Revenue before computers - The administration of Income Tax

Individual taxpayers in Ireland are long accustomed to receiving a single annual notice of assessment for income tax. The resulting demand for payment of the liability is issued as a single bill. It was not always like this. For most of forty years after the foundation of the State, individual taxpayers had a very different experience.

Income Tax was introduced in England in 1799 for purposes of financing the Napoleonic War. In terms of tax yield, it was deemed a ‘dismal failure’ due to wholesale evasion and an inadequate system of compliance. There was also strenuous opposition to this form of tax. The Income Tax system was revamped in 1803. From then, assessments were made according to five schedules (A, B, C, D and E) of the Income Tax Acts. These schedules still exist today. The effect of applying schedules ‘leaves unrevealed to all those connected with the assessment of the tax, the total income of any person except those who claim entire exemption from it, or those who seek to obtain an abatement of duty’. Being a war time tax, Income Tax was abolished following the defeat of Napoleon in 1815 but was reintroduced in 1842.

Income Tax was introduced in Ireland in 1853, a few years after the catastrophic famine. In the eyes of many, it was seen as a way of making the Irish pay for their starvation. Clarke (2021) noted that the measure inflamed a sense of economic injustice and contributed to the growth of Irish nationalism. Notwithstanding this opposition, Income Tax became a permanent addition to the tax system. The British Income Tax system was carried over to the new Irish Free State in 1923. The new State had little room to manoeuvre on the tax front. Partition effectively cut off the most industrialised part of Ireland with the highest average incomes. Clarke (2014) stated that of almost 300,000 industrial workers in 1912, only 80,000 were in the area covered by the Irish Free State. The Economic War in the 1930s was followed by the Second World War in the 1940s. The long shadow of the Second World War was evidenced by the continuation of food rationing until December 1951.

In 1929, the Minister for Finance, Ernst Blythe signalled his intention to simplify the income tax code. He intended to submit a bill to the Dáil on this matter. In October of that year, the Revenue Commissioners appointed a departmental committee to undertake the necessary preparatory work. The task of that committee “had proved to be arduous and prolonged”. The departmental committee delivered its 300-page report in 1931. Among its proposals was “that all income tax directly chargeable on a taxpayer for a year should be made in one assessment and included in one notice of assessment”. However, there was a change in Government in 1932 and the proposal was dropped. Thirty years later the proposal had yet to be implemented. In 1927, the then UK Chancellor of the Exchequer, Winston Churchill, mooted the same idea for UK taxpayers. By 1959 it still had not been implemented there.

Against this backdrop, the Minister for Finance, Gerard Sweetman, set up the Commission on Income Taxation in February 1957. Its terms of reference were broad ranging. Among other things, the Commission was asked to consider if the taxation of profits and income should be terminated. Réamonn (1981) noted:

“The Commission toiled so assiduously that, between 1957 and 1962, it produced no fewer than seven extremely valuable reports. Most of their recommendations (which of course were not all reached with complete unanimity) were followed by legislative or other action”.

The Commission, led by Cearbhall Ó Dálaigh, devoted its third report to the question of substituting Income Tax in favour of alternative taxes. Its findings were clear:

“Notwithstanding the shortcomings of income taxation we are of opinion that its merits greatly outweigh its demerits. We have unanimously reached the conclusion that in principle income taxation is a good form of taxation, and that it should continue to be a feature of our taxation system”.

In its second report in 1959 the Commission recommended “One Taxpayer, one charge”. At that time, a taxpayer with income from different sources could get separate income tax assessment notices for one year. Given the tax collection system in place then, it was also possible to get separate bills for those assessments.

In the forty years after independence, five factors in particular shaped taxpayers experience with the administration of Income Tax. These were:

  1. The absence of a system of pay as you earn (PAYE).
  2. The tax collection system.
  3. The assessment to Income Tax under the Schedules A, B, C, D and E.
  4. The place where income is to be assessed and charged under the schedules within the Income Tax Acts.
  5. The assessment to Sur Tax.

In 1959 there were almost sixty collectors of income tax engaged by the Revenue Commissioners. These collectors were independent contractors and were assigned to collect specific taxes in specific areas. Until PAYE was introduced on 1st October 1960, these collectors’ responsibilities included collecting income tax due on wages and salaries. Assessments on wages and salaries were raised under Schedule E of the Income Tax Acts.

There were substantial problems with Schedule E arrears. A centralised collection unit was set up within Revenue in 1952 to alleviate the pressure on collectors of income tax. Réamonn (1981) stated that upwards of 80,000 taxpayers were in arrears in 1958. This was a harbinger of the appointment of the Collector General from the staff of the Revenue Commissioners in 1963. The Institution of the Collector General, wholly staffed by Revenue officials, supplanted the old system of Collectors of Income Tax.

In addition to tax charged under Schedule E, broadly put, income tax was chargeable under the other schedules as follows:

  • Schedule A: Income from the ownership of lands and buildings.
  • Schedule B: Income from the occupation of land by farmers or others.
  • Schedule C: Income from certain public investments etc.
  • Schedule D: Income from trades, professions and vocations, on income from investments and deposits, and on rents from business premises.

In practice, Revenue did not raise assessments under Schedule C. Income under Schedules A and B was assessed on a notional basis. The notional income was based on valuation of the property under Griffith’s Valuation which was completed between 1852 and 1865. Schedule A covered not only income from letting but also income imputed to an owner occupier. The main categories coming under Schedule A were:

  1. Premises let for occupation by the tenant for the purposes of a trade, profession or vocation.
  2. Premises occupied by the owner for such purposes.
  3. Residential premises (houses; flats) let to tenants.
  4. Owner-occupied dwelling houses.
  5. Lands, including farmhouses or farm buildings used as such.

Owner occupiers were assessed on the benefit that they enjoyed from not paying rent on the dwelling house that they lived in.

Notices of assessment under Schedule A were not issued in respect of properties situate in large urban areas. In accordance with the relevant tax law, a general notice was given in the Iris Oifigiúil, and in some daily newspapers. Taxpayers were advised that the assessments may be inspected in the respective tax offices by the persons assessed. Provision for time allowed for giving notice of appeal was also made. It was possible to be assessed under both Schedule A and D in respect of the same property, but credit was given for the Schedule A charge in the Schedule D assessment. This led to many calls for Schedule A to be removed.

Tax districts also issued separate notices of assessment under Schedule D and E to taxpayers. In its submission to the Commission on Income Taxation, the Revenue Commissioners noted:

“The Income Tax Acts provide generally that income is to be assessed and charged at the place where it arises. Thus, under Schedule A, properties are assessed where they are situate; under Schedule D, businesses are chargeable where they are carried on and, under Schedule E, the emoluments of public offices and other employments are assessed at the head office of the department or company or concern under which the offices or employments are held. Persons who are not engaged in business or employment are normally chargeable where they ordinarily reside”.

Some taxpayers were also liable to sur tax. It replaced super tax which was introduced by the UK Government in 1910. This tax applied to taxpayers with incomes in excess of £2,000. The threshold for making sur tax returns had been gradually reduced over time from £5,000 when it was introduced. Separate tax returns were required to be made for this purpose to Special Commissioners based in Dublin. The reason for this was as much historical as legislative. In its submission to the Commission the Revenue Commissioners noted:

“In 1910 the people with more than £5,000 a year were mainly those whose incomes were derived from property or dividends and who, under the law at that time, were not called upon to make a return of their total income from all sources for Income Tax purposes. Their numbers were small; and they were very sensitive about disclosing their full incomes particularly to local officials. It was therefore arranged at the outset that the administration of the tax should be completely centralised and kept absolutely out of the hands of the local assessors”.

The Commission on Income Taxation made a number of recommendations in its second report for a system of one taxpayer-one charge. These included removing the requirement to file separate tax returns for sur tax. In effect, the assessment and collection of sur tax should be dealt with the income tax return to the local tax district. It also called for the virtual abolishment of Schedule A.

The goal of ‘one taxpayer-one charge’ did come to pass. It was facilitated by the introduction of computers in Revenue in 1963. Réamonn (1981) noted that without computers, the system of ‘one taxpayer one charge’ could not have been brought in. And without it, sur tax could not have been decentralised.