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Redress for Taxpayers (Special Report)

Appendices

Appendix 1*

* (In the interests of clarity I have omitted references to paragraph numbers in Revenue's responses to my draft investigation reports)

The Revenue's response to my first draft investigation report, 12 April 2001

I refer to your letter of 13 March, 2001 enclosing a draft investigation report on complaints by Mrs. Maria Kelly and seven others. I want to thank you for allowing us some additional time for the making of representations on this draft report. The report raises important issues and we were anxious to make as full and comprehensive a response as possible. This letter will deal in turn with the analysis and findings in relation to each of the two specific questions raised in the report.

Question 1 : Are retrospective payments of overpaid income tax due in the cases of Mrs. Kelly and Mrs Nolan?

Draft findings 1. The draft finding in answer to the first question about Mrs. Kelly and Mrs. Nolan is that both women are entitled to a repayment of the tax overpaid by them outside of the statutory five year time limit specified in section 133 of the Income Tax Act 1967. This finding is apparently grounded on the belief that Revenue were mistaken in applying section 133 (instead of section 498 of the Income Tax Act) and that they acted contrary to Revenue's Charter of Rights. The report indicates that Revenue's failure to repay outside of the five year statutory limit fell within section 4(2)(b) of the Ombudsman's Act on two counts: it was based on erroneous or incomplete information; and it was otherwise contrary to fair or sound administrative practice.

2. We feel that the draft report in relation to this issue contains some important inaccuracies and possible misunderstandings. Our particular concerns as regards the text of the report are set out in paragraphs 13 to 15 below. But before going into the detail of the report we would like to address the two basic findings, namely the "erroneous information" finding, and the "contrary to fair administrative practice" finding. We feel strongly that neither finding is reasonably justified on the strength of the facts of the two cases and the analysis set out in the report.

The "erroneous information" finding

3. As already indicated, the "erroneous information" finding appears to be primarily based on the view that Revenue were mistaken in applying section 133 rather than section 498 of the Income Tax Act 1967 and in limiting the period for which retrospection was payable. Unless we misunderstand the report, the issue between us essentially boils down to a difference of legal opinion.

4. Revenue received legal advice at the relevant time from Senior Counsel, on two separate occasions, that section 133 was the correct legal mechanism for processing the retrospection claims for Mrs. Kelly, Mrs. Nolan and others in this situation. On the second of those occasions Revenue's Senior Counsel was specifically asked if section 498 applied. All these papers have been made available to you. (There was also an oral consultation with Counsel to ensure the issue was fully understood). The outcome of the process was clear advice that section 133 was the correct legal basis for the processing of refund claims in these cases and Revenue acted on that basis at the time.

5. The draft report states that your Office has now sought separate legal advice "on the question of whether the claim for retrospection following O'Carroll fell to be considered under section 133 or section 498". Later on it is stated, presumably on the basis of the separate legal advice your Office has now received, that the appropriate provision in the legislation for requesting a refund in theses cases was section 498.

6. We have difficulty in accepting the reasonableness of a report which contains an adverse finding based solely (or largely) on a new legal opinion, particularly when we have not had an opportunity to see and consider that opinion. Indeed we are not at all clear as to why the specific question put by your Office to Counsel was framed in the way it was since section 498 does not, in itself, provide a legal basis for any refund of tax. However, we would be happy to consider the matter further if your Office is prepared to forward a copy of the separate legal advice obtained in this matter. If necessary the obtaining of the advice of the Attorney General might be a reasonable approach in these circumstances.

The "contrary to fair administrative practice" finding

7. The second finding in the report is that Revenue acted contrary to its Charter of Rights and this, presumably, was the basis for the finding that Revenue's actions, in the case of Mrs. Kelly and Mrs. Nolan, were "contrary to fair and sound administration".

8. It is difficult to respond to this charge since the analysis of this issue in the report is confined to just one paragraph and two sentences. The first of these simply states in general terms that "it should be obvious that good administration in the area of taxation demands that Revenue should not retain taxes which are not due from a taxpayer The second quotes extracts from Revenue's Charter of Rights, which states that taxpayers are entitled to have their affairs dealt with in an impartial manner by Revenue staff "who seek to collect only the correct amount of tax or duty, no more and no less".

9. From our standpoint the problem with this analysis is that it takes no account of the legal constraints and the highly regulated context within which Revenue must operate. As a matter of principle it is of course difficult to disagree with the broad statement in the report that "Revenue should not retain taxes which are not due from a taxpayer". Yet the law does not provide unqualified support for such a principle. Neither does it provide unqualified support for the principle that "a taxpayer should not retain taxes which are due to Revenue".

10. For good administrative and policy reasons, mainly to do with achieving finality and closure, tax law sets down time limits - and other conditions - for the making of repayments to taxpayers where excessive tax has been paid: there is no unlimited or unfettered right to restitution. By the same token our tax law lays down time limits and other conditions in relation to Revenue's power to collect underpayments of tax. There are many examples of this in the tax code, for example, there is a general three-year time limit (running from the date of death) on the recovery of unassessed tax from a deceased person's estate.

11. Whether there is scope for achieving greater fairness or symmetry in these statutory rules is a matter for debate, but we feel that Revenue should not be criticised for applying the clear rules in the case of Mrs. Kelly and Mrs. Nolan. If our interpretation of this legislation is correct - and we have already indicated that we are prepared to look again at this when and if we receive your Office's separate legal advice - then our actions in this regard could not, in our view, reasonably be regarded as contrary to fair or sound administration.

12. Revenue did not, as is indicated in the report, seek to retain tax in the Kelly and Nolan cases following the 0'Carroll decision. On the contrary Revenue actively sought a means of repaying this tax within the law and suggested section 133 as a possible avenue, which was endorsed by Counsel. In doing so, Revenue was complying fully with the Charter of Rights commitment to collect only the correct amount of tax due under the law. We were fully mindful of the need to be fair to the taxpayer while at the same time ensuring that there was a proper legal basis for any retrospection. It is clear from the Revenue papers that there was an anxiety 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.

Concerns about specific aspects of the draft report in relation to Question 1

13. We have concerns about some of the text of the report relating to Mrs. Kelly and Mrs. Nolan. First of all there is an implication that the decision to appeal the 0'Carroll decision to the High Court was taken purely on the grounds of expediency in that it would buy Revenue some time. 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 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.

14. We feel that there may be a misunderstanding of the Revenue position with regard to the backdating of retrospective payments. First of all it is important to recall that Revenue took great care in the O'Carroll case to ensure that the approach adopted was correct in legal terms. Two formal opinions were sought from Senior Counsel and a meeting was held between Revenue officials and Counsel to discuss fully the issues involved. Following this, Revenue were satisfied that section 133 was the correct legal basis for processing retrospection claims and that section 498 did not provide any right to repayment of tax for previous years. Our view was and is, based on Counsel's advice, that section 498 has no relevance to these cases.

15. The report suggests that tax and legal experts are unsure about the application of Section 133. It is not clear on what basis such a broad statement could be justified.

Question 2: Should compensation for loss in value in the form of interest be paid on tax refunded to the complainants?

The draft findings

16. The main draft finding in answer to the second question about paying interest to all eight complainants is that, in refusing to pay interest in these cases, Revenue's action was "improperly discriminatory". This finding appears to be largely grounded on Revenue's failure to extend to these eight cases the benefits of the O'Rourke decision (i.e., the December 1996 decision of the High Court to order payment of interest on PAYE tax overpayments to Social Welfare Branch Managers who had been incorrectly classified as Schedule E taxpayers). There is a second finding that Revenue's failure to exercise its care and management discretion to pay interest in these eight cases was "contrary to fair and sound administration". And there is a further finding that failure to provide for a general scheme which allows for such interest payments is itself an undesirable practice and is otherwise contrary to fair and sound administration.

17. It appears from the report that the second and third findings may be dependent on the first. In other words, the exercise of care and management, in place of statutory provisions governing the payment of "O'Rourke-type" interest, and the putting in place of a general scheme for such payment only arise if the O'Rourke decision should be applied on a wide basis - or at least wide enough to encompass the eight complainants.

Some context: background to the paying and charging of interest on tax over/underpaid.

18. Before going on to address the report's findings we feel it would be useful to give some background to the legislation governing the payment of interest on tax overpaid and the charging of interest on tax underpaid. As was pointed out in the report, the Tax Acts provide for interest to be paid on tax overpayments in limited circumstances, for example, overpayments of preliminary tax under the self assessment system. There is no general statutory right to interest on overpaid tax. Indeed the Ombudsman specifically acknowledged this on page 19 of his Annual Report for 1996 and on page 20 he indicated that he had written to the Department of Finance in this regard.

19. Looking at the legislative history in this regard it seems clear that interest has, over the years, primarily been seen as a tool to improve tax compliance. It is fair to say that it was never seen by our legislators purely in terms of equalising compensation to the State and to the taxpayer for loss of value where tax was underpaid or overpaid as the case may be.

20. Prior to 1963 no interest was charged on unpaid income tax. A 6% p.a. interest charge was introduced that year, but was confined to Schedule D taxpayers. It was not matched with a provision to pay interest where tax was overpaid.

21 . In 1971 the 6% interest charged was increased to 9% but in the same year significant changes were made to the "payment on account' and appeal rules for Schedule D cases: such cases could avoid an interest charge if they made a satisfactory payment on account before their tax bills were finalised and paid the balance within 2 months of finalisation. Because of these changes, which required a degree of estimation on the part of the taxpayer when making the payment on account, the law provided, for the first time, that interest - also at 9% - would be paid on any tax overpaid.

22. The introduction, in 1971, of a provision to pay interest on overpaid income tax was in the specific context of incentivising Schedule D taxpayers to make prompt payment of tax in circumstances where a degree of estimation was involved and where underpayment of tax would attract an interest charge. These provisions were subsequently amended in section 30 of the Finance Act 1976 and were carried forward into the preliminary tax system (which is an estimated payment on account procedure) for self-assessment. It should be noted also that, since 1986, the rate of interest payable on overpayments - in the limited circumstances where interest is payable - has been significantly less than the rate chargeable on tax underpaid.

23. In our view this historical context is important in that it indicates that equality of treatment between the State and the taxpayer (as regards compensation for loss of value) was not the guiding force in the development of tax law relating to interest; rather it was the improvement of tax compliance. The limited circumstances in which interest is allowed to be paid - and which mainly relate to situations where taxpayers have to make a payment on account, such as preliminary tax, in advance of knowing the correct liability - are not, as seems to be suggested in the report, a pointer that, in general, taxpayers are entitled to compensation for tax overpaid.

24. Indeed, apart from Income Tax, it is rare to find examples in the tax code where interest is paid on repayments due to the taxpayer. In the VAT area, for instance, Revenue repay enormous sums to taxpayers each year - �1 .681 billion in 1999 - but no interest is payable on those repayments.

The 'improper discrimination" finding: non-application of the O'Rourke decision

25. A large part of the report is taken up with an analysis of the 1996 decision of the High Court in the case of Laurence O'Rourke. The investigator's conclusion is that as each of the eight complainants received refunds of tax which were not due for payment by them in the first place, and that as these overpayments extended over a period of time, it follows that the doctrine of "unjust enrichment' applies in these cases. The report goes on to say that "I believe the Revenue Commissioners are free to invoke the O'Rourke principles in the present cases".

26. We cannot accept this conclusion. The O'Rourke decision was based on a combination of the power of Courts to order payment of interest in accordance with section 22 of the Courts Act, 1981 and the common law principle of restitution. This latter is an area of the law which has been evolving incrementally over the past 25 years or so. The judicial rationale for this body of common law is to reverse "unjust enrichment". However, there is still - notwithstanding the radical development of this law in the 1993 Woolwich case and its subsequent adoption into Irish law in O'Rourke - no general right of restitution based simply on proof of an unjust enrichment1. This is an important point as the report appears to conclude from an analysis of O'Rourke that: (a) there is such a general right, and (b) Revenue should put in place administrative procedures to vindicate such rights where persons have overpaid tax and there is no statutory right of redress.

27. As Judge Keane acknowledged in O'Rourke, the law of restitution "has been developed incrementally on a case by case basis, so as to ensure that a vague and uncharted area of the law in which 'palm-tree' justice flourishes is not judicially encouraged". It is necessary for a

1 For example, Lord Browne-Wilkinson in Woolwich [1993] A.C. 70 said (at p. 196): "though as yet there is in English law no general rule giving the plaintiff a right of recovery from a defendant who has been unjustly enriched at the plaintiff's expense, the concept of unjust enrichment lies at the heart of all individual instances in which the law does give a right of recovery".

person claiming rights under this common law principle to come within one of the recognised grounds for restitution, whether it be mistake, duress, lack of consideration or some aspect of the newly-developed Woolwich doctrine. And it is important to recognise that the common law allows a number of defences to a claim for restitution of overpaid taxes (or consequential interest), such as estoppel, change of position or restrictions on locus standi.

28. There is also the question of a defence based on the economic necessity of preventing excessive disruption of the public finances. This particular defence was successful in the case of Murphy v Attorney General, but unsuccessful in the case of O'Rourke, because only 80 or 90 persons were involved. But it is not clear from O'Rourke where the boundaries of that defence may lie.

29. Furthermore, there may be a legitimate defence based on the extinction of restitutionary actions beyond limitation periods. These limitation periods will presumably depend on whether an action could be taken by judicial review or founded on simple contract or through some other civil law process.

30. We have stated before that in our opinion the whole question of interest or compensation for loss of value in relation to tax overpayments is in need of review. It is clear from the historical background set out above that, for policy reasons at the time, statute law as regards payment of interest is not entirely consistent as between the various taxes and within taxes (for example, self-assessment vs. PAYE cases). It is clear also that there is inconsistency between the rapidly developing common law of restitution and statute law in relation to overpayments of tax (and the question of paying interest). 31. An option, which was also considered by the UK Law Commission following Woolwich (Consultation Paper No. 120), is to find a synthesis of the common law and statutory approaches in the form of one statutory provision. However, the question of protecting the public finances, for example, by way of a short limitation period, would of course also need to be considered. You will appreciate that these are highly complex issues with major policy implications that need to be considered carefully.

32. While we would like to see a review of the tax statute law in relation to interest and "restitution" completed as soon as possible, any decision to change the statute law in this area is of course a matter for the Minister for Finance, the Government and the Oireachtas.

33. In the meantime, pending any legislative change in this area, we feel it is unreasonable to criticise Revenue for failing to apply a general principle of "unjust enrichment" across the board in its administration of the tax system. To adopt such an approach could give rise to the type of 'palm tree' justice referred to by Judge Keane in O'Rourke.

Care and Management

34. A section of the report looks at the whole question of Revenue's "care and management'' function, using material from the Commission on Taxation's Fifth Report in 1985 and from an Institute of Taxation publication on Capital Gains Tax. On the basis of this material the report concludes that care and management provisions allow Revenue administrative discretion to accede to concessional treatment "where it is proper to do so". The report goes on to say "it is clear to me that the validity and reasonableness of the case in favour of a compensatory payment in these instances has been established."

35. Clearly no tax administration can function properly without some degree of managerial discretion in its day-to-day operations, especially on matters which have significant implications for its use of resources. While the boundaries of what is possible under our own care and management authority are not always clear, Revenue do try to exercise it fairly and consistently within the guidance provided by decided case law on this issue and legal advice we have received over the years2

36. The circumstances of the eight complainants in this instance vary widely involving, for example, the treatment of pension income, professional services withholding tax, the treatment of a redundancy payment, artist's exemption, Land Bonds and double taxation relief. There is no common thread except that it could be argued in each case that the State has been "unjustly enriched" by having the use, for a period of time, of tax revenues to which they were not entitled, notwithstanding that there is no statutory basis in these instances for the payment of compensation for the time value of the money withheld. 2 The Irish Courts have not considered the issue of care and management but our advice is that they would be likely to adopt a similar approach to the UK House of Lords in the 1981 case of IRC v National Federation of Self Employed [1981] STC 260 (the so-called "Fleet Street Casuals case". Revenue received a legal opinion on the scope of care and management from the Attorney General in 1984 and have also received legal advice on some specific issues touching on care and management over the years.

37. But if that argument holds good in these widely disparate cases, it must, in all logic, apply across the board in the whole sphere of tax administration. This appears to be the conclusion of the report since it criticises Revenue for not making provision for a "general scheme".

38. Given the potential significance of what would be involved in such a general non-statutory scheme, and the public finance and public policy implications of any such scheme, we feel it a matter which is far beyond the scope of care and management and any such scheme should have a clear legislative basis.

39. Finally, reference is made in the report to other areas of the public service that have compensation schemes. While we are not totally au fait with all of these schemes, they appear to be concerned primarily with administrative delay in circumstances where the Department or agency involved has been responsible for the delay and, at least in some of the more significant instances, for example, the Department of Social, Community and Family Affairs, have legislative status. That would appear to be very different from what is involved in these cases. 40. As we said at the start of this letter, the matters covered by the draft investigation report raise difficult and complex issues and we were anxious to respond to them as comprehensively as possible. If you think it would be useful, we would be more than happy to meet with the Ombudsman or any members of his staff to discuss these issues further.

Appendix 2

The Revenue response to my restructured draft investigation report, 13 September 2002

1. I refer to your letter of 2 August enclosing a further draft of the Investigation Report in relation to the above-mentioned complaints. I note that the Ombudsman has not altered the substance of his original draft Report in light of the detailed submission by the then Chairman on 12 April 2001.

2. I appreciate the opportunity now afforded to me as the new Revenue Chairman to comment on this latest draft -notwithstanding that the section 6(6) requirement has already been complied with - before the Ombudsman makes any recommendations arising from the investigation.

3. I have read the latest draft Report very carefully. It seems to me that Revenue's views and concerns have already been very well articulated in our 12 April 2001 submission. I endorse the views expressed in that submission and I am pleased to see it is intended to include it as an annex to the final Report.

4. At this stage I do not intend to go over the same ground again in any detail; rather I propose to confine my comments to what I consider to be the main issues of contention between us and also to inform your Office of some relevant policy developments in the meantime in relation to the interest or "loss of value" question.

Mrs Maria Kelly and Mrs Phyllis Nolan: section 133 vs section 498

5. In the case of Mrs. Kelly and Mrs. Nolan I find it difficult to conclude that the net issue between us is anything other than a difference of legal opinion. I do not want to rehash here the technical arguments about the interpretation of sections 133 and 498, but the fact is that the Senior Counsel employed by Revenue took one view (which has not been contested in the Courts) and separate legal advice sought by your Office presented another view.

6. The Ombudsman does not accept that the issue between us boils down to a difference of legal opinion. If I read the draft Report correctly, he holds this view because he is "satisfied that at no stage was (Revenue) Counsel briefed in an open-ended way The clear implication is that the issue between us is not a "true" difference of legal opinion because the Revenue opinion is biased or tainted (because of a closed-ended briefing of Counsel by Revenue officials), whereas the Ombudsman's legal opinion is not. This is not grounded on fact and it seems to me that this is a very wrong conclusion which is unfair to both the Revenue officials concerned and to Revenue's Counsel.

7. My understanding of the facts is that, while section 498 was not mentioned in the first request for Counsel's opinion, it was specifically included in subsequent requests for his opinion and an oral consultation took place to ensure he fully understood the section 498/133 issues. Indeed the opinion given on 20 October 1990 is concerned exclusively with the relevance of section 498 in these cases.

8. I don't wish to overstate the implications of the draft Report for Revenue's Counsel, but the clear suggestion in the Report is that his opinion was not a reliable statement of the law - because Revenue officials were essentially putting words in his mouth. This implicitly calls into question the Counsel's competence, objectivity and independence.

9. You will recall that, in our 12 April 2001 submission, we offered to consider the matter further if your Office was prepared to send us a copy of your separate legal advice. We also indicated our willingness to seek the advice of the Attorney General, if that would help resolve the legal opinion stalemate". This seemed to us to be a reasonable approach at the time. Before the Ombudsman makes any recommendations in these two cases he may wish to consider again whether this is not the best way forward.

Compensation for Loss of Value in Tax Refunds

10. In relation to the "compensation for loss of value" issues, I will comment:

• first, on whether Revenue can be faulted for not putting in place a general non-statutory scheme to compensate tax refund cases for the time value of money; and
• second, on whether Revenue should, without specific legislative authority, compensate the eight named complainants for loss of purchasing power.

General (Non-Statutory) Compensation Scheme

11. I am pleased to note that the Ombudsman now acknowledges that the question of whether or not a ... general [compensation] scheme is possible under the care and management provisions is "clearly open to argument." This appears to be a welcome change of position from the first draft Report.

12. However, it remains our very strong view that it is neither legally possible nor appropriate, having regard to the public finance and public policy implications involved, for Revenue to put in place a general non-statutory interest repayment scheme. Any such scheme would have to have a clear legislative basis. It must be borne in mind that Revenue repays in the region of �4 billion across all taxes each year.

13. I would add that in the UK, which has a very similar care and management" framework to us, they operate a general scheme of paying interest on tax refunds, but this is grounded in legislation, not on care and management.

14. If the Ombudsman considers that the failure to make provision for a appropriate general scheme is contrary to fair and sound administration, then the responsibility for such failure does not rest with the Revenue Commissioners - save to the limited extent that Revenue can influence legislative change in this area.

15. In this connection I can tell you that arising out of the Ombudsman's examination of these eight cases - and because there was no basis for Revenue to accept the assertion that we could provide for a non-statutory scheme of compensation under care and management - we brought the Ombudsman's concerns to the attention of the Department of Finance in the context of last year's Finance Bill. Given that a general scheme would have budgetary and other implications, the Department felt it would be necessary to consider the matter in detail, having regard to best practice in other jurisdictions, with a view to bringing forward options or recommendations for consideration by the Minister and the Government in the context of a future Budget and Finance Bill. The work is currently underway.

Compensating the Eight Complainants

16. While acknowledging that the question of whether a general scheme is possible under care and management is "clearly open to argument" the Ombudsman considers that the question of compensating the eight named complainants does fall within care and management, and that Revenue should have exercised its care and management discretion in these eight cases to compensate them for loss of purchasing power.

17. I'm not sure if your Office is aware of the fact that, where the exercise of care and management creates a precedent, Revenue publish the details of the precedent on the Revenue website. This ensures that everybody is aware of the precedent and that everybody who falls within the criteria published will be able to benefit from the precedent - although not strictly falling within the letter of the law.

18. The Ombudsman, in his 1996 "Best Practice" Guide, says that dealing fairly with people means treating people in similar circumstances in like manner. But this is qualified by saying that rules should not be applied so inflexibly as to create inequity. It seems to me that these two principles are sometimes difficult to reconcile; the extract from Judge Keane's book on the law of Equity (paragraph 5.4.6) makes this point very well. In the same way that "hard cases make bad law", hard cases can make bad administrative practice if they lead to uncertainty and inconsistency.

19. Turning to the eight cases in question, the only common denominator is that they all involve Income Tax - they cover a very wide range of circumstances:

• Two of the refunds arose from the High Court decision in the Breda O'Carroll case;
• One arose from the High Court decision in the Michael Daly case;
• One was a straightforward refund of Professional Services Withholding Tax;
• One related to a redundancy payment tax exemption claim;
• One related to non-residence for a particular year and the Ireland/Cyprus Double Taxation Treaty;
• One related to a claim for Artist's exemption in respect of a school text book; and
• One related to the deductibility of interest on a rental property, which was determined by the Circuit Court.

20. The circumstances of these cases are so disparate that it would be impossible - and unfair - to ring-fence them in the context of the draft finding that failure to provide for the same treatment in similar cases is improperly discriminatory. Any such exercise of care and management would have to be extended widely: in effect the entire population of Income Tax payers are potentially "on all fours" with the eight cases. And indeed it would be impossible to stop at Income Tax.

21 .This of course brings us back full circle to the question of a general non-statutory scheme which, for the reasons already stated above, is not possible under care and management. If anything is to be done here it must be a statutory scheme. While Revenue recognises the merits of providing for a statutory scheme, this is a matter for Government and would, as indicated in paragraph 16 above, have to take budgetary and other implications into account. Hopefully the work now underway will come up with appropriate recommendations in due course.

Meeting

22. Given the importance of the issues raised in this Investigation, we would be more than happy to meet with the Ombudsman or any members of his staff before the final Report and any recommendations are made.

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