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Redress for Taxpayers (Special Report)

Chapter 4 - The Revenue Commissioners' refusal to make full retrospective payment of income tax to two widows

Chapter 4

The Revenue Commissioners' refusal to make full retrospective payment of income tax to two widows

This chapter describes my investigation of complaints made by Mrs Maria Kelly and Mrs Phyllis Nolan.

Mrs Maria Kelly's complaint

Mrs Kelly is a widow in receipt of a widow's pension in respect of her late husband's employment in the Civil Service. The pension is paid to her by the Office of the Paymaster General (PMG). She is also in receipt of a contributory widow's pension from the Department of Social & Family Affairs. Incorporated in each pension was a sum payable in respect of Mrs Kelly's children. Initially, pension payments in respect of Mrs Kelly's children under both pension schemes were treated as the income of the surviving parent for income tax purposes. However, in November 1988, the High Court decided in O'Carroll (see chapter 2) that the children's portion of a Garda Síochána widow's pension was the beneficial property of the children and should not be assessed as income of the surviving parent.

The decision in O'Carroll also applied to the pension payable to Mrs Kelly. On 8 April 1989, in the light of this judgement, Mrs Kelly claimed a refund of the income tax which had been paid on the element of her PMG pension applicable to her children. She received a refund of the excess tax deducted for the tax year 1989/90 in December 1989 through the PMG. She subsequently received, in 1990, a refund of income tax paid on the children's portion of the pension in respect of the years 1983/84 to 1988/89. In all, she received a refund of �15,542.55. The Revenue refused to allow a refund of income tax paid on the children's portion of her widow's pension for the years 1980/81 to 1982/83 on the grounds that the claim for repayment was for a period outside what it described as the statutory limit of five years specified in Section 133 ITA 1967.

Mrs Phyllis Nolan's complaint

Mrs Nolan is a widow in receipt of a widow's pension payable in respect of her late husband's employment in the Civil Service. As with Mrs Maria Kelly, she also received a limited refund of income tax paid on the children's portion of the civil service pension. The refund amounted to �4,599.17 and was paid to her in September 1990. The Revenue refused to allow a full refund of income tax paid on the children's portion of the widow's pension on the grounds that the claim for repayment was for a period outside the statutory limit of five years. Mrs Nolan was denied a refund of the tax paid on the children's portion of the pension for the tax years 1979/80 to 1982/83.

The Preliminary Examination

I conducted a detailed preliminary examination of the complaints from Mrs Kelly and Mrs Nolan.

Mrs Kelly

Mrs Kelly was widowed in February 1981. Following the decision in O'Carroll, she received a refund of income tax paid on the children's portion of the pension for the years 1983/84 onwards. No repayments were due, according to the Revenue, for the tax years 1980/81 to 1982/83 as these years were outside the limit in which refunds could be made under Section 133 ITA 1967. The Revenue, in accordance with legal opinion received, claimed that Section 498 ITA 1967 (as amended by Section 4(5) of the Finance (Miscellaneous Provisions) Act, 1968), which provided for the repayment of income tax for up to ten years did not apply in Mrs Kelly's case as that section only applied to repayments which were not covered by any other provisions of the Income Tax Acts governing repayment. In Revenue's view Mrs Kelly's case was expressly covered by Section 133 which provided for the shorter time limit.

Mrs Nolan

Mrs Nolan was widowed in April 1979 and received repayments for the years 1983/84 to 1987/88 as these were within the five year time limit. No repayments were due, according to Revenue, for the tax years 1979/80 to 1982/83.

Having carried out a preliminary examination, I asked the Revenue to review the decision not to refund the additional amounts of income tax paid by Mrs Kelly and Mrs Nolan. In addition, I asked the Revenue to consider making provision for a compensatory payment to restore the loss in purchasing power of any additional refund due to the complainants.

In its response, the Revenue said that there was no statutory provision for the refund of tax in these cases beyond the five year limit nor for the payment of compensation in such cases.

In the light of this response, I decided to commence a formal investigation of the complaints. On 22 July 1999, I notified the Revenue of my intention to carry out an investigation of the complaints under Section 4 of the Ombudsman Act, 1980.

The investigation centred on the issue of retrospective payments of tax and compensation for the loss in value of any additional refund due in the cases of Mrs Kelly and Mrs Nolan. The scope of the investigation of the compensation issue was extended to include six other cases where a tax overpayment had been refunded but where requests for compensation for loss in value had been refused. Details of these additional cases are set out in chapter 5.

The investigation process centred mainly on the examination of the tax files of the complainants and tax policy files supplied to me by the Revenue. The investigation also included research into relevant court decisions, legislation and general practice across the public service on the issue of retrospective payments and the payment of interest or compensation for loss in value.

The Investigation

The Legal Background - The O'Carroll case

In O'Carroll, an Appeal Commissioner determined a case in Mrs Breda O'Carroll's favour concerning the liability to income tax of a contributory pension which she was granted on the death of her husband who was a member of the Garda Síochána. The facts of the case are briefly set out in chapter 2.

The decision of the Appeal Commissioner was considered by the Revenue to be likely to have wide-ranging implications. It believed that it would lead to a significant loss of income tax and would trigger potentially large retrospective payments. In a memo prepared by a Revenue official, dated 20 March 1987, the question of appealing to the High Court was considered. In the memo the official noted that there would be:

"a substantial loss of tax revenue if the Appeal Commissioner's decision were to be accepted as Revenue policy".

Prior to the matter being considered by the High Court, it was the view of the Revenue that the children's contributory pension paid to Mrs O'Carroll under the terms of the Garda Síochána Pension Scheme was in fact the income of the children. In a memo dated 1 December 1988 a Revenue official wrote:

"The Children's Contributory Pension paid to Mrs O'Carroll under the terms of the Garda Síochána Pension Scheme was initially considered by the Revenue Commissioners to be the income of the children. When the Inspector subsequently pointed out that the scheme is almost identical to that of the Civil Service Widows and Childrens Scheme, Defence Forces Scheme, National School Teachers Scheme and presumably other State Pension Schemes and that the decision would have wide implications it was decided to take the opposite view ... The Appeal Commissioner, Mr Ó hUallaigh, held against Revenue ... Counsel opinion was sought which was not optimistic. Nonetheless the case was appealed to the High Court."

The decision to appeal to the High Court was taken, not on the premise that the Revenue case had legal merit but on grounds of expediency in that it would buy the Revenue sufficient time to assess the effects (in terms of loss of tax) of an adverse ruling in the Courts. The period from the date of the Appeal Commissioner's decision (September 1986) to that of the High Court judgement, which upheld that decision, was just over 2 years.

In its comments on a draft of my investigation report the Revenue took issue with this conclusion. It said:

"It is of course accepted that a by-product of taking the appeal was that there would be additional time to consider the full implications. But it would be wrong to imply that this was the only or principal reason for taking the case. The Appeal Commissioner's decision had the effect of turning the existing interpretation and practice on its head and had major implications for all pension schemes. Such an important point of principle could not be accepted without reference to the higher courts. Indeed it would be unusual if Revenue did not appeal such a decision."

My conclusion is based on information contained in the Revenue's files and I could quote six or seven extracts to support it. I will confine myself to just two further quotations, the first of which is taken from a memo written by a Revenue official when the question of pursuing the case further in the Supreme Court was being considered. The memo noted that it was the unanimous view that the appeal should not be pursued and that there was absolutely no prospect of overturning the decision of the High Court on appeal and added:

"It is worth recalling that when the issue first arose the view ... was that the child had a separate pension and that the income from that pension should be assessed on the child and not the mother. When the Inspector questioned the wisdom of this approach because of its widespread applicability, ... (it was) agreed to recommend pursuing the matter to appeal ... Thereafter it seems that decisions in this case were driven by implications rather than by consideration of the merits in Revenue's arguments. I think that there is a lesson for us all in the circumstances which led ultimately, to a fairly futile appeal to the High Court".

The Revenue did not appeal to the Supreme Court.

The second quotation is from a note dated 27 July 1989 from a Revenue legal officer to the Attorney General's Office outlining the background to the case:

"The Revenue Commissioners decided in April 1986 that, because of the wide-ranging implications of accepting the arguments in Mrs O'Carroll's case, the case was to be taken to appeal despite the fact that the Revenue case was weak in law ...

A case stated was demanded as a protective measure and counsel's opinion was sought. The Counsel's opinion received dated 17 February 1987, a copy of which is herewith, was not optimistic of success. Despite this it was decided that even if there was a strong probability that the Revenue case would fail, the case should be appealed to the High Court which course would apart from any other consideration allow sufficient time to assess the effects (in terms of loss of tax) of an adverse judicial decision. On 20 March 1987 the Department of Finance were informed that the appeal was unlikely to succeed but that it was being appealed for the reason outlined above."

Section 133 or Section 498?

It was accepted by the Revenue that the O'Carroll High Court judgement would have important consequences. In a note dated 8 March 1989 a Revenue official considered the implications of O'Carroll for the tax treatment of children's pensions. He noted:

"It would seem that all open cases and future cases must be settled on the basis of the recent judgement and that any years already settled should not be re-opened. However the taxpayer has the right under Section 133 ITA 1967 to require an assessment to be made provided the notice in writing is given within the five year limit.

Subsection (a) of Section 133 is at the taxpayer's option, subsection (c) is mandatory. In regard to subsection (c) the assessing procedure for 1987/88 and prior years would be completed.

I take the view that the term "settled" for the purposes of the tax memo* means in a PAYE case, where the source has not been assessed,
- the issue of a P.21 Balancing Statement
- the issue of a formal letter to the taxpayer advising him of the balance (if any) of the tax due or overpaid.
Such a case can only be re-opened on receipt of a timely claim under Section 133(a)"

*an instruction to tax inspectors as to what should be done.

This official's note was included in the papers submitted to a Revenue legal officer and to Counsel for consideration of the question of retrospective claims. In an opinion dated 4 May 1989, Counsel wrote:

"Having regard to the cases to which Section 133 of the Income Tax Act, 1967 is relevant then it is my opinion that the provisions of Section 133(1)(a) enable a person by notice in writing to the Inspector within five years from the particular year of assessment to require an assessment to be made ..."

In a comment on Counsel's opinion a Revenue official noted that it:
"confirms that retrospective claims should be admitted subject to the five year limit."

Following an indication from one of the teaching organisations that it might dispute the time limit for retrospection and look for ten year reviews by relying on another Section of the Act, i.e., Section 498 rather than Section 133, a further Counsel opinion was sought. An internal memo submitted by a Revenue official to a Revenue legal officer on 4 July 1990 said:

"In our view the only avenue by which these years could be re-opened is by a request from the taxpayer under Section 133(a) ... are we correct in assuming that the only avenue by which these settled years may be re-opened is Section 133 or does the taxpayer have the right to claim a repayment subject to the 10 year limit?"

A further opinion on the matter from Counsel, dated 20 October 1990, considered the question of retrospective claims in respect of 'settled cases' which he described as follows:

"The term "Settled" cases refers to:
(i) Those where the Inspector has issued a statement showing the balancing position for the year on Form p21; or
(ii) Form p21 has not issued but the Inspector has notified the taxpayer in writing of the balancing position for the year.

It is my opinion that taxpayers under Schedule E who require a revision of their liability by the issue of an assessment would have to avail of Section 133 and that the five year limit applies to it.

Furthermore, it is my opinion that Section 498 does not amend or modify or increase the rights of a taxpayer who has claimed under Section 133 nor does it give him a greater right.

I think it is also a construction of Section 498 that the words "save as otherwise expressly provided by any provision of this Act" would capture a situation under Section 133 which requires an assessment to be issued."

Analysis

Good administration in the area of taxation demands that Revenue should not retain taxes which are not due from a taxpayer. This principle is at the heart of the Revenue Charter of Rights, published in 1988, which refers to the role of Revenue staff as seeking to collect 'only the correct amount of tax or duty no more and no less'.

A logical consequence of the application of this principle is that tax which is not due but is collected by the Revenue should be refunded in full to the taxpayer. In this context, if, following the completion of an investigation of a complaint relating to a refusal to refund tax collected but not due, I were to find that the taxpayer was improperly discriminated against, the appropriate redress would involve a complete refund of the tax paid, i.e., with full retrospective effect. However for pragmatic reasons relating, inter alia, to possible implications for public finances (see Murphy v Attorney General, etc.), I have confined my analysis to the question of whether these taxpayers were entitled to the refund available under Section 498 of ITA 1967. I have done so on the basis that the High Court decision in O'Carroll was confined to Garda pension cases and that the Court's attention was not drawn to the much wider implications for a number of similar public service pension schemes.

In endeavouring to fulfil its role, Revenue has to be guided by the legislative provisions governing the repayment of income tax. Section 133 of ITA 1967 provides that an assessable person can write to the Revenue Commissioners and ask to have an assessment made in respect of any year within five years of that particular year. In the case of the complainants, any such assessment would have to take into account the O'Carroll decision in respect of the children's contributory pension and make the necessary tax refund. Section 498 of the Act limits the period for claiming refunds generally to 10 years 'save as expressly provided for by any provision of this Act'. The question which arises is whether it can be justifiably argued that Section 133 contains an express provision for an alternative time limit for repayment.

In considering the question of whether the time limits for making a retrospective claim are those which are deemed to apply under Section 133 or those explicitly stated in Section 498 the following points are relevant:

(i) The word 'expressly' is defined in the Oxford English Dictionary as "in direct or plain terms; clearly, explicitly, definitely". Unlike Section 498, refunds are not expressly provided for in Section 133. I accept, however, that they may be implicitly provided for on the basis that, by writing to the Revenue Commissioners for an assessment for a particular year, a taxpayer is re-opening consideration for tax liability in that year and, if there is an overpayment, a refund may be made.

(ii) Given that the words 'expressly provided for by any provision of this Act' are used in the Act, if it is to be argued that they do not apply to Section 133, then it would seem reasonable to conclude that these words were included to cover other situations provided for in the Act where a repayment could be made but where time limits other than the one contained in Section 498 would apply. I have referred in chapter 2 to Sections 191 and 307 of ITA 1967 where alternative time limits to the ten year rule are expressly provided for and where, as a consequence, Section 498 would not apply.

(iii) For two years following the judgement in O'Carroll, the question of retrospection was considered by Revenue. [I should mention that I would have liked to see what exactly was done in the case of Mrs O'Carroll but the Revenue was unable to provide any clarification on this matter from its records]. Before deciding that retrospection was to be limited to 5 years under Section 133, Revenue initially sought and received Counsel's opinion on the issue on two occasions (4 May 1989 and 20 October 1990). Following receipt of the first opinion it was noted by Revenue that Counsel had suggested that "as the matter is quite complicated it may be that a consultation or further facts might be necessary". In this context, given that the tax and legal experts in the area appeared to be unsure about the applicability of Section 133 to requests for retrospection following the O'Carroll judgement, it suggests to me that Section 133 could not be relied upon as a basis for expressly excluding the possibility of retrospective payments over the 10 year period, which is provided for in Section 498.

In its comments on a draft of my investigation report, the Revenue argued that it is not clear on what basis I could justify my statement that the tax and legal experts appeared to be unsure about the application of Section 133. A close reading of Counsel's opinion of 20 October 1990 (the fourth opinion obtained on the issues involved) showed that it related solely to cases where the taxpayer is looking for an assessment. Where such requests are made, this may or may not re-open their liability to income tax for the year in question but the express provision of the Section is to enable an assessment to be made. In O'Carroll the Court determined that an overpayment of income tax had been made because the children's contributory pension should not have been assessed as the income of the surviving parent. This ruling in my view should have applied to all similar cases and would not have required each person affected to give a written notice seeking assessment. In the absence of any limitation by the Court similar to that in Murphy v Attorney General, failure to apply the ruling generally would have been discriminatory and contrary to fair or sound administration. Indeed, the strict application of Section 133 would involve discrimination as the five year period would vary depending on the date each person asked for an assessment to be made.

(iv) My Office sought legal advice on the question of whether the claim for retrospection following O'Carroll fell to be considered under Section 133 or Section 498. The advice indicated that Section 133 merely provides for a relaxation of the Revenue's obligation to issue annual Schedule E assessments and that the purpose of Section 133 is to outline the circumstances where there is still a requirement on the Revenue to issue assessments rather than make an express provision for limited refunds. My legal advisors said that, having regard to the fact that the courts had already determined the main points at issue, there was no statutory prohibition on the Revenue from issuing revised assessments and processing the repayments subject only to the general 10 year time limit contained in Section 498. At no stage have the Revenue pointed to a statutory requirement that, in order to get repayment of overpaid tax as a result of a Court judgement, the taxpayer must invoke Section 133. It is interesting to note that in 'Taxes Consolidation Act 1977 - Guidance Notes', prepared by the Revenue and available on the Revenue website, reference is made to Section 997 TCA 1997 (which replaced Section 133 ITA 1967). The Guidance Notes state: "This section provides that assessments need not be made in respect of PAYE emoluments except in a small number of cases."

In a note prepared for the Minister for Finance in October 1989, a Department of Finance official noted that implementation of the High Court judgement in O'Carroll was estimated by the Revenue, in the case of the Garda Scheme and schemes with similar wording, at about IR�1 million and that the retrospective payments covering a period of five years could involve an additional cost of up to IR�5 million. In this regard, it is not unlikely that Revenue's actions following O'Carroll were essentially an exercise in damage limitation. The appeal to the High Court was, as Revenue's papers show, a tactic to give them breathing space to see how it might deal with the issue of retrospection as both its legal advice and the views of its own officials clearly pointed to the fact that the appeal had no hope of success.

Counsel's advice to Revenue was that Section 133 was the appropriate section under which retrospective payments could be made. However, it seems that in seeking Counsel's advice on the scope of retrospective payments in the first instance in April 1989, emphasis was put on Section 133 as the means through which repayments could be sought and there was no mention of Section 498. When a teaching organisation raised the question of the applicability of Section 498 to such cases a further opinion was sought from Counsel. His opinion was that taxpayers who require a revision of their liability would have to avail of Section 133 and that the five year limit applied. However, in O'Carroll, it is clear that the Court had already decided the issue of liability. Those taxpayers affected by that judgement should not need to seek a revision of liability but rather a repayment in accordance with the conclusions reached in the judgement.

O'Carroll upheld the determination of the Appeal Commissioner that the children's portion of the Garda Pension was the income of the child. In a note on the Appeal Hearing which was held on 11 September 1986, a Revenue Official recorded that the Appeal Commissioner:

"accordingly reduced the assessment to take account of the child's portion of the pension"

In an opinion dated 20 October 1990, Counsel for Revenue said that:

"... it is a construction of Section 498 that the words 'save as otherwise expressly provided by any provision of this Act' would capture a situation under Section 133 which requires an assessment to be issued."

For Section 498 not to apply there must be an express provision for an alternative, as there is in Sections 191 and 307. To my mind, deeming that a construction of Section 498 captured a situation under Section 133 is very far removed from saying that the latter section is an expressly provided alternative to Section 498.

In commenting on a draft of my investigation report, Revenue pointed out that it was anxious to give the best possible benefit to the taxpayers within the law but the legal advice available at the time of the decision was clear that Section 133 was the only avenue of approach. Revenue argued that the issue between it and my Office essentially boiled down to a difference of legal opinion. I do not accept this argument. Cases will arise from time to time which hinge on a particular statutory interpretation and where a statutory provision is open to different interpretations. Only the courts can settle such cases. This is not such a case. I have examined the papers relating to the giving of legal advice very carefully and I am satisfied that at no stage was Counsel briefed in an open-ended way. Responding to my restructured draft investigation report, the Revenue repeated the claim that this conclusion is unfair to both the Revenue officials concerned and to Revenue's Counsel. I am not calling into question Counsel's competence, objectivity and independence as claimed by Revenue. I am simply recording that there was no evidence whatsoever on the Revenue files to support its claim that it wanted to give the best benefit to the taxpayers. Indeed, as I outlined earlier, the emphasis seemed to be on limitation of cost. In any event, as I have made clear in this report, taxpayers who have paid tax which is not due should have it refunded in full subject only to avoidance of excessive disruption to the public finances.

Section 498 was not considered until raised by a teaching organisation. There was no reference to Section 191 which deals with errors and mistakes nor to Section 1(2) of Schedule 2, even with the intention of demonstrating that these provisions were either not applicable or less advantageous than Section 133. In the correspondence my Office had with the Revenue, the argument was made that Section 498 is designed to cover claims for reliefs and allowances (e.g., medical insurance relief) and does not apply to cases of the kind involved here. I can find no basis in the 1967 Act for this distinction. It may be that this assumption in relation to Section 498 coloured the whole approach to retrospection but I remain convinced that there was some element of damage limitation involved especially given the position of the Exchequer in the late 1980's. On the basis of the cost given in relation to five years' retrospection, I do not consider that retrospection for ten years would have involved excessive disruption to the public finances.

My findings on the question of Revenue's refusal to pay full retrospection to these two widows are set out in chapter 6.

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