Friday 4 December 2009

November tax figures - not as good as they seem

An Saoi: Newspaper headlines suggest that the decline in tax revenues is bottoming out, and indeed the November figures themselves look at first glance quite reasonable. But a more detailed analysis may suggest otherwise.

The first issue to consider is how the Central Bank strike last Friday influenced the figures. I understand from friends in the Revenue that repayment instructions were not sent to the Central Bank for some days before the strike, effectively stopping Revenue refunds from 25th November onwards. This is particularly significant in a VAT filing month, such as November, where many repayment claims were only filed electronically on 23rd of the month.

The second issue is the departure of much of the Revenue’s middle and senior management on the Government’s ISER programme. Approval for larger refunds requires sign-off from higher grades, who have been clearing their desks and offices since early November and have not been replaced. Many advisors have complained recently about delays in getting approval for large repayments, and this position will only get worse with the departure of perhaps 25 per cent of Senior Grades.

Thirdly, the fairy godmothers have been at it again. Corporation Tax now exceeds the annual target with one month remaining. This is an incredible performance considering the huge level of corporate tax refunds made this year. For a summary of corporation tax repayments made in 2009 see the written reply to Joan Burton’s question, Ref No: 42636/09 on 24th November.

Looking at the figures themselves, I am afraid I cannot see the signs of bottoming out suggested by for example the Irish Times new right wing guru Pat McArdle. The self-employed Income Tax figures are swollen by the way the Income Levy is assessed. It is charged on income before deducting pension contributions and capital allowances. It is therefore assessed on a figure perhaps much higher than the taxable income. This perhaps raises the question of Alternative Minimum Tax. The effectiveness of such a restriction on the use of tax schemes can be seen in a written response received by Ms. Burton on 3rd November last, ref. 38989/09.

The VAT returns also look very weak, particularly if there is between €100M- €125M in un-issued refunds lurking. There is no sign of either an increase in consumer spending, which would lead to increased VAT being paid or conversely in VAT repayments arising out of investment. The continued low level of customs duties is another sign of these weaknesses.

It is important to note that these figures are before the implementation of any further deflationary cuts by the Government and also and perhaps more importantly the withdrawal by the European Central Bank of their support mechanisms, which have kept the Irish banks’ afloat. I will try after next Wednesday’s slaughter of the innocents to provide an updated view of 2010 projections. Comments welcome, particularly from Dept. of Finance.

7 comments:

Proposition Joe said...

Here's the data from Joan Burton's PQ on the minimum effective rate.

The numbers aren't huge, but not to be sneezed at either.

Bringing the threshold all the ways down to €75 seems a bit extreme though. Coupled with an increase in minimum effective rate to say 35%, the effect in the €75k-100k range wouldn't be to reduce the impact of over-sheltering (as this isn't prevalent in that income range). Rather it would just equate to straight tax rise.

An Saoi said...

@ Joe The effect of the "temporary" levies is very similar and perhaps a minimum contribution rate is a lot more honest. The choice of income limit and minimum rate is one that is open for discussion. The role of an alternative minimum tax is to restrict excessive claims of capital allowances & other reliefs not to collect additional tax from the majority of tax payers who do not use such schemes. The Deputy's question provided a wide range of income points and AMT rates. Excessive tax planning goes on at all income levels from €50,000 upwards, in particular film relief.

Pavement Trauma said...

"Excessive tax planning goes on at all income levels from €50,000 upwards"

That's an interesting statement - would you have a source for it?

" in particular film relief."
The tax cost in 2007 for film relief was €91 million or about 2% of the €4.5 billion of taxes paid that year by those in the 60K-100K range (as per today's Irish Times).

An Saoi said...

Film relief is one big scam, mainly marketed to those in employment and with sufficient income taxable @ 41%. It works as follows,

1) The taxpayer "buys" shares, putting up a certain amount and "borrows" the balance of the cost of the shares.

2) He sells the shares for less than the total at 1, but enough to clear the loan.

3) He claims tax relief and gets his original investment plus some additional money from the State.

The main gainers are the accountants who operate the scam and Anglo Irish Bank, which was the main funder. Now most of programmes made using film relief are pre-sold e.g. the clinic, Ros na Rún, Fair City etc.

Now the other area of excessive claims is in relation to AVCs. In many cases the individual is also being ripped off because of the level of charges. Over funding of pensions is widespread, particularly in the public sector. It is also generally poor value.

Antoin O Lachtnain said...

Re the film industry - without tax breaks or direct government investment, film production and foreign TV production in this country would more or less stop. No more films or TV programs would be made here. This is just the nature of the film/TV business. Maybe you are right and this is what should happen, I don't know.

If the accounts of tax provided by the Department of Finance are really so greatly influenced by a one-day strike, then someone really should be fired and professional management accountants should be brought in from the outside. This is an unacceptably crude way to account for revenue.

Anyway, this blog has been (rightly) focused on the challenges relating to creating new jobs and retaining existing ones.

Sustaining existing jobs and creating new ones should be at the heart of budget policy during a time of recession. However TASC seems to be focusing on budget policy as a means to redistribute wealth. This is a laudable objective, but it seems like a strange time to be setting about it.

An Saoi said...

Antóin, Direct support would be a lot cheaper than the current manner of tax based support. As I pointed out, almost all relief is granted to productions which are pre-sold. The idea of the film relief scheme is that it would act as a spur for risk capital. It has not done this. Indeed direct support is targetted at the risky ventures. I would suggest that almost all of the cost of the tax relief went into the hands of advisors and banks with the only real benefit to the programme producers being access to slightly cheaper loans for cash flow purposes. I would suggest that those jobs, other than in professional practices & banks, are very expensive.

Antoin O Lachtnain said...

I find that hard to accept. I can see how it's possible that the financing mechanism at present is expensive (although I doubt there is any cheap way to finance a movie). But I cannot see how the government can beneficially get involved in picking winning film projects, especially if it is going to be looking for 'risky' ones.