BRIAN KEEGAN: New thinking needed to up tax compliance level

It’s not just politicians, business groups, unions and individual taxpayers who lobby government for tax changes. Government agencies and semi-state bodies also have a tilt at the Minister for Finance in the run-up to a Budget.

Most organisations publish what they’ve lobbied for. But it was RTÉ which published the news, a few days ago, that the IDA had sought tax exemptions for Airbnb lettings, car sharing company Uber, music streaming and firms which provide non-bank finance.

The IDA idea of exempting income from the so-called sharing economy isn’t new. A few years ago, the then UK Chancellor George Osborne introduced a £1,000 exemption for income from letting accommodation along with another £1,000 exemption for small services.

The idea was spun as a way of showing how a caring British government could also be a sharing one by encouraging new forms of social enterprise made possible by social media. It also served to make UK tax compliance figures look a lot better.

The UK publishes a statistic every year called the Tax Gap - a measure of the amount of tax government thinks it should collect compared to what it actually does. The smaller the gap, the better the tax system is working. The problem is that few enough people think to disclose some of the money they get from a casual accommodation letting or from a profit made on eBay. No better way, then, to close the Tax Gap by making such omissions legal.

Had the IDA restricted its ambition to a more modest exemption for sharing economy income than the €5,000 which it was reported they had sought, perhaps they might have got somewhere. A €5,000 income exemption would imply a loss of revenue of anything up to €2,500 per claimant, and that’s not an amount any Minister for Finance would surrender lightly. Nevertheless, the problem which remains for Revenue is that it is costly to pursue relatively small amounts of money from a relatively large number of taxpayers.

The Irish tax system works reasonably well for employees, less well so for the self-employed, but is cumbersome at tackling the increasingly common situation of employees who earn some money outside of work.

There will always be some income which it is uneconomic to tax but nevertheless must be taxed if the integrity of the system is to be preserved. This is a dilemma facing all revenue authorities, but rather than just providing UK-style exemptions for some types of earnings, other governments are taking unusual steps to make their system work.

Estonia has decided that instead of requiring small casual businesses to worry about filing tax returns, they will be obliged to put their gross earnings into a special type of bank account. Then every quarter, the bank pays over 20% of what has been lodged to the Estonian revenue.

The concept is probably sound even if it might not look viable. If money can be earned via social networks in ways which weren’t anticipated a decade ago, it can be taxed in ways which weren’t anticipated a decade ago either.

Brian Keegan is director of public policy and taxation with Chartered Accountants Ireland

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