Revenue officials in Cork have confirmed that they are currently reviewing the tax affairs of contractor companies in the South West, and their directors, in relation to expense “deficiencies” that have resulted in the tax liabilities of the company directors being under declared.  As a result of their findings they say it will be an area of significant focus of regional enquiries throughout the year. 

In a letter to the Institute of Taxation the Revenue South-West Region advised that they have uncovered “deficiencies in accounting” for expenses which have resulted in “a significant understatement of tax liability to the benefit of the directors”. They go on to state that they regard the under-declarations of tax as stemming from deliberate behaviour and will therefore attract penalties ranging from 10% of the tax underpayment (for an unprompted disclosure) up to 100%  of the tax underpaid for those failing to make a disclosure or complete disclosure. Interest may also be payable so it could lead to contractors facing a liability of more than twice the amount of the initial tax saved. 

The issue of allowable expenses for self-employed contractors and company directors is not a new one, and in a routine Revenue audit it would always be the subject of scrutiny to identify any possible non-compliance. This investigation highlights the importance of contractors being given trustworthy and professional advice when it comes to declarations of expenses. Prima’s emphasis is always on ensuring that clients seek advice from our qualified accountants to clarify the tax treatment of their business expenses. Advice from friends/colleagues or anecdotal evidence regarding the validity of expenses from other contractors cannot be relied upon. Unfortunately, too often this “advice” comes from people who are not qualified to give an opinion on the matter, and relying on it could lead to tax penalties being incurred. But the financial cost is only part of the story. Any contractors who incur financial penalties as a result of this Revenue investigation may also suffer damage to their personal and business reputations. It’s a high price to pay in every respect, but it can all be avoided by investing in professional advice from the outset.  

At Prima we always encourage contractors who have doubts about the validity of their expenses to take advice and review their expense claims as a matter of priority. If tax has been underpaid they should make a full disclosure to minimise the level of penalties applied. It is the aim of Revenue to encourage disclosure, so if a full disclosure is made along with payment of any tax due, hefty penalties could be avoided. It could also help avoid a detailed audit of your tax affairs over the previous four years. 

It remains to be seen whether Revenue will extend their review beyond the south west of Ireland – the letter suggested it was “likely” to be initiated in other regions – but if they are of the opinion that the issue of overstating expenses is widespread throughout the industry it will undoubtedly become an area of focus for the foreseeable future.

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