Opinion: Local Property Tax system is wide open to constitutional challenge

For something that attracted such a public outcry when it was introduced, Local Property Tax — LPT — has become tolerated, if not fully accepted, very quickly.

One reason for this is that people knew what they would have to pay, right up to the end of 2016. LPT is predictable. People quickly lose interest in anything predictable.

The Revenue, however, remains fascinated by LPT, even though it is only a tiny component of the overall tax take. 

It seems that the €500m which will be collected from LPT will only account for about 1% of the total tax take from the country in 2015.

However, LPT provides Revenue with access to information that they might otherwise not have had. 

They don’t just know where you live, they now know all about your house as well.

LPT also provides additional tax collection methods to the taxman. 

If you pay your LPT in one lump sum, you might have received a letter recently from Revenue inviting you to spread your payments out over 2016.

Revenue are not concerned about your cash situation. They don’t want to make life easier for you by putting you on an instalment system. 

Instead it’s because collecting tax from employers, or government departments, or via monthly direct debits is easier for them than chasing individuals for single lump sums.

Encouraging people to pay their LPT in instalments throughout the year, along with some other strategies like blocking the sale of a property unless the LPT has been paid, works well. 

So well that Revenue can claim high levels of compliance with LPT in every county in Ireland — from 91.3% in Donegal to 99%+ in South Dublin and Laois. This is a system that isn’t broken, yet there are now official proposals to fix it. Why?

The property values on which the tax is based were due to be re-estimated in 2016 for LPT payable in 2017 and beyond. 

The initial valuations dated from May 2013. Residential property prices have increased since then. Between May 2013 and May 2015, property prices on average increased by 25%. 

This increase varied depending on the area and the type of property — apartments in Dublin jumped by more than 40% in the same period. 

As property prices increase, so too will local property tax. The big jump (always presuming property prices continue to increase) would be in 2017, when the increase in values between 2013 and 2017 has full effect.

Property valuations

LPT is charged by reference to property valuation bands which go in steps of €50,000, so many of us might not be affected much, if at all. 

Others might be charged a lot more. 

The Government asked one of the original designers of LPT, Dr Don Thornhill, to examine and respond to the implications of developments in the property market.

Dr Thornhill made several recommendations, among them a suggestion that LPT should be much more closely aligned with the budgeting process in local government. 

He even went so far as to suggest that the tax be renamed the “Local Council Tax” (LCT instead of LPT) to emphasise that it is a tax raised to pay for local council services. 

Every council would set its own rate of LCT. Such new budgeting processes would take time to establish, so as a holding measure the property revaluations due in 2016 would be deferred to 2018 or 2019. 

From the taxpayer’s perspective there would be no change until 2020.

As far as I can establish, the Thornhill proposals are being left for the next government to consider.

The finance minister has already stated his intention to defer the revaluation date to 2019. That deferral may not be as straightforward as it sounds. 

More often than not during the years, the Supreme Court has defended the right of the Oireachtas to raise taxes and challenges made by taxpayers on constitutional grounds have rarely succeeded. But there is a constitutional question mark over a tax system which attempts to collect monies based on out-of-date information. 

As residential property prices increase and more new houses are built, we may even see properties being marketed as being ‘pre May 2013’, with lower LPT valuations than new residences.

Deferring valuation

The Thornhill report highlighted this problem and recommended that the deferral only take place along with the overall redesign. The current position — the deferral of the valuation date without undertaking an overall redesign — leaves the LPT system open to constitutional challenge.

Another of the Thornhill recommendations also needs urgent addressing. This is the proposal that LPT payments should not be allowed as a deduction to landlords against income or corporation tax.

At the moment they are not allowed anyway, so this proposal closes off future relief for landlords. It’s wrong because refusing this relief increases the amount of income tax landlords pay. 

It makes what is supposed to be a property tax just another form of income tax and another driver of costs in a difficult rental market.

No one wants there to be big jumps in LPT bills from 2017. The way to achieve this, without prejudicing the integrity of the system already there, is to carry out the scheduled revaluations in 2016 but taper down the rates of tax charged. 

This means that the LPT payable will be based on up-to-date valuations and removes any constitutional question mark. That would better suit both government and taxpayers.

Brian Keegan is director of Taxation with Chartered Accountants Ireland


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