Accountants are being targeted by the Revenue Commissioners in the latest clampdown on professionals using aggressive tax avoidance schemes. Commissioners are extending previous operations that examined professionals’ use of tax planning to include accountants, lawyers and dentists.
Investigations into the use of tax avoidance schemes by professionals have proven lucrative for the Revenue Commissioners. An investigation into the tax arrangements of 800 medical consultants led to the collection of €61m in taxes, penalties and interest from just 276 consultants.
Revenue chairman Niall Cody explained to the Public Accounts Committee the approach taken. “The issues that Revenue challenged centred on the incorporation of a private practice with a view to securing an overall reduction of tax payable, through tax arbitrage between personal and corporate rates of tax. This identified significant tax risk and, therefore, a targeted sectoral compliance programme was implemented nationally,” he said.
Cody continued: “The tax risks that were identified included the purported disposal of goodwill by medical consultants to their controlled companies, cross-charges made between medical consultants and their controlled companies that lack any commercial basis, claiming personal expenses against professional income, insufficient or no supporting documentation to support large expenses claimed as tax deductions, excessive incorrect tax deductions claimed in relation to salaries-pensions of spouses and children, and deferring professional income to later tax periods, thus delaying taxation.”
According to Cody’s evidence, where in the past high net worth individuals were typically given advice on tax avoidance, this had in some instances now become advice centred on “deliberate default”. He argued “that is moving out of legal schemes to what we consider as illegal schemes…., we see them as beyond legality and acceptability.”
A report by the Comptroller and Auditor General published in September last year said that medical consultants were “being advised by their accountants” to set up companies as part of a “tax planning strategy”. One of those accountancy firms was Houlihan Cushnahan Consulting Ltd, which has been sued over its advice by medical consultants who are former clients. The firm’s partner Nicholas Cushnahan was this year severely reprimanded by CARB, fined €3,000 and ordered that he pay costs of €16,870 for “failing to co-operate adequately with CARB’s investigations”. In an email to AB, CARB declined to explain the nature of the original complaint against Cushnahan. However, it was reported that legal proceedings by clients were delayed until after the CARB hearings and its disciplinary decision reached.
(Houlihan Cushnahan was “restructured in August this year”, with Nicholas Cushnahan now operating through a new firm, Nicholas Cushnahan & Associates. He did not respond to two emailed requests for comment.)
A spokeswoman for the Revenue Commissioners confirmed that the use of tax avoidance strategies by professionals is a key focus of its investigations. She explained: “Revenue uses leading edge digital systems, data analysis and many third party data sources to identify tax evasion. It is our standard practice to constantly monitor new and emerging risk and Revenue is alert to the risks posed by the use of corporate structures by certain professionals.
“A focus of a number of our compliance programmes has been to address the tax issues arising from the incorporation of certain professionals’ and sole traders’ businesses….. Revenue will continue to conduct reviews of groups of professionals who are incorporating where there is little evidence to support the commercial reality and validity of the transactions.”
Aidan Clifford, technical director for ACCA Ireland, suggested that accountants consider carefully their response to this closer scrutiny. “Professionals are entitled to arrange their financial affairs so as to minimise or postpone their tax liabilities,” he pointed out. “Many do this by incorporating their professional practice because incorporation serves to lower the tax rate on profits reinvested in a business from potentially 55% to 12.5%. Incorporation also provides more flexible pension and retirement planning options as well as reducing the professional’s business risk. However, incorporation also allows the capitalisation of goodwill which can be particularly tax advantageous when combined with retirement relief.
“Medical consultants were successfully targeted by Revenue mainly because of a widespread misinterpretation of the law on one single issue: the capitalisation of goodwill on incorporation. It is reported that the majority of the consultants concerned were advised by one single accounting practice, although Revenue mentioned at a meeting once that there were about four practices in total involved. Some tax advisors still maintain that Revenue are wrong in their interpretation but substantial settlements were made by the consultants.
“The same issue simply does not arise in a general accounting practice although accountants who incorporated would be advised to make sure that they had good supporting evidence for their calculation of goodwill on incorporation. Most accounting practices use 1:1 for recurring fees, in their goodwill calculation and as the traditional valuation method it is, if anything, understated in the current market. Some practices used 1.2:1 for recurring and 0.2:1 for non-recurring and this may require better supporting calculation if it is to be accepted. Some capitalised brands as part of the goodwill on incorporation and that might be challenged as well.
“Given the stated Revenue intention of auditing professional practices, they would be advised to tidy up their record keeping in the ‘old reliable’ areas of motor and travel and subsistence. Practices operating parallel incorporated and unincorporated businesses will need to ensure that invoicing and cross billing is all correct and up to date. But as every accountant in practice knows, Revenue usually find that there is a missing invoice, that a disallowed expense was accidentally claimed or that a business trip was missing the necessary supporting documentation; and some sort of check may need to be written. But the biggest issue with Revenue Audit is the inconvenience and disturbances that a revenue audit causes the practice.”
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Commissioners’ successes
The Revenue Commissioners have targeted a variety of avoidance schemes in recent years, in particular those schemes that are regarded as artificial. Many of these have been imported into Ireland from the UK.
During 2016, Revenue settled 40 tax avoidance cases, yielding €10m in tax, interest and penalties. At the end of 2016, another 836 cases of suspected artificial use of tax avoidance schemes were continuing. There is also a focus on the use of offshore accounts to hide taxable income. Last year, Revenue collected €7.7m linked to the use of offshore accounts to evade tax. Over a longer period it collected €2.8bn from more than 35,000 cases of tax evasion that used offshore accounts.