Colm’s columns

Colm Rapple
Irish Mail on Sunday, 30th March 2008

A tax dodge whereby some privileged people have been able to pay for their child care costs out of pre-tax rather than after-tax pay is being closed off by the Revenue. The favoured individuals have, in effect, being able to claim tax relief on their child care costs, a relief that has never been available to most taxpaying parents.

The beneficiaries include Dublin based employees of the ESB who have secured the benefit with the support of the State owned company. But they are not the only lucky ones, although by its nature this particular tax break has only been available to those working in larger firms and State bodies that have been willing to pay some of the cost of providing child care and crèche facilities.

Under the Revenue’s benefit-in-kind rules, such facilities can be provided to employees as tax-free benefits provided certain conditions are met. The employer must have some responsibility for managing and financing the facilities or else have provided capital for its construction.

In many cases the facilities are provided in the employer’s own premises and the employer bears the capital cost of furnishing and equipping the crèche. But very often employees making use of the service have to pay the cost of employing the child-care workers and other incidentals.

That, according to the Revenue should be paid out of after tax pay. But some employers have been deducting employee contributions out of pre-tax wages thereby enabling the workers involved to avoid tax.

The Revenue Commissioners have always maintained that any such employee contributions should be paid out of after-tax income. But some employers have been deducting it from pay before deducting tax. So the money going to pay for the crèche service was never taxed.

It’s a significant benefit.

Most people have to pay childcare costs out of after tax income, but those enjoying this tax break are effectively getting tax relief on their costs.

For example those paying tax at the top rate of 41% need to earn €100 gross to have €57 to put towards their childcare costs. That’s taking account of the 2% health levy on all income but ignoring PRSI which may not be payable on the top slice of income.

But those able to make use of this tax dodge get the benefit of the full €100, since it is deducted from their pay before tax is imposed.

The average cost of a full time crèche place is estimated at €174 a week according to a recent survey conducted by the National Children’s Nurseries Association. In some areas of Dublin the costs are as high as €222 or over €11,000 a year.

The beneficiaries of this tax loophole are not paying that much because their employers are bearing some of the cost. That was a necessary condition for making use of the loophole. But let’s assume that they were paying €100 a week or €5,000 a year. For a top rate tax payer the tax saving would be over €2,000 a year.

And this was going to people in very good jobs whose employers were already paying part of the cost of child care.

A provision in this year’s Finance Bill, which was signed into law last week, has closed off the loophole. The Revenue Commissioners maintain that there never was a loophole, but not everyone agrees. The Finance Act clarifies the issue by removing any ambiguity that may have existed.

If the drafters in the Department of Finance have got it right this time, this particular loophole is certainly closed off for the future. But what about the past. The Revenue believes that those who have been benefiting from the relief were never entitled to it. As yet, however, no action has as yet been taken to claw back the unpaid tax.

Its inaction is costing the Exchequer millions of euro at a time when tax revenue is falling short of expectations.

The Revenue, when asked, said that they knew about this practice and that in their view it was not in accordance with the law and that it has never accepted the validity of such schemes.

But while admitting that it knew of the practice, its statement added that “if” discovered such practices will be challenged and the collection of any tax found to be due will be pursued.

“However, in order to put this matter beyond doubt and to provide legislative clarity on the issue” a provision of the current Finance Bill “deals with the issue of salary sacrifice and copper-fastens, on a legislative basis, Revenue’s interpretation of the issue.”

That suggests that the Revenue is not sure of its ability to collect the tax revenue lost through the use of this practice in the past. If that is the case, there are bound to be claims that the its tardiness is tackling an obvious abuse of the tax system, that has resulted in a major loss to the Exchequer. It is believed that the main recipients of the dodge have been public servants. The Revenue won’t put on estimate on exactly how much has been lost.

But if blame is to be apportioned the politicians must also take their share. Finance Minister, Brian Cowen make no specific reference to this section of the Finance Bill during its passage through the Oireachais although its purpose must have been explained to him. Neither did it attract the attention of the many opposition TDs who spoke at some length of various aspects of the Bill. It wasn’t the only loophole belatedly closed off this year but more of that another time.

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