCD”) is effectively the corporate arm of the old Large Cases Division. It is responsible for corporates with an Irish turnover in excess of €190m or total tax payments greater than €18m.

LCD will operate through national sectoral branches, the split of which is largely unchanged from Large Cases Division. The one exception to this is the establishment of a new Financial Services branch to deal specifically with aircraft leasing, REITs and section 110 companies. This district is being led from Galway.

High Wealth Individuals Division

High Wealth Individuals Division (“HWI”) is a spin-out of the districts in Large Cases Division that dealt with high net worth individuals, being those individuals with net assets greater than €50 million. HWI is also responsible for non-residents with substantial economic activity in Ireland. The Division also has specific responsibility for pensions and anti-avoidance matters.

The €50m threshold remains unchanged from that of Large Cases Division, a matter which has come under close scrutiny of late. As part of a review carried out in 2018 by the Comptroller & Auditor General (C&AG) on the management of high wealth individuals’ tax liabilities, the C&AG observed that the €50m threshold was high by international standards and recommended that Revenue review this to ensure that it “remains appropriate”. Appearing before the Committee of Public Accounts in November, Niall Cody stated that the threshold would be revisited and suggested that consideration could be given to reducing this to €20m.

Medium Enterprises Division

The Medium Enterprises Division (“MED”) replaces the Second Tier Districts although it will deal with significantly more cases than its predecessor owing to a lower entry threshold. Unlike the Second Tier, MED will manage both the customer service and compliance affairs of its case base.

MED is responsible for the following organisations:

  • Companies with an Irish turnover of more than €3m (and less than €190m)
  • Companies with an Irish turnover of between €1m - €3m, where there are more than 100 employees
  • Construction companies with an RCT contract value greater than €3m
  • All companies who make claims for the R&D Tax Credit and/or the Knowledge Development Box
  • All companies supported by the IDA
  • Large legal and accountancy firms (including partners of same)
  • Government departments and public bodies
  • Subsidiaries/parent of MED corporates

MED also manages the affairs of certain individual taxpayers:

  • Proprietary Directors of corporates in MED Individuals with total income exceeding €500,000 on their Form 11 and an effective tax rate of less than 30%
  • Individuals with a capital transaction with total consideration greater than €700,000 and total capital losses (current year plus brought forward) of greater than €500,000
  • Individuals with total property transactions that have a value greater than €3m over the 3 most recent years

The MED case base is segmented into nine sectoral branches. This sectoral model will facilitate a more coordinated approach to risk profiling, meaning that each branch is better positioned to apply learnings from audits to taxpayers operating in the same sector.

Business Division

The Business Division is responsible for all entities with a turnover of less than €3m (other than those dealt with by LCD or MED). It also manages the affairs of Proprietary Directors and subsidiary/parent entities of companies in the Business Division. The Business Division is segmented into a number of local branches which we understand are responsible for taxpayers within their geographic region.

Personal Division

The Personal Division is responsible for all personal taxpayers, non-trading entities, trusts and not-for-profit organisations. This Division also has specific responsibility for Stamp Duty and Local Property Tax.

A structural breakdown of each Division is available in Appendix II.

How will the realignment impact taxpayers?

All taxpayers will be impacted by the realignment to some extent.

All cases have now transitioned to their new divisions and caseworkers. The one exception to this is pre-existing audits which will remain with the old caseworker. I understand that ongoing appeals have transferred to taxpayers’ new caseworkers.

Revenue will not be notifying taxpayers of their new division although Revenue’s contact locator has been updated to reflect the new structure.

Revenue has confirmed that taxpayers’ audit history will travel to their new division and will be very clearly visible to their new caseworker. So, to the extent that say, a company was subject to a VAT audit by a Second Tier District in 2018, it is unlikely that MED would carry out another VAT audit in 2019 (unless of course the caseworker thinks that there is sufficient risk there to warrant another audit).

For most taxpayers, the realignment will mean that their affairs are being dealt with by a new caseworker. I am already seeing increased engagement from caseworkers as they seek to familiarise themselves with their case base.


For taxpayers in LCD, HWI and MED, the increased headcount allocation was designed to facilitate more audit activity, and this has already commenced.

  • Proposed changes to the Code of Practice

Revenue is proposing a number of changes to the Code of Practice for Revenue Audit and other Compliance Interventions (“the Code”). Most of the proposed changes, are being introduced on foot of the new PAYE Modernisation regime and we understand the revised Code will be issued shortly.

One CAT-related revision to the Code was already published by Revenue in February 2019. The contents of Part 18 of the CAT Manual, which relates to CAT audits, has been incorporated into the Code.

  • Revenue compliance activity

Risk profiling

Revenue’s sophisticated approach to risk profiling continues to be the driver behind its compliance activity.

Revenue has long been adopting a risk-based approach to select cases for intervention to ensure that its resources are targeting those cases that will give rise to a yield on an audit. Central to Revenue’s risk assessment is its extensive use of the various data sources available. While taxpayer and third-party filings provide Revenue with vast amounts of data, Revenue is now drawing more and more on information from external platforms.

This data is only as powerful as Revenue’s ability to interrogate and analyse it. To this end, Revenue has invested significantly in its analytics resources to maximise the use of the data and its capabilities in this space continue to evolve.

“We use a broad range of data, intelligence and analytical technologies to identify and quantify risk. Insights and intelligence are increasingly important in directing our attention to new or emerging risks

Revenue’s data analysis processes are largely automated. First the data is cleansed to standardise it, then matched to the appropriate taxpayer and compared to the returns filed for that taxpayer. The data is also integrated into Revenue’s REAP (Risk Evaluation Analysis and Profiling) system which can subject the data to over 600 rules to generate risk indicators for each taxpayer.

In the past 12 months, I have seen audits triggered by anomalies identified by Revenue from a review of various data sources including Form 46G’s, Form 8-2’s, iXBRL accounts, customer reviews and contracts awarded by public bodies. It is important to note that anomalies don’t always mean that tax has been underpaid and they can often be explained…but once an audit notification has been issued, it can’t be reversed.

The taxpayer segmentation in Revenue’s new organisational structure also lends itself to more effective risk profiling and the increased knowledge sharing of industry-specific risks.

National projects

Revenue initiated a number of national projects in 2018 which will form the basis for some of its compliance activity in 2019:

Medical locums

During 2018, Revenue commenced its medical locums project which involved the appraisal of the tax affairs of 400 locums that have incorporated a business and are employed by a Personal Service Company or a Managed Service Company. The review has focused on such companies and their directors when the main source of income is a contract for the provision of medical services through an intermediary (and where the directors are the only employees of the company).

As part of this project, Revenue identified a number of issues that could give rise to an underpayment of tax. These include:

  • The tax-free reimbursement of non-vouched expenses or expenses not incurred wholly, exclusively and necessarily in the performance of the duties of the employment (e.g. expenses incurred on travel between an employee’s home and place of work)
  • Payments to family members that are not commensurate with the duties undertaken
  • The non-application of VAT on income arising from the provision of staff

Of the 400 companies appraised, Revenue has initiated audits on 200 of these. In addition, aspect queries have been issued to circa 100 directors associated with those companies

Service for Compliance initiatives

Revenue is actively carrying out a number of “Service for Compliance” initiatives in respect of certain taxpayer groupings. This typically involves Revenue writing to, or meeting with, taxpayers to remind them of their obligations and to encourage them to regularise their tax returns where these obligations have not been met.

These initiatives should be distinguished from formal compliance interventions and are viewed by Revenue as a proactive way of assisting taxpayers achieve full compliance. It is Revenue practice to carry out a number of follow-up checks on these cases and compliance interventions, including audits, will be initiated where Revenue has identified sufficient risks.

The key service for compliance campaigns carried out by Revenue over the past 12 months include:

  • RCT: In November, Revenue wrote to circa 200 principal contractors who had made 10 or more unreported payments in the last 12 months. A copy of the letter issued is included in Appendix III.
  • Letting of short-term accommodation: In September, Revenue wrote to 12,000 taxpayers who were in receipt of income from the provision of short-term / holiday accommodation to remind them of their tax obligations in respect of this income. I understand that Revenue will be conducting follow-up checks on a number of these cases in 2019.
  • PAYE Modernisation: Revenue carried out a significant number of onsite visits in 2018 to inform employers of their obligations under the PAYE Modernisation regime and to help them prepare for the transition. These took the form of “customer service visits” and “compliance visits”. While the majority of these visits were constructive and supportive, some of the compliance visits were carried out in the manner of formal Profile Interviews which involved a detailed review of underlying documentation and the collection of tax where errors were identified.
  • For taxpayers and practitioners, the varied approach to such meetings makes it difficult to gauge the level of preparation required. I would strongly advise that any meeting with Revenue, regardless of how it is framed by the caseworker, is treated as a formal compliance intervention. Being over-prepared can do no harm…being under prepared is likely to result in the escalation of the case to an audit.

Audit activity

Who and what is in focus?

No taxpayer is immune from Revenue attention and all are risk assessed through Revenue’s aforementioned risk profiling activities. It’s fair to say, however, that certain sectors of the economy have been scrutinised more than others. Revenue has openly stated that there was a particular focus on the motor industry, large tax practitioner and legal firms, public bodies and the construction sector in 2017. Clearly perceived by Revenue as sectors with a greater degree of monetary return it is not surprising that a dedicated MED branch has been established for each of these industries under the new structure.

Revenue’s audit activity continues to be wide-ranging. The statistics in the 2017 Annual Report (the latest available to us) tell us that over 70% of the audits carried out by Revenue focus on more than one tax head (broadly similar to the 2016 figures). It’s not surprising that Revenue continues to adopt a multi-tax head approach. At the commencement of an audit, most taxpayers, with assistance from their adviser, will present Revenue with the findings of a “self-audit” in the form of a Qualifying Disclosure, so a wider scope is unlikely to substantially increase the workload of the Revenue caseworker, yet it will most likely increase the audit yield.

Over the past 18 months, however, I have seen an increase in single tax head audits being carried out by Large Cases Division. This trend is driven by the fact that a number of central audit teams have been established in Large Cases Division to work across the case base of the various sectoral branches. These include audit teams that focus on single tax heads such as; Employment Taxes, Customs and Transfer Pricing (there is also a multi-tax head audit team and an e-Audit team).

In my experience, the majority of audits being carried out by Revenue over the past 12 months, whether single or multi-tax head, focus to some degree on Employment Taxes. This is because (i) it is typically the biggest yield-earner on audits and (ii) Revenue deliberately focussed on it in 2018 to ensure that employers were prepared for the transition to PAYE Modernisation. I expect this trend to continue as Revenue scrutinise the monthly PREM filings to identify anomalies. The main Employment Tax areas that Revenue are focussing on include:

  • Non-cash benefits provided to employees, such as vouchers and professional subscriptions
  • Expense claims and the documentation to validate the business nature of same
  • Contractors

Revenue is using e-audit techniques to interrogate data sources such as general ledger accounts, expense reports and payments listings to identify possible discrepancies in respect of the above.

The audit process

In the main, audits continue to be a drawn-out affair, and this can be frustrating for all parties involved. In my experience, there are two main factors driving a more lengthy process:

  • e-audits: Revenue’s statistics suggest that 43% of audits carried out by Large Cases Division in 2017 were e-audits, with the figure dropping to 12% for the other districts. In my experience, e-audit testing is being used on the vast majority of cases that are suitable for an e-audit (i.e. where the taxpayer has electronic data and is of sufficient size). Where an e-audit is involved, a pre-audit meeting is typically required in advance which means that the interaction with Revenue starts earlier. In addition, e-audits involve more sophisticated testing on larger datasets – this gives rise to a greater number of anomalies which need to be explained by the taxpayer. The duration of e-audits has been discussed at TALC and, interestingly, Revenue’s internal stats suggest that e-audits take less time to complete.

  • The “audit file”: Since the C&AG review of audit settlements, the “audit file” has evolved into a key feature of audits. The audit file includes all documentation relating to the audit including taxpayer correspondence, audit tests performed, information obtained, audit methods applied, technical analysis and conclusions reached. To ensure that audits are being conducted in a comprehensive and consistent manner, Revenue carries out ongoing assurance checks on a sample of audit files. In addition, all files are reviewed at senior levels in Revenue before settlements are agreed. For this reason, auditors are asking more probing questions to build up their audit file and are placing a greater weighting on the availability of documentary evidence to support their audit findings (e.g. board minutes, commercial agreements, log books, timesheets etc.).

The Irish Tax Institute has raised concerns at TALC on the length of the audit process and has recently put forward a proposal to Revenue on this matter. The objectives of the proposal are to:

  • Streamline the end-to-end audit process
  • Provide increased visibility on the status of the audit for all parties
  • Ensure that where delays in the process do occur, the reasons for such delays are easily identifiable
  • Avoid the issue of assessments in late December

While it is unrealistic to think that agreement can be reached on a fixed timeline for the completion of all audits (due to the differing nature and complexity of audits), I believe that it would be feasible, and beneficial for all parties, to agree timelines for the completion of certain key milestones. As we move into a potentially more intensive period of audit activity under Revenue’s new structure, it is an opportune time for stakeholder engagement.


Appendix I – Reallocation of Revenue resources under new structure

Source:https://data.oireachtas.ie/ie/oireachtas/committee/dail/32/committee_of_public_accounts/submissions/2018/2018-11-15_briefing-documents-finbarr-domoney-office-of-the-revenue-commissioners-32r001723-i-vi_en.pdf


Appendix II – Revenue Organisational Structure

Personal Division

Business
Division

Medium Enterprises Division

High Wealth Individuals Division

Large

Corporates Division

PAYE Modernisation Branch

Service to Support Compliance Branch 1 (see note 1)

Accountancy, Legal & HWI Branch

High Wealth Individuals Branch 1

Multi Tax Audit Branch

PAYE Service Branch

Service to Support Compliance Branch 2 (see note 2)

Agriculture, Health & Tourism Branch

High Wealth Individuals Branch 2

Transfer Pricing Audit Branch

PAYE Service Branch

Compliance Branch 1

(Galway & Roscommon)

Construction Branch

Pensions Branch

Alcohol, Tobacco & Multiples Branch

Self Assessed Service Branch

Compliance Branch 2

(Mayo, Sligo, Donegal, Leitrim and Longford)

IT, Science & Finance Branch

Tax Avoidance Branch 1

e-Audit

Audit Branch

Self Assessed Service Branch

Compliance Branch 3

(Dublin City Centre, North City)

Manufacturing Branch

Tax Avoidance Branch 2

Property, Construction &

General Manufacturing Branch

Compliance Branch

Compliance Branch 4

(Dublin South City, Dun Laoghaire Rathdown)

Motor Transport & Utilities Branch

Natural Resources,

Food & Leisure Branch

LPT Branch

Compliance Branch 5

(South Dublin, Fingal)

Public Admin and Non-Resident

Online Trading Branch

Financial Services (Banking) Branch

Stamping Branch

Compliance Branch 6

(Louth, Cavan, Monaghan)

Retail and Wholesale Branch

Financial Services (Insurance) Branch

Compliance Branch 7

(Kilkenny, Waterford,

Wexford, Carlow, Laois)

Medium Enterprises Division – Divisional Office

Information, Communications & Technology Branch I

Compliance Branch 8

(Kildare, Wicklow)

Revenue Technical Services Branch

Information, Communications & Technology Branch II

Compliance Branch 9 (Cork)

Motor, Oils & Transport Branch

Compliance Branch 10

(Limerick, Clare, Kerry, Tipperary)

Life Sciences (Biotechnology, Pharmaceutical & Medical) Branch

Compliance Branch 11

(Westmeath, Offaly, Meath)

Financial Services (Financing & Investment Funds) Branch

Business Division – Divisional Office

PREM and Customs Audit Branch

Sources: Revenue eBrief 196/18 and whodoeswhat.gov.ie


Appendix III – RCT Service for Compliance Campaign

Obligation to Correctly Operate Relevant Contracts Tax (RCT)

Dear,

I am writing to you, in your capacity as a principal contractor, to remind you of your obligation to correctly operate RCT. You will find a summary of how to correctly operate RCT overleaf.

According to our records you have made a number of unreported payments to subcontractors in the past 12 months.

A principal contractor who makes a relevant payment to a subcontractor other than in accordance with a Deduction Authorisation from Revenue in relation to that payment is liable to a penalty. The penalty applicable to an unreported payment is dependent on the subcontractor status and can range from 3% to 35% of each payment made. In addition, the failure to deduct RCT is a Revenue offence which may lead to prosecution.

Furthermore, you should note that the failure to operate RCT correctly will increase your likelihood of being selected for a Revenue audit or other compliance intervention.

Please ensure from now on that you operate RCT correctly in respect of all relevant payments to subcontractors.

Yours Sincerely

Branch Manager


RCT Obligations for Principals

RCT is a tax deduction at source system that applies to payments made under relevant contracts in the following sectors: construction, meat processing and forestry.

If you are a principal contractor in those sectors you must conduct all transactions with Revenue electronically through the eRCT system on the Revenue Online Service (ROS). You should:

  1. Notify Revenue of all relevant contracts.
  2. Notify Revenue of intended payments to be made to subcontractors.
  3. Deduct RCT from the payment in accordance with the deduction authorisation received from Revenue and provide details to the subcontractor of the tax you will be deducting.
  4. Submit a deduction summary, which is a monthly or quarterly return.
  5. Pay Revenue the RCT deducted from payments made to sub-contractors.

  • Contract notification

You should notify Revenue immediately after entering into a relevant contract with a subcontractor.

On submitting a contract notification, you will receive a Site Identifier Number (SIN) for the site or project. The SIN is created when you enter the site or project name and address on ROS. Revenue will notify all subcontractors of the SIN on their contract confirmation letter. You must use this SIN for all contracts that you submit to us relating to that site or project.

  • Payment notification

Before you make a payment to a subcontractor, you must notify Revenue of the gross amount of the intended payment.

  • Deduct RCT from the payment and provide details to the subcontractor of the tax you will be deducting

When you submit a payment notification, you will receive a notification in your ROS inbox. This notification includes the details of the amount of tax, if any, that you must deduct from the payment. This is known as the deduction authorisation. If you must deduct tax from the payment, you must give the details of the deduction authorisation to the subcontractor.


  • Deduction summary or return

Revenue will create a deduction summary based on your payment notifications. This summary lists payment notifications submitted to Revenue and the total RCT you are due to pay. This deduction summary will be available to you in ROS shortly after the end of the return period.

The deduction summary will cover either one month if you file monthly or three months if you file quarterly.

You should check the deduction summary to ensure that you have included all payments and that the amounts are correct. If everything is correct, you do not need to do anything else. This will be your return for the period.

You may make amendments to the summary before the 23rd of the month which follows the return period. Tax deductions made must be paid to Revenue by the same date.

Penalties

A principal contractor who makes a relevant payment to a subcontractor other than in accordance with a deduction authorisation from Revenue in relation to that payment is liable to a penalty. The penalty applicable to an unreported payment is dependent on the subcontractor status.

The following penalties apply to each unreported payment:

Subcontractor status

Penalty

0% deduction rate

3% of the relevant payment

20% deduction rate

10% of the relevant payment

35% deduction rate

20% of the relevant payment

Unknown

35% of the relevant payment


For more detailed guidance on RCT please visit www.revenue.ie

Revenue Commissioners Annual Report, 2003

Revenue Commissioners Annual Report, 2016

https://www.oireachtas.ie/en/debates/debate/committee_of_public_accounts/2018-11-15/7/

C&AG Annual Report 2017, Chapter 18

https://www.oireachtas.ie/en/debates/debate/committee_of_public_accounts/2018-11-15/7/

Revenue Statement of Strategy, 2017 - 2019

Annual Report, 2017

Source: Revenue Press Office

C&AG Annual Report 2012, Chapter 27