AIB markets tax avoidance scheme to universities

REVENUE officials have uncovered a complex tax avoidance scheme, which AIB has been marketing to universities.

Under the scheme, rental income from newly built student accommodation, which should have been subject to 42% tax, was diverted to a charitable company, where it was exempt from tax. This means the exchequer has lost millions of euro, while the banks and third-level institutions have made substantial profits.

Internal correspondence from the Revenue describes the tax avoidance scheme as "totally unacceptable" and an "abuse of tax relief". But an AIB spokesperson rejected any allegation of abuse of the tax laws and insisted it was a legitimate scheme they had been operating under the 1999 Finance Act for a year-and-a-half.

Finance Minister Charlie McCreevy is to introduce legislation next year to close the tax loophole. But Labour's Pat Rabbitte said it was clear the banks had not learned their lessons since the DIRT scandal.

Details of the tax avoidance scheme show the Revenue was very concerned that banks would market the avoidance scheme to other areas of the construction industry and third level colleges. One document reads: "Revenue has only recently learned that the scheme has been specifically set up for third level colleges. If the abuse is not closed off, it will undoubtedly be used by other colleges and could possibly extend to other projects in tax designated areas." While Mr McCreevy has moved to close off the loophole, investors will continue to benefit from tax-free rental income on projects already completed for the 10-year duration of the tax relief scheme. The loophole, known as Section 50 relief, was aimed at encouraging private investment in the building of student accommodation through tax incentives.

The Government targeted the tax relief at the investor alone, who would be able to offset the construction costs of student accommodation against the rental income.

But the bank's scheme involved ensuring that virtually all rental income, which would normally be liable to tax, was diverted to a company with charitable status where it was tax-free. This meant taxpayers were effectively subsidising both the construction costs and losing out on substantial tax revenue on rental income. While described as an "abuse of tax laws," the practice was not illegal, it was allowed under the 1999 Finance Act.