Revenue Commissioner Marvin Gaerty told Vanessa Macdonald that defaulters and evaders usually regularise their position as soon as they know they have been found out – but warned there would be zero tolerance for those that did not.

It is very worrying that there are so many different answers whenever I ask how much VAT revenue actually is, because the picture is complicated by assessments, arrears, interest and payments

The amount of arrears makes it look as though the department is inefficient when it comes to collecting revenue, which is far from the truth.

If people do not submit a VAT return – or income tax return, for all that matter – the department issues a best of judgement assessment, based on information available to the department such as previous years’ returns. But this could be wildly inaccurate, either on the low or high side. But whatever the department calculates, that amount remains there in the system. These cases have been accumulating over the years but no one knew where to start.

After commissioning an internal exercise to delve into this very issue the results show that approximately 90 per cent of the arrears are made up of estimated assessments.

This, in my opinion, clearly shows that the arrears are in the majority made up of estimations issued by the department because no return was submitted which may have been overstated. The VAT Department must now focus on reviewing these cases and action must taken immediately.

The message we portray from now on has to be clear: we are on top of things and as soon as things go wrong with your tax, a red flag will be raised; if you are defaulting, we will let you know and we will do all that we can to help you to regularise your position; but if you ignore us and carry on defaulting, then we will do all that the law allows us to make sure that you do not get away with it.

A year ago, there was a scheme for people to regularise their VAT position. How many came forward and what was the amount paid?

The scheme acknowledged that the problem was the interest charged and penalties which could add up to four or five times the amount due itself. Even reducing the interest rate and penalties to 20 per cent may not be enough of an incentive. The manner in which the appropriation system worked, although in accordance with the law, was extremely draconian. One cannot expect to be compassionate with defaulters but unless the department takes action in good time, it makes it far more difficult to collect what is due.

The first thing we did when I came here was to suggest changes to make appropriation system fairer – one of the measures promised by the government. For example, there was a short-payment penalty imposed if someone did not make the payment in full and on time. This was effectively a late filing penalty, however, at the same time the legislation also imposed a late payment penalty – and it clearly did not make sense to have both. So we did away with the short-payment penalty completely.

You have to prioritise and audit the cases where there is most risk of irregular activity

You also had taxpayers who did not make VAT payments in the first and second periods of the year because of cash flow problems – but then paid it in full in the third and final instalment. In the past, we would penalise them for the first and second missing instalments, and the payment made by the taxpayer would go towards that, rather than the actual VAT due. The law has now been amended so that once you submitted your VAT return for a VAT period on time and payment made in full that period would be closed. This provides a good opportunity for businesses which have problems of arrears to become compliant.

We also reduced the interest rates from 9 per cent to 6.5 per cent.

However, there are taxpayers who are in very deep financial trouble so we issued a legal notice a few weeks ago which gives the department the discretion to waive part of the interest due (in addition to the penalties as was the case). This will only apply to balances prior to January 2104.

Decisions in respect of approved/disapproved remissions taken by the internal board set up specifically to approve remissions will be reviewed by a Remissions Auditing Board, to be set up by the Finance Minister, which is independent of the department. The independent board will be auditing both the process and the actual remissions approved/disapproved so as to ensure that all applications are treated fairly and consistently. And there is now a protocol and formula establishing how to assess applications.

There are now no more excuses.

Another area which is being tackled is the Final Settlement System where employers deduct national insurance contributions from their employees’ salaries and do not pass them on to the Inland Revenue Department.

The government introduced the option of a flat rate of 15 per cent on rental income in an effort to encourage people to declare it. If they do so, won’t they fear investigation of past activity?

A new system effectively caps the tax payable on rental income to 15 per cent of the gross rent. The system is optional and very similar to the property tax and investment income tax, i.e. one can still choose to declare the rental income in a tax return and be charged to tax at the normal (applicable) tax rates. The new system will apply to rent received during 2013. From next year one has the opportunity to declare their rental income in a special form and pay tax at 15 per cent on the gross rental income – this income will not be part of the income declared in the annual tax return which means those who are non-filers will not be required to submit a tax return if they choose to submit the special form. Details of the system are to be announced soon.

There is a perception that there is widespread evasion when it comes to rentals, however, we believe that it is not nearly as bad as people think.

The Inland Revenue Department does a number of exercises on a regular basis – and we do a considerable amount of enforcement.

For example, as regards commercial property, if the lessee wants to deduct the rent he is paying as a business expense, this expense is not allowed unless he identifies the lessor – and of course, we then check whether the lessor is declaring that rental income.

Our automated systems can search through individual taxpayers and identify those who have more than one property; one may assume one to be their residence and perhaps the second a summer house. The more properties the taxpayer has, the more likely it is that he is renting them out. We then check whether he is declaring any rental income.

You have to prioritise and audit the cases where there is most risk of irregular activity.

There are obviously other initiatives which will help us to detect undeclared rental income.

There is another point that is overlooked: landlords still have the option of paying according to the old system, deducting their expenses and paying on the net income. I believe that there are a number of taxpayers who do not declare their rental income because they are not aware that certain deductions can be claimed which could actually result in no tax being payable – for example, those who take out loans to purchase property for rent.

What will happen to those who start to declare income as from this year? Will you investigate what they did in the past?

The perception that we will start investigating people on undeclared rental income because a new 15 per cent regime is to be introduced is wrong.

First of all if one declares rental income in 2013 or 2014 it does not mean that he was previously not declaring rental income.

The last thing that we want is to discourage landlords from coming forward and starting to declare their income. We are looking forward, not backwards. This scheme should not be a trigger for people to be investigated about their past because they regularise their position.

We will obviously continue investigating people on the basis of risk assessments, of reported irregularities, of crossmatches from tenants’ payments and so on – as we have done so far. No more. No less.

The reality is that it was the intention of the IRD to step up enforcement of rental income before the idea came about to introduce the 15 per cent regime. It was felt that once enforcement increased, it would be a good idea to provide an incentive to taxpayers to start being compliant. One can also look at it from another angle, i.e. honest/compliant taxpayers who may be paying tax at 35 per cent on their rent will now have the opportunity to pay tax at an effective lower rate.

Taxpayers will be given the opportunity to declare past undeclared rental income and pay tax at reduced rate such as 15 per cent. Details of how this will work will be announced.

The government also announced an asset registration scheme where taxpayers would pay 7.5 per cent. How does that fit it with the rental scheme?

The asset registration scheme requires the registration of eligible assets while the reduced tax rate on past undeclared rent requires the declaration of income, i.e. rent.

If one did not declare, for example, €10,000 rental income, it would not make sense to register the property which is being rented out and pay tax at 7.5 per cent on a property worth for example €200,000 (partial registration is not allowed). So in such a case, one would be better off declaring the rent and paying for example €1,500. The two complement each other.

Personally I am fully against these type of schemes. However, the reality is what it is: there will always be those who get away with it - although everything comes at a cost, which in this case is peace of mind. Those who evade tax need to find ways of hiding their undeclared funds which results in added risk.