Who’s there to seal tax loopholes?

IN ORDER to entice private enterprise into the building of student accommodation the government offered a tax incentive under a scheme known as Section 50 relief.

Nobody should be even remotely surprised that such an incentive has had an impact on tax revenue.

Revenue officials estimate that it has led to an elaborate tax avoidance scheme that has cost the exchequer millions of euro.

Tax avoidance schemes are always likely to exist. It is important that people should not make the mistake of confusing tax avoidance with some of the illegal tax-free bank schemes that were the subject of recent scandals.

The bogus offshore schemes promoted by National Irish Bank and Ansbacher, or the registering of accounts under false foreign addresses in order to evade the Deposit Interest Retention Tax (DIRT), constituted illegal tax evasion, whereas tax avoidance is always within the law.

The scheme to promote the building of student accommodation was made attractive to private investors by allowing them to obtain tax relief on the money used to construct the buildings. But some enterprising people then further availed of other incentives in the tax law designed to promote charitable and educational projects by obtaining a designated tax status to avoid paying the 42% tax on the rental money paid by the students in the same buildings for which tax incentives had already been granted.

Thus some people availed of two different forms of tax relief first on constructing the building, and then on rental earned from the same structure.

"It's remarkable that in the wake of the DIRT inquiry that the banks are using their best tax advice on ruses aimed at short-changing the Exchequer," Deputy Pat Rabbitte of the Labour Party complained. He enjoyed good press as a result of his excellent work in exposing and highlighting the DIRT scandal. But there is no real comparison with the DIRT issue and this tax loophole. One amounted to illegal tax evasion, whereas the other was legal tax avoidance.

There is a whole industry of tax consultants and tax advisers employed by rich individuals, as well as banks, companies and different industries to advise on ways of avoiding tax. If tax loopholes are exploited, it is absurd to blame the people who exploited them.

The real blame lies with the politicians who introduced the loopholes in the first place, as well as their advisers, if they failed to warn of such loopholes.

The whole thing only came to public attention when the Department of Finance announced that the Minister had moved to shut-off the tax loophole that has been exploited by investors for up to three years. From now on, investors who have not entered into binding contracts will not be able to benefit from the loophole, but those who were already signed up will be able to benefit for the ten-year duration of the tax relief scheme.

In the circumstances Deputy Rabbitte is perfectly right to ask how much tax revenue is likely to be lost, because the government are primarily responsible in their role as lawmakers, but the opposition must also shoulder some of the blame for failing to spot the loophole. The role of a constructive opposition is not merely to criticise after things go wrong, but also to anticipate things that might go wrong. We need more constructive opposition.