tax controversy workshop 17 january 2019 · 2020. 5. 24. · tax controversy | construction...

January 2019

Tax ControversyConstruction Industry / Property Developers

Tax Controversy | Construction Industry/Property Developers 2© 2019 Deloitte Ireland LLP. All rights reserved.

Welcome Introduction

Niall Glynn


Agenda

Introduction Niall Glynn

Overview of Current Revenue & Intervention Landscape Feargal Kenzie

PAYE Debbie Jennings

VAT John Stewart

RCT Alan Kilmartin

Revenue Interventions Sandra Brennan

Conclusions Niall Glynn


What to get from Workshop

Share your experience in a private setting

Learn from counterparts in similar organisations

Ask questions as we go through slides

Become experts on Revenue Hot Topics

Learn how to approach and deal with Revenue interventions

Free follow up for everyone in attendance


Overview of Current Revenue & Intervention Landscape

Feargal Kenzie


Tax Controversy - Overview

Landscape continually evolving

Tax is being digitalised

Revenue’s access to

Information and use of

Technologies growing

Risk related behaviour is

driving Revenue audit/

compliance interventions

E-Audits will soon be the

norm


Tax Controversy – Construction / Property Industry

• Your industry is a target for Revenue.

• “In 2017, we continued to invest in and develop our data analytics function, to help us to manage risk, address non-compliance and allocate our resources cost-effectively. We piloted a range of risk assessment models and developed new models to identify risk in the mineral oils, construction and property rental sectors.”

(Extract from The Revenue Commissioners 2017 Annual Report published April 2018)

This showcases the link between the resource to identify risk and the audit policy to monetise it.

• Indication of the scale of industry in 2017 - 554,960 relevant contracts (only) notified to Revenue with a value totalling €49.12bn.

Construction Sector: 2017 Overview

Yield: €60.2m

12% of total yield from all interventions

Most frequently audited sector

Top of tax defaulter list


What are Revenue doing?

INTERESTING FACT: In 2016 Revenue’s compliance initiatives (HRI, HTB, AQ for example) in the construction sector contributed to increased revenues of €290 million. The Budget 2016 target was €20m.

Revenue Audit selection policy –based on RISK

RISKData Analytical Tools

(REAP / CRE / SNA)

Technology

- Revenue investment- Information

eRCTVAT

return / VRTD

PMODReal time Management Accounts for Revenue

Home Renovation Incentive (HRI)

Specific target


What is the Construction Industry tax footprint?

Reverse Charge for VAT on sub contractors has “taken them out” as a risk (in the main) – the principal is now the mark1

PMOD will record real time payroll records, facilitate benchmarking/outliers - % of staff to sub contractors, % of payroll to overall wages and salaries for example3

Property Transactions: Stamp duty returns/CG50 clearance & CGT returns/VAT payments/refunds5

The electronic record of sub contractors makes for ease of identification of potential short scenario’s where RCT not operated (electronic download of your

records)2

Expenses of travel/subsistence (including country money) will continue to be an area of interest 4

Cross Border: VIES/Intrastat/PAYE Exclusion orders/VAT registration/trigger local taxes 6


What is the Revenue Audit / Intervention landscape?

Role of “Electronic” in the process – Analytics, RFTS, e-Audits/IDEA software, eRCT, PMOD

Access to legislative power to access your information (S900’s….)

Joint Investigation Units – DEASP, WRC, NERA, Social Welfare - Site Visits/Dawn Raids

Revenue Commissioner tolerance

Code of Practice for Revenue Audits and Other Compliance Interventions

Role of the Qualifying Disclosure

Afterlife – Penalty, Publication, Prosecution and Appeal Process.

1

2

3

4

5

6

7


PAYE

Debbie Jennings


Tax Controversy

PAYE Landscape

PAYE Modernisation

(PMOD)

Gross Up Settlements

Revenue Intervention

Insights

Onus on employer to

withhold


Areas to watch for

PAYE – Common Pitfalls

Expenses

Life Assurance

Salary Sacrifice

Travel and Subsistence

Directors

Expatriates

Severance payments

Professional Subscriptions

Medical Insurance

Premiums –Gross versus

Net

Share based remuneration

BIK

Contractors


PAYE

Tax free reimbursement – “….incurred wholly, exclusively and necessarily in the performance of the duties of the employment….”

Motor Travel, Subsistence, Business Expenses

Tax Tip: anything tax free/tax efficient is scrutinised!

Civil service mileage &

subsistence rates

Record keeping vital

Flat rate basis or vouched

basis

Expense policy

Extensive Revenue guidance

Revenue intervention

insight

Normal place of work

Expect rationalisation /

testing by Revenue of the circumstance

presented

Linking employees

home address, site address, BIK, expense

position

Travelling appointments, directors, site

based employees (country money)

Watch for Criteria!


Normal place of

work


Record keeping vital


Travelling appointments, directors, site

based employees (country money)


Watch for Criteria!


Contractors

PAYE

• Continues to be an area of interest by Revenue – will get a renewed focus post PMOD.

• Employed V’s Self employed – Contract of Service V’s Contract for Services.

• Code of Practice for determining employment or self employment of individuals – last updated in 2007

Indicators Employed Indicators Self-Employed

Supply of labour only Owns his/her own business

Lack of control/management Is responsible for management of business

Not in business on own account Has control over what is done etc.

Cannot subcontract Can subcontract

No financial risk Can profit from business

Can provide services to more than one business at a time


Contractors

PAYE

PAYE –Contractors

Tax exposure – anything from ER PRSI to full payroll taxes

(on a grossed-up basis).

Personal Services Companies – “disguised employments”

being tackled in UK – changes in the future?

Issues:- Loss to exchequer

- Social insurance issues- Employment rights issues

Other areas of focus – Family wages, inbound/outbound

contractors/employees

Substance over form

Revenue Insight:

Contractors Project in the IT sector - 4 years and

deliberate behaviour – ER PRSI – the price of comfort?

Sole Traders – Risk Area


PAYE

Benefit in Kind

Tax Tip: BIK exemption for electric vehicles post 01/01/2018 (€50k cap from 01/01/2019)

Business Mileage &

Normal Place of Work

Pooled Vehicles

Vehicle Classification

Watch for criteria!

Record keeping

Medical insurance –gross v net premium

Mobile Phones-

allowances & private use

Accommodation - conditions

Professional Subs -

conditions

Record keeping


Recovering PAYE on a grossed up basis (Gross Ups)

PAYE

Finance Act 2017 –legislative basis for

‘gross ups’

Example:

€100 gross, marginal rate of 52%, tax due €52

versus

€100 net, marginal rate of 52%,

Re-grossed income €100/.48 = €208.33

Tax due €108.33

Applies where:

• Total non-operation of PAYE on all emoluments; or

• Employer tries to disguise payments of emoluments as something else

All payments will be treated as received

net by the employee

In effect more than doubles the outlay

(before interest and penalties)

Does not apply to genuine

misdemeanours


PAYE Modernisation

Real Time Reporting system for Revenue

Live from 1 January 2019 – monitor bedding in period (reminded of ‘sledgehammer’ post e-RCThoneymoon period)

Pressure points – Benefit in kind (motor vehicles), company credit cards, taxable expenses, professional subs

Visibility of in year adjustments – effect on taxpayers profile – trigger intervention?

Penalties for non compliance - €4,000 penalty per breach of PAYE regulations, €3,000 on company secretary per breach (item basis)

Strong governance, knowledge of policies/procedures/payments made, strong internal controls


PAYE Wrap Up

Invariable one chance to deduct tax from an employee

The settlement rate of tax can reach in excess of 60%

Layer this up with potential gross ups and the PAYE landscape can be very costly

Be aware of red flags – late filings, multiple adjustments, untimely payment of liabilities, large increases in employee numbers, large increases in monthly liabilities

Skeletons – options available – PAYE Self Correction, PAYE Settlement Agreements and Disclosures

Ongoing self reviews and PAYE healthchecks

Break Out

Session


PAYE Example

• Employer provided medical insurance to 1000 staff members

• Incorrect subjected the net premium (€800) to payroll taxes instead of gross premium (€1,000) for all employees

• What is the potential impact of the income missed?

Fact Pattern

• €200 x 1000 = €200,000 per year

• Four year review period - €200,000 x 4 = €800,000 missed incomeCalculation

• €800,000 x (52% + 10.75%) = €502,000 settlement before interest and penaltiesProactive

Approach – Best Case

• €800,000 treated as net - regrossed €1,666,666.67 x (52% + 10.75%) = €1,045,833.33 settlement before interest and penalties, publication?

Reactive Approach – Worst

Case

PMOD Penalties?


VAT

John Stewart

28Tax Controversy | Construction Industry/Property Developers© 2019 Deloitte Ireland LLP. All rights reserved.

Focus on Indirect Taxes

Tax Controversy | Construction Industry / Property Developers 29© 2019 Deloitte Ireland LLP. All rights reserved.

Royal & Sun Alliance

Lord Justice Sedley

"Beyond the everyday world … lies the world of VAT; a kind of fiscal theme park in which factual and legal realities are suspended or inverted”

Tax Controversy | Construction Industry / Property Developers 30© 2019 Deloitte Ireland LLP. All rights reserved.

VAT – Risk Areas

1

Disallowable VAT E.g. Food & drink for employees.

3

Connected Party transactionsCan be subject to specific rules.

5

Recovery of VAT on overhead expenses.Agreed Methodology?Annual review?

2

Input VATAre invoices received valid for VAT purposes?

4

Entitlement to Recover VATVatable or exempt activity?

6

Revenue rulingsHave they been properly implemented?Are they current?


Sale

Commercial

Vatable Exempt

Residential

Joint Option to

Tax

Transfer of

Business Relief

Sale

VAT Treatment Property Transactions


Lettings

Residential

Exempt

Commercial

Landlords Option to Tax

Lettings



CGS records

Acquisition

Annual Adjustment

Development

Change in Use

Capital Goods Scheme


Break Out

Session


Residential Property for Letting

Example

Developer NewCo Developer

13.5%

TPC

PSP

23%

13.5%

23%

Third Party Contractor

Professional Services Providers


RCT

Alan Kilmartin


Withholding tax which applies to certain payments by principal contractors to sub contractors in the construction industry

Managed electronically through ROS – contract, payment notification and post-payment matters

Sub contractor – restrictions as to the use of the tax withheld

Punitive penalty regime – payment based and based on affairs of sub contractor

Tax Controversy – RCT Landscape


• RCT is a withholding tax

• Applies to payments a Principal Contractor makes for specific services –known as relevant operations

• Penalties can be significant and are linked to the recipients RCT rate;

What, when and how does it apply?

Relevant Contracts Tax

Contractors RCT Status Potential RCT penaltyPotential penalty on

€150k payment

0% 3% €4.5k

20% 10% €15k

35% 20% €30k

Not registered 35% €52.5k


Common pitfalls

Relevant Contracts Tax (RCT)

Principal Contractors

Middleman

Developers

Connected Persons

State & Semi-State

Water, Gas,

Electric

Telecoms

Not registered as a Principal Contractor, ‘man in the middle’ e.g. landlord – tenant works

Oblivious Principal


Common pitfalls


May have an RCT registration in place but not including all relevant services, e.g. repairs

Unaware services within remit of RCT

Single Contract

Goods

Maintenance

Repairs


Payment Controls

AP inputs

Common pitfalls


Issuing payments before obtaining Authorisations

Not operating system correcting


Company A Company B Contractor

Common pitfalls


Non or only partial operation of RCT between group entitiesPayments for or between group

companies


Common pitfalls


Incorrectly charging or recovering VAT on RCT servicesVAT not treated correctly

Reverse Charge

VAT

RCT services

Recovery?

Non RCT services


Common pitfalls


Oblivious Principal

Unaware services within remit of RCT

Not operating system correcting

Payments between group companies

VAT not treated correctly

Connected Persons

Unreported Payments -v- Post Payments

Repairs -v- Maintenance

RCT Contracts

Deduction summary adjustments & surcharges

Break Out

Session


Pop Quiz

1 Is there an amount that can be paid without RCT/VAT being operated?

2If there are multiple contracts with the same subcontractor, must each contract be notified separately?

3Sometimes an invoice/document will be for an RCT operation while RCT would not apply to other invoices/documents from the same subcontractor. What is the correct procedure?

4 What is the distinction between repairs and maintenance?

5 Does RCT apply to skip hire, landscaping, painting?


Revenue Interventions

Sandra Brennan


Significant Changes in Recent Years

Technology

• Data Analytics

• e-Audit

Personnel

• Auditor profile

Revenue Approach

• Structured

• CCF


Types of Revenue Interventions

Revenue Non-Audit

Compliance Interventions

Risk Management

Interventions – 201,603

Assurance Checks –

416,662 Tip: Non-audit compliance interventions can lead to a Revenue Audit – nature of response is key Unprompted Qualifying Disclosure Available

Revenue Audits

5,220

Revenue Investigations

66


Notification - 21 days notice is a short timeframe - Is an extension required?

Scope - review scope of revenue audit – revenue are highlighting the risk areas

Information requested in advance – Revenue are prepared

Formality of the Revenue Audit process

Revenue Audit

Ability to make an unprompted qualifying disclosure no longer available


Engagement with Revenue Auditor – co-operation

Time to prepare is crucial to a positive outcome

Identify issues/high risk areas

Quantify underpayments – decision on qualifying disclosure

Revenue Approach – other matters / other years

Opening Meeting – attendees / strategy

Managing the process

Strategy

Brand / Reputation Risk


• Unprompted Qualifying Disclosure

• Prompted Qualifying Disclosure

Disclosures

Tax Tip: once an unprompted or prompted qualifying disclosure is accepted by Revenue you are protected from publication

Disclosures Category of Behaviour Penalty % Qualifying Disclosure Full Co-Op Penalty No Disclosure made full

co-operationFull co-operation

not given

Unprompted co-operation

Prompted co-operation

AllCareless Behaviour without significant consequences

20% 3% 10% 15%

First DisclosureCareless Behaviour with significant consequences

40% 5% 20% 30%

Deliberate Behaviour 100% 10% 50% 75%

€100,000 tax liability can attract

penalties of between €3,000 and

€100,000


Conclusion

Niall Glynn


Recent Issues

Valuations LossesOffshore

Structures

FamilyOwned

Business

Domicile

Levy


Action Points


Action Points & General Review

Tax Health Checks

Consider your control framework


Healthcheck – when to do one?

Healthcheck

Change in personnel

Default position –every two

years

In advance of a M&A event

Following discovery of a process error outside of the self-correction

period

On receipt of a Revenue

Audit notification

letter

Director’s compliance statement

Shareholder report / AGM

No Audit in recent years

In advance of PAYE

Modernisation


Consider your control framework – Risk Areas

Processes Procedures TechnologyPersonnel

THANK YOU

Important notice

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tax controversy workshop 17 january 2019 · 2020. 5. 24. · tax controversy | construction...

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