The Shadow Economy

The Shadow Economy

The shadow economy costs every tax payer money through higher taxation. If everyone declared the income they made then the tax take would increase significantly and the tax burden on an individual basis would fall so we would all pay less.But of greater concern is the effect people,operating with out paying taxes, have on legtimate business. If you are a carpenter qouting for a job and you competion is some guy who pays no tax and no insurance then you just... simply cannot compete. The home renovation scheme has helped alleviate this to some extent in the building industry but it still is a prevalent hinderance to fair trade through out all sectors of the economy.
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1. What is the shadow economy?
In general, shadow economy activity is activity in respect of which businesses (including professions) and individuals engage in inappropriate practices with the aim of not complying with their legal obligations relating to matters such as taxes & duties, PRSI, licenses and employment. Shadow economy activity includes -
not declaring, or under-declaring, a source of income (for example, not declaring or under-declaring 'cash jobs') so as to avoid tax and other liabilities;
employers paying employees in cash under an 'off the books' arrangement so as to evade tax and PRSI liabilities;
'working and signing' - working or running a business whilst at the same time claiming falsely job-seekers benefit from the Department of Social Protection;
non-operation of the VAT system;
tobacco smuggling including the sale of illegal tobacco products;
oil laundering including the sale of washed diesel.
Most of the shadow economy activity takes place within that which is referred to as the ‘cash economy’ (i.e. the payment for goods and services by way of cash).
2. What are the main effects of shadow economy activity?
Shadow economy activity –
reduces tax, duty and other revenues owing to the State;
creates an un-level business playing field that has a negative impact on legitimate businesses as regards competitiveness, sustainability and long term job creation.
3. Reporting shadow economy activity
You can report (or report via your representative body) to Revenue details of shadow economy activity by using our Online Reporting Form. Alternatively, a report may be made by way of a telephone call to your local Revenue office.
Frank McGivney & Co. Ltd Tel 0469293891 email fmcgivney@live.com

Tax Planning Exempt Income

Exempt income

Life is full of decisions one of the ones you can decide to make is whether you try to minimize the amount of tax you pay. This leads to a further decision of whether you do this legally or illegally.

Legally this is called tax avoidance or tax planning depending on the scale of how you organize your affairs. Both are perfectly valid means of minimizing your tax

Illegally this is called tax evasion, the shadow economy or sponging of the rest of society. It has high penalties for detection including hefty fines and prison sentences. Each time you evade tax then you end up driving the amount taken by other people to higher levels as they have to compensate for the amount you are not paying.

One of the ways to avoid income tax is through exemptions.

Within the Irish tax code there are various exemptions to income tax.

(1)   Exemption Limits:

Once you reach the grand age of 65 then any income you earn below €18000 is exempt from income tax. Once you reach 66 then you also avoid PRSI. If you are over 70 then you are charged a reduced rate of Universal Service Charge

 (2) Personal injury settlements (s 189), payments from the Haemophilia HIV Trust (s 190), Hepatitis C compensation (s 191), and payments in respect of thalidomide victims (s 192).

(3) Income of artists, writers and composers, subject to an overall annual limit of €50,000 (s 195).

(4) Interest on savings certificates (s 42) and instalment savings schemes (s 197).

(5) Income of recognised charities (s 207, 208).

(6) Income of amateur sports bodies (s 235).

(7) Rent from letting farm land (s 664). A claimant must be aged 55 or over, or unable through physical or mental incapacity to carry on farming. Exemption is given for the lower of:

(i) the farm rental income surplus, or

(ii) €40,000 where the lease is for more than 14 years, €30,000 where the lease is for 10 to 14 years, €22,500 where the lease is for seven to 10 years, or €18,000 in any other case.

(9) Rent-a-room relief (s 216A). Income from lodgers is exempt provided your gross income from such letting does not exceed €12,000 in the tax year.

(10) Home childcare earnings of up to €15,000 in the tax year (s 216C).

(11) Earnings of special assignees (s 825C). 30% of income above €75,000 in the case of employees assigned from a tax treaty country to work in their employer’s Irish operation.

(12) Start Your Own Business relief (s 472AA). Where a person previously long-term unemployed sets up a business, the first €40,000 of profits in a tax year are exempt. Expires 31.12.2016.

Frank McGivney www.meathaccountants.com 0469293891

Motor Expenses and Subsistence for contractors (Computer consultants, engineers, etc)

Motor Expenses and Subsistence for contractors (Computer consultants, engineers, etc)

The Revenue have a special project running at the moment which is looking at the tax compliance of contractors who use company structures to provide their labour only services to mainly one customer. Examples of this may be computer consultants or engineers who provide services to bigger firms. rather than been hired as employees they are hired as subcontractors and put in place a company to provide the services. This is a perfectly legtimate structure to have in place. However the Revenue has decided that they are not willing to allow motor expenses from the home to the place of work as been deductible for tax purposes and also alot of subcontractors would have claimed subsistence and the revenue is also not allowing this (dependent on the individual case). This is based on the basic maxim that all costs must be wholly and exclusively for the business in order to be claimable for tax purposes.
They are been reasonable with people who come forward to amend previous returns and pay any outstanding tax. If you are in this situation you can ring me on 0469293891 to discuss what you need to do.

 

Revenue’s Contractors Project

Background

Revenue’s National Contractors Project is aimed at addressing very specific problems that emerged through audit activity. A succession of tax audits had revealed that individuals were providing their services to clients ("end-users") via intermediaries - often, but not exclusively, personal service companies. The intermediary treats the individual as an employee and operates PAYE on the remuneration which it pays to the individual. An assumption underlying these arrangements is that the individual is not an employee of the end-user. While this may be true in the generality of cases, the facts will determine whether or not there is an implied contract of employment between the individual and the end-user.
The tax audits have revealed that in some instances the use of intermediaries has resulted in evasion, which arose when intermediaries paid tax-free "expenses" in circumstances where the expenditure had not actually been incurred. In other circumstances, the expenses had no relation to the business. It was clear that some contractors were using the device of an intermediary company (which they usually owned or controlled) to contend that they are compliant PAYE taxpayers, while actually extracting a large part of the company’s contract income from the company free of tax in circumstances where such income should have been taxed. In some of the worst cases encountered, up to 70% of income was extracted in this manner.
While the project was intended to be narrowly focused, there are many different circumstances arising, which give rise to requests for clarification. The purpose of this article is to address the treatment of expenses and the procedures which Revenue is adopting for this project.

Revenue’s Approach

Revenue’s Contractors Project is designed to deal quickly and cleanly with the particular problem. Contractors whose accounts show unusually high proportions of expenses are being identified for compliance intervention.
To facilitate disclosure, we adopted the practice of providing assistance to those who were experiencing difficulty, and where a genuine effort is being made, we accept amendment of disclosures following discussion. At the same time, tax agents have been invited through their professional organisations to encourage their clients to consider whether they should make an unprompted qualifying disclosure.
We are also ready to discuss methods of paying the disclosed amounts where there is an inability to pay in one sum. Within the disclosure itself, we undertook to accept disclosures that dealt with the four specified years provided the resulting level of expenses was within industry norms, and provided we had no specific knowledge that the declaration was likely to be false. This is a considerable concession, because Revenue routinely checks disclosures in some detail. Finally, for the purposes of this project we advised that Revenue would not seek to "re-gross" expenses in calculating the tax underpayment. We have adopted this approach on the understanding that the parties concerned will comply strictly with the law in future. In the event of a future re-audit discovering this not to be the case, then Revenue will not feel bound by the approach adopted to date in relation to re-grossing, and future tax underpayments, and associated interest and penalties will be pursued.

Treatment of expenses of travel and subsistence where the services of an individual are provided through an intermediary to an end-user

The publicity attracted by the National Contractors Project has caused some questions to be raised about the application of tax rules, and has led to requests for general rulings from Revenue about hypothetical cases in a wide variety of situations.
The basic legal provisions are in the Taxes Consolidation Act, which provides in Section 81 that a business may not deduct expenses that are not "wholly and exclusively" incurred for business purposes. Section 117 provides that sums paid as expenses are assessable as emoluments of the office or employment, while Section 114 provides for a deduction in respect of expenses which an employee or office-holder is necessarily obliged to incur in travelling in the performance of the duties of the office or employment or other expenses wholly, exclusively and necessarily incurred in the performance of the duties of the office or employment.
The Act does not make specific provision for the payment of tax-free expenses. However, to avoid the operation of PAYE on expenses which would then lead to repayment claims on foot of deductions due under Section 114, Revenue has long accepted that expenses which meet certain conditions may be reimbursed tax free in certain circumstances. Revenue has given detailed guidance on the circumstances in which tax-free reimbursement of expenses may be made in its Statement of Practice SP/IT/2/2007 (PDF, 157KB), in information leaflets IT51 and IT54, and in this year’s Tax Briefing 3 of 2013, all available at: www.revenue.ie.
The guidance given in Tax Briefing 3 of 2013, entitled "Reimbursement of Travel and Subsistence Expenses by Intermediaries", clarifies the Revenue position on the circumstances in which expenses of travel and subsistence may be reimbursed free of tax where the services of an individual are provided through an intermediary to an end-user, generally at the premises of the end-user. Services provided through an intermediary include services provided through a personal service company, a managed service company or an agency.
The key characteristic of the arrangements which are the subject of Tax Briefing 3 of 2013 is that the end-user is acquiring the services of a specific individual who will work under the general direction and control of the end-user. In some instances, the contract between the end-user and the intermediary will be explicit in identifying the individual whose services are being acquired by the end-user. In others, it will be apparent from the nature of the services, the manner in which they are provided and the conduct of the parties, that what is being provided is the services of a specific individual.
The main point which Tax Briefing 3 of 2013 sought to clarify is that, in applying previous Revenue guidance to the arrangements referred to in the Tax Briefing, home cannot be treated as a "normal place of work". Revenue does not accept that the fact that administrative work is carried out at home, or that home is the registered office of the intermediary alters this position. It follows that the cost of travel to and from home may not be reimbursed free of tax. As Tax Briefing 3 of 2013 points out, in most instances, the end-user premises is the normal place of work and expenses of travel and subsistence may be reimbursed free of tax in respect of necessary business absences from this normal place of work.
In referring to the "normal place of work", Tax Briefing 3 of 2013 was picking up the terminology of previous Revenue guidance. At the same time, it is important to bear in mind that "normal place of work" is not mentioned at all in statute. The true test of whether the cost of travel is allowable for Schedule E purposes is whether the journey was necessarily incurred in the performance of the duties of the office or employment. This is a test which has repeatedly been recognised in various judicial pronouncements as narrow and hard to meet.
Some of the scenarios in the examples in Tax Briefing 3 of 2013 would be rather unusual in the context of an intermediary which provides the services of an individual to an end-user. Nevertheless, they are intended to bring out the circumstances in which Revenue will accept that the cost of travel and subsistence may be paid tax free to an individual whose services are being provided via an intermediary.
Applying the foregoing test to the scenarios in Tax Briefing 3 of 2013, Revenue’s view is that a journey from the person’s home to a job is not a journey necessarily undertaken in the performance of the duties of the employment. The person is simply travelling from home. The length and cost of the journey is not imposed by the office or employment but is dictated by the choice of place of residence of the individual concerned. Similarly, an individual whose services are provided via an intermediary and who incurs expenses in living away from home cannot claim the cost of living away from home.
The fact that an intermediary may provide the individual’s service under a series of short-term contracts does not alter the position. Each location at which the individual provides services becomes a "normal place of work" while the services are being provided to that end-user. The expenses of travelling from home to each of these locations or the expenses of living at those locations cannot be reimbursed tax-free.

Treatment of Expenses of Travel and Subsistence in other Cases

The situations dealt with in Tax Briefing 3 of 2013 are to be distinguished from situations where a company provides goods or services, other than the services of a specific individual, to its customers or clients. There is no change in Revenue’s interpretation or application of the law in relation to such cases. Previous Revenue published practice as set out in Revenue leaflets IT51 and IT54 and Statement of Practice SP IT/02/2007 continues to apply.

Family Members as Employees

The question of whether any individual is an employee of an intermediary company can only be determined in the light of the particular facts. This applies equally to the engagement of family members of directors. Revenue has found that, in some of the cases examined in the course of the project, alleged employments of family members were not bona-fide. Revenue will continue to examine such arrangements to determine whether they have been put in place on an arm’s length basis. This means that the family member must be performing services or duties in the business and rates of pay must be similar to the rates paid to other employees doing the same type of work. If the pay is for technical work, the employee (payee) should have the skills, qualifications and experience necessary to carry out that work and to justify the rate of pay.

Penalties

As outlined in the Code of Practice for Revenue Audit, auditors will exercise care in considering whether penalties arise in any particular case, and in considering the appropriate category of tax default. Because of our experience with early cases encountered, Revenue’s view is that the type of activity being targeted in this project is in the deliberate behaviour category. Of course, the circumstances of each case will inform the level of penalties being proposed. The deliberate behaviour category is fully appropriate where the claimed expenses are not incurred, or not incurred in connection with the business. A lower penalty is appropriate where it is clear that the practice at issue resulted from a reasonable interpretation of the law or practice which turned out to be incorrect.
Where a taxpayer does not agree to the level of penalties being proposed, Revenue may seek to have the penalty determined by a relevant Court [Paragraph 4.5.3 of the Code of Practice contains more details]. Where the default is in the deliberate behaviour category, and if a "Notification of a Revenue Audit" has not issued, the penalty level proposed is 10%. A taxpayer who has received a "Notification of a Revenue Audit" still has an opportunity to make a prompted qualifying disclosure, and the penalty payable will be 50%, where the default is in the deliberate behaviour category. Where any default is shown to be due to careless behaviour or innocent error, much lesser penalties, if any, will apply. Finally, those who have a liability to additional tax, due to deliberate behaviour, and make no effort to make a disclosure (or make a false disclosure) are liable to penalties ranging from 75% to 100%, and to audit of several years if evidence of possible tax fraud is discovered. In particularly serious situations, consideration will be given to investigating with a view to prosecution.

Protocols in relation to the making of Disclosures

All matters in relation to qualifying disclosures are dealt with in accordance with legislation and the Code of Practice for Revenue Audit.

Who is being Audited?

In general the focus of the audit will be on the intermediary company and the individual. It may be necessary in some cases to extend the scope of the intervention to other directors to verify particular aspects of the matters under review. All taxpayers who are to be audited will receive a "Notification of a Revenue Audit".

How many years are being Audited?

In order to deal quickly with the problems identified Revenue decided not to launch an open-ended audit programme, but instead to focus on just four years – 2008 to 2011 - and to encourage tax agents to advise their contractor clients to review those years and make disclosures where appropriate.

Previously Audited

The fact that a case was previously audited [Comprehensive or PAYE (Employers)] and the matter of the tax-free reimbursement of expenses was not raised does not preclude Revenue from raising the matter in the course of an audit under the Contractors Project. The fact that deliberate default was not discovered on an earlier audit does not mean that Revenue has approved or excused the default. Where the treatment of expenses was specifically raised during an earlier audit, Revenue will consider accepting any subsequent adjustment as a Technical Adjustment, without penalty. For a technical adjustment not to attract a penalty, the auditor must be satisfied that due care has been taken by the taxpayer and that the treatment concerned was based on a mistaken interpretation of the law or practice, and did not involve deliberate behaviour. However, an exception to this treatment might be where the level of expenses which should have been taxed increased substantially in years subsequent to the audit.

Inability to Pay

Claims to Inability to Pay are dealt with in accordance with Paragraph 4.9 of the Code of Practice.

No Liability

Many individuals are satisfied that they have no need to make a disclosure because their affairs are in order. While we do our best not to trouble such people, some may receive audit notices, normally where the expenses appear high for the business in question. In that case, it will save a great deal of trouble if the contractor writes to Revenue stating why he/she believes there is no outstanding liability, and briefly explaining why the nature of the actual business generates unusually high expenses.

Review/Complaint

For those who feel they have been unfairly treated, the procedures for seeking a review are set out on Revenue’s website: www.revenue.ie

Progress to Date

Well over a thousand audit letters have been issued by Revenue, and the response has generally been engagement by the contractor to discuss the making of a disclosure (Revenue officials offer advice if required), or to explain why they have no need to do so. There is also a steady flow of disclosures from those who have not yet been selected for intervention. The small group who have decided not to engage have entered the audit process.
Revenue has met with companies, tax agents and representatives of both contractors and recruitment agencies to discuss the project, and to allay some ungrounded fears about Revenue’s intentions. Revenue has not changed its interpretation of tax law. It is focussed on dealing with tax evasion which, if left unchecked, will result in unfairness to other compliant taxpayers and a loss to the Exchequer.
The national project has identified a very wide range of structures and practices being used by contractors, and it has become clear that this project (or a successor) may need to continue for some time, to deal with issues specific to subsets of the contracting sector, and with connected issues.

Quick Summary of the Budget for 2014

RATES/CREDITS 2014
Personal Tax Credits 2013 € 2014 €
Single persons 1,650 1,650
Married or in civil partnership 3,300 3,300
Additional one-parent family 1,650 0
Single person child carer n/a 1,650
PAYE 1,650 1,650
Age credit – Single 245 245
Age credit – Married/Civil partners 490 490
Home carer 810 810
Dependent relative tax credit 70 70
Rent relief
Under age 55 single persons 200 200
Under age 55 married/civil partners 400 400
Aged 55 or over single persons 400 400
Aged 55 or over married/civil partners 800 800
Incapacitated child 3,300 3,300
Blind persons: Single 1,650 1,650
Married/civil partners (both blind) 3,300 3,300
Widowed additional credit 540 540
Widowed person bereaved in year of assessment 3,300 3,300
Widowed parent: 1st year after year of bereavement 3,600 3,600
2nd year after year of bereavement 3,150 3,150
3rd year after year of bereavement 2,700 2,700
4th year after year of bereavement 2,250 2,250
5th year after year of bereavement 1,800 1,800
Exemption limits – 65 – years and over
Single/widowed/surviving civil partner 18,000 18,000
Married or in civil partnerships 36,000 36,000
Standard rate bands
Single/widowed persons/surviving partner 32,800 32,800
Married couples, one income 41,800 41,800
Married couples, two incomes 65,600 65,600
One parent/widowed parent 36,800 36,800
Tax rates
Standard rate 20% 20%
Top rate 41% 41%
PRSI
Employee ceiling No limit No limit
Employee PRSI exemption No exemption No exemption
Employee PRSI rate 4% 4%
Employer PRSI (higher rate) 10.75% 10.75%
Employer PRSI (lower rate) 4.25% 8.5%
Self-employed ceiling No limit No limit
Self employed – minimum contribution €500 €500
Self-employed PRSI rate 4% 4%
Universal Social Charge (USC)
Exemption limit €10,036 €10,036
€0 - €10,036 2% 2%
€10,037 - €16,016 4% 4%
> €16,016 7% 7%
Self-employed income > €100,000 10% 10%
Aged 70 and over/medical card holders, >€60,000 7% /10% 7%/10%
PERSONAL TAX
INCOME TAX RATES AND BANDS
There have been no changes to the income tax rates and bands.
USC
There have been no changes to the USC rates and bands.
PRSI
No changes to the PRSI rates were announced. However, as a carry forward from Budget 2013, with
effect from 1 January 2014, PAYE employees will be subject to PRSI on their unearned income,
including rental, investment, dividends and bank deposit interest income.
In addition the 4.25% low rate of PRSI for employers is due to revert to 8.5% on 1 January 2014.
MEDICAL INSURANCE RELIEF
Tax relief for medical insurance premiums will be restricted to the first €1,000 per adult insured and
the first €500 per child insured. The tax credit for these premiums will remain at the standard tax rate.
ONE-PARENT FAMILY TAX CREDIT
This credit is to be replaced with a new single person child carer tax credit with effect from 1 January
2014. The new credit will be to the same value (€1,650) but will be available to the principal carer of
the child only.
HOME RENOVATION INCENTIVE (HRI)
Tax relief of 13.5% will be available for qualifying expenditure on home renovation and improvement
work. The relief will be granted by way of a tax credit split over two years following the year in which
the works are carried out. The minimum expenditure must be €5,000 and relief will be provided on all
qualifying expenditure up to a maximum of €30,000. The relief relates to the principal private residence
of an individual only while the relevant contractors must be tax compliant.
START YOUR OWN BUSINESS (SYOB)
An exemption from income tax up to a maximum of €40,000 per annum will be provided for a period
of two years to individuals who set up a qualifying, un-incorporated business, having been unemployed
for a period of at least 15 months prior to establishing the business.
HIGH EARNERS’ RESTRICTION (HER) AMENDMENTS
The initial 30% relief for investments under the Employment and Investment Incentive Scheme (EIIS)
will be removed from the HER calculation for a period of three years.
Capital allowances and losses on plant and machinery used in manufacturing trades, which are claimed
by passive investors, will be included as a specified relief for the purposes of the HER.
FILM RELIEF
The new film relief scheme is being brought forward from 2016 to 2015. This means that the existing
form of tax relief available to individuals investing in the film industry will cease a year earlier than
expected. The definition of ‘eligible individual’ for the purposes of the relief is to be extended to include
non-EU talent, in conjunction with the introduction of a withholding tax. This is subject to EU State
Aid approval and a commencement order.
TAX RELIEF ON LOANS TO ACQUIRE AN INTEREST IN A PARTNERSHIP
This relief will be withdrawn on a phased basis over 4 years. Relief will not be allowed for new loans
taken out from 15 October 2013.
Existing claimants will retain the relief on a reducing rate basis until 1 January 2017.
LUMP SUM PAYMENTS
Top slicing relief will no longer be available in respect of all ex-gratia lump sum payments arising on
or after 1 January 2014. All lump sum payments to individuals who worked in Magdalene Laundries
will be exempt from tax.
LIVING CITY INITIATIVE
This will be extended to include residential properties constructed prior to 1915 and to include Cork,
Galway, Kilkenny and Dublin. This initiative is subject to EU State Aid approval and a commencement
order.
PENSION CONTRIBUTIONS
Income tax relief at the marginal rate will remain for qualifying pension contributions.
DEPOSIT INTEREST RETENTION TAX AND EXIT TAXES ON LIFE ASSURANCE POLICIES AND
INVESTMENT FUNDS
The rate of retention tax that applies to deposit interest, together with the rates of exit tax that apply to
life assurance policies and investment funds, is being increased to 41% (previously 33% or 36%
depending on the frequency of the payment). The increased rate will apply to payments, including
deemed payments, made on or after 1 January 2014.
FARMER TAXATION
The eligibility for young trained farmers relief is being extended by adding three more qualifying
courses to the list of relevant qualifications required for the 100% rate of stock relief and for the stamp
duty relief for the purchase of agricultural properties.
BUSINESS TAX
The Minister’s speech contained 25 pro-business measures, many of which are non-tax related and
some of which are covered elsewhere in this summary. The key corporation tax measures are set out
below.
R&D TAX CREDIT
Last year the Minister announced that a full review of the R&D tax credit regime would be carried out.
On foot of this review a number of changes have now been introduced:
- the first €300,000 of qualifying expenditure will benefit from the 25% R&D tax credit on a volume
basis, with no requirement to refer to the 2003 base year spend. This is an increase of €100,000. For
R&D expenditure in excess of €300,000 the relief continues to be based on incremental costs in
excess of the 2003 spend.
- it is also intended that the base year 2003 will be phased out entirely over time.
- the limit on the amount of expenditure on R&D outsourced to third parties which can qualify for the
R&D tax credit is being increased from 10% to 15%.
- since 2012, a company with an entitlement to the R&D tax credit can surrender a portion of the credit
to key employees, effectively in the form of a tax free payment. Subject to certain conditions, the
employees can use the benefit of the tax credit to reduce their own income tax liability. Amendments
are being made to this element of the scheme to remove some barriers to take-up that were identified
in the review process.
FOREIGN DIRECT INVESTMENT
In tandem with Budget 2014, the Minister also published Ireland’s International Tax Strategy statement.
Broadly, this reaffirms Ireland’s commitment to maintaining an open and transparent tax regime. It
also confirms our commitment to retaining the 12.5% corporation tax rate, “the tax rate is settled policy,
we are 100% committed to the 12.5% corporation tax rate, this will not change”.
The International Tax Strategy paper also notes the active role that Ireland is taking in the BEPS project,
which broadly seeks to eliminate global tax mismatches and ensure that the global tax framework is
“fit for purpose”.
This is particularly relevant given the dramatic changes in recent years in how companies do business
across borders.
An interesting change flagged in the Minister’s speech is an amendment to the tax rules for certain
Irish incorporated companies that are not regarded as tax resident anywhere. While the detail will be
included in the Finance Bill, it will no longer be possible for such companies to remain “stateless” in
terms of their tax residence.
BANKING SECTOR
The Minister introduced a levy on banks to operate in the period 2014 to 2016. The levy will be broadly
based on the amount of DIRT tax paid by the banks in 2011 and mirrors what is already in place in
several other EU Member States.
In a relieving amendment, the restriction on the use of tax losses generated by banks that transferred
loans to NAMA has been lifted. Under the old provisions, the banks could only shelter half of their
future taxable profits through the use of historic losses. This restriction has now been removed.
CAPITAL TAXES
CAPITAL GAINS TAX (CGT)
CGT rate remains unchanged at 33%.
CGT ENTREPRENEURIAL RELIEF
A new relief from CGT has been introduced to encourage individuals to reinvest in trading assets. The
relief applies to individuals who have paid CGT on the prior disposal of an asset (since 01 January
2010). The reinvestment must be:
1. in “an asset for use in a new productive trading activity”/“new business”;
2. made between 01 January 2014 and 31 December 2018; and
3. the new asset must be held for 3 years prior to its subsequent disposal.
The CGT payable on the disposal of the new asset will be reduced by the lower of:
- the CGT paid by the individual on a previous disposal of assets since 01 January 2010; and
- 50% of the CGT due on the disposal of the new investment.
The new relief is subject to EU State Aid approval.
7 YEAR CGT HOLIDAY EXTENDED
The relief from CGT in respect of real property bought and held for at least seven years has been
extended. This relief now applies to real property acquired before 31 December 2014.
RETIREMENT RELIEF FOR FARMLAND UNDER LONG LEASES
Retirement relief has been extended to include the disposal of leased farmland (minimum of a 5 year
lease). The disposal must be to a person other than the child of the vendor.
This relief is aimed at encouraging older farmers with no children to lease out their farms to younger
farmers.
CAPITALACQUISITIONS TAX (CAT)
CAT rate remains unchanged at 33%. There is no change to the tax-free thresholds.
STAMP DUTY
The transfer of shares in companies on the Enterprise Securities Market (ESM) of the Irish Stock
Exchange will be exempt from stamp duty. This exemption is subject to commencement order.
Stamp duty rates otherwise remain unchanged.
INDIRECT TAXES
RETENTION OF THE 9% VAT RATE
The temporary 9% VAT rate applying to the tourism and hospitality sectors is due to revert to 13.5%
on 1 January 2014. The Minister has announced that the rate will remain in place for the foreseeable
future.
FARMERS FLAT RATE ADDITION
The flat rate addition, payable to unregistered farmers to compensate them for VAT incurred on costs,
will increase to 5% from 4.8% from 1 January 2014. The VAT rate applicable to the sale of livestock
remains at 4.8%.
CASH RECEIPTS BASIS
Traders whose turnover is below the current threshold of €1.25m are entitled to account to Revenue
for VAT on sales when they get paid, rather than when they issue sales invoices. This threshold will be
increased to €2m with effect from 1 May 2014 and will extend the availability of this important cash
flow saving measure to a larger number of traders.
EXCISE CHANGES
From midnight on Budget night, the excise applicable to a packet of 20 cigarettes will increase by 10
cents (with pro rata increases for other tobacco products), a pint of beer or cider or a standard measure
of spirits will increase by 10 cents while a bottle of wine will increase by 50 cents (all increases are
VAT inclusive). There is no change in the excise applicable to petrol, diesel or home heating oil.
VAT ANTI-FRAUD MEASURES
To assist Revenue in combating the shadow economy, legislative changes will be introduced in three
areas:
- disallowance of input VAT – businesses which have not paid (in full or in part) for supplies within
six months will be required to repay the VAT claimed on those supplies (a similar provision already
applies in the UK).
- quick reaction mechanism – allows Revenue to introduce an emergency and temporary reverse charge
mechanism to certain goods and services to deal with sudden large scale VAT fraud.
- record keeping – powers to allow Revenue issue notices to traders to procure specific information
where Revenue believe that the specified records might assist in identifying VAT fraud.
AIR TRAVEL TAX
This will be reduced to zero with effect from 1 April 2014 with the objective that airlines increase
routes and flight numbers as a result of the initiative.
PENSIONS
TAX RELIEF
Relief for pension contributions continues at the marginal rate of tax.
PENSION LEVY
The 0.6% Pension levy introduced to fund the Jobs Initiative in 2011 will be abolished from 31st of
December 2014. An additional levy on pension funds of 0.15% will, however, be introduced for 2014
and 2015. Therefore the total pension levy in 2014 will be 0.75% reducing to 0.15% in 2015.
CHANGE TO THE MAXIMUM ALLOWABLE PENSION FUND.
The limit on the total capital value of pension benefits that an individual can draw in their lifetime,
where those benefits are drawn after 7th of December 2005, has been reduced from €2.3 million to €2
million. This limit is known as the Standard Fund Threshold (SFT). Individuals with pension benefits
in excess of €2 million on 1st of January 2014 will be able to protect the capital value of those rights
by claiming a Personal Fund Threshold (PFT) subject to a maximum of €2.3 million, being the old
SFT. Those who already have a PFT will retain it and do not need to take any action.
In valuing Defined Benefit rights the current capitalisation factor of 20 will apply for benefits accrued
to 1 January 2014. It is proposed that benefits accrued after this date will be capitalised using a new
age related factor. For example at age 50 or less the capitalisation factor will be 37 while at 65 it will
be 26.
This leaflet is only a summary of the Budget Speech and is not intended to be a comprehensive guide. 15/10/13.

Proposed Light Version of Examinership in Ireland

Proposed Light Version of Examinership in Ireland

In Ireland the Examinership process is a means by which companies can avail of the protection of the High Court for a period in order to explore options to reorganize and restructure in the hope of securing the future viability of the company. As High Court Justice Clarke noted in the Traffic Group Ltd Case (2008) "It is clear that the principal focus of the legislation is to enable in an appropriate case, an enterprise to continue in existence for the benefit of the economy as a whole and, of equal, or indeed greater, importance to enable as many as possible of the jobs which may be at stake in such enterprise to be maintained for the benefit of the community in which the relevant employment is located. It is important both for the court and, indeed, for examiners, to keep in mind that such is the focus of the legislation".

 It is a process unique to Ireland and it allows firms to avail of the stewardship of an independent examiner (usually an accountant) to negotiate and reorganize itself so that it can continue to operate into the future.

At the moment the process is extremely expensive both in terms of the legal costs because of the fact the High Court is the court involved and also because of the costs of the examiner who because he is appointed by the High Court is also under a duty of care and responsibility that can only lead to high costs. Also the highly complicated and detailed work involved makes it costly.

However there are proposals that the proposed new Companies Act will provide provisions for the process to be availed of by smaller companies. The usual criteria of meeting two of the following will likely apply

(1)   Turnover is less than 8.8million per annum

(2)   A balance sheet value of less than 4.4 Million

(3)   Fewer than 50 Employees

This new process will allow applications for examinership of a certain size to go to the Circuit court. Hopefully this will help to reduce the costs involved and to allow more companies to avail of it.

A lot of companies that fail do so because they can not meet their debts as they fall due at a particular point in time. However this liquidity failure does not mean the business couldn’t be made viable by reducing its cost base and intelligent restructuring of its systems and processes.

Hopefully the Minister can recognize this and implement a scheme that will allow for the successful protection of firms and the employment they provide.

By Frank McGivney BA ACMA CGMA 30 July 2013

Very good Article from Chartered Global Management Accountants Magazine about the world economy

Finding your pace in the three-speed world economy 

By Sabine Vollmer 

April 22 2013

The slow recovery in the US and the euro-zone crisis dampened economic growth worldwide last year and prompted the International Monetary Fund to lower its global economic growth projections for 2013. Europe’s economy is expected to contract yet again this year, but the US and particularly economies in Asia, sub-Saharan Africa and Latin America are beginning to see higher growth, the IMF projected in its spring 2013 world economic outlook.
The IMF estimated that the global economy will expand by 3.3% this year, revised down from a 3.6% estimate six months ago. The revised expansion is expected to be driven largely by an accelerated growth in emerging market and developing economies. Supported by resilient domestic consumption and functioning labour markets, this expansion in global output is projected to steadily rise to 4% and 5.7% in emerging market and developing economies in 2014.
IMF Managing Director Christine Lagarde (at left) has said the three-speed recovery isn’t good enough for an increasingly interconnected global economy and urged policymakers worldwide to take customised action that would allow the global economy a “full-speed recovery”.
The euro zone must press ahead with its banking union, Lagarde said. In the US, leaders need to fix the pace of fiscal adjustment. And fast-growing emerging markets need to strengthen financial regulation and invest in infrastructure.
With inflation largely under control thanks to lower food and energy prices, “emerging market economies are doing well,” the IMF outlook stated. “The main macroeconomic challenge in emerging market and developing economies is to recalibrate policy settings to avoid overstimulation and rebuild macroeconomic policy buffers.”
Risks that could derail the accelerated growth and affect world output include rapid credit growth, such as in China’s shadow banking system, an unexpected slowdown in key emerging markets or investment cutbacks, especially in Brazil, Russia, India, China and South Africa, a group also known as the BRICS.
Asia. Projections suggest the region is starting to recover after economic growth dipped to 6.6% in 2012 from 8.1% in 2011. Asia’s GDP growth is projected to reach 7.1% in 2013 and 7.3% in 2014.
Robust domestic consumption and investment and increased external demand, especially as the US economy improves, are projected to boost economic growth in China to 8% this year and 8.2% in 2014.   A remaining risk that is attracting more attention is China’s shadow banking system. Unregulated lenders are responsible for about half of the nation’s borrowing.
The purchase power of a growing class of consumers, a better monsoon season and a switch to pro-growth policies, including proposed reforms to clarify tax laws and stabilise the tax regime, are expected to raise GDP growth in India to 5.7% in 2013 and 6.2% in 2014. Economic growth dropped to 4% in 2012 from 7.7% the previous year.
Structural challenges, such as supply and labour bottlenecks, and an elevated inflation will keep India’s GDP growth from accelerating faster.
The group of ASEAN-5 countries (Indonesia, Thailand, Malaysia, the Philippines and Vietnam) is projected to see economic growth of 5.9% in 2013 and 5.5% in 2014. Indonesia leads the group, followed by the Philippines.
Latin America and the Caribbean. Strong domestic demand – supported by easy financing conditions and high commodity prices – is projected to help raise GDP growth in the region to 3.4% in 2013 and 3.9% in 2014. In the past two years, economic growth dropped to 3% from 4.6% in 2011.
Brazil’s economy, especially, is expected to do better. Economic growth in Brazil slowed to less than 1% last year, but new policies targeted at boosting private investment should start taking effect this year.
Mexico and most other Central American economies are projected to expand in line with potential, or about 3.5% to 4.5%.
Africa. Exports and domestic consumption and investment contributed to 4.8% economic growth in sub-Saharan Africa last year, down slightly from 5.3% in 2011 due partly to civil conflict in Mali and Guinea-Bissau and the interruption of oil exports from South Sudan. Growth projections for the region are 5.6% in 2013 and 6.1% in 2014.
Investments in infrastructure and production are expected to help boost economic growth in Nigeria to 7.2% this year and 7% in 2014, up from 6.3% in 2012.
Increased oil production is helping the Angolan economy expand a projected 6.2% in 2013 and 7.3% in 2014. Cote d’Ivoire’s economy is rebounding following election-related disruptions two years ago and expected to grow 8% per year in 2013 and 2014.
South Africa, which saw labour stoppages last year, is projected to generate economic growth of 2.8% in 2013 and 3.3% in 2014. That’s up from 2.5% in 2012.
Central and eastern Europe and Russia. The euro-zone crisis spilled over into emerging economies in central and eastern European such as Romania, Bulgaria, Serbia, Hungary and Turkey. But economic growth in emerging Europe is projected to reach 2.2% in 2013 and 2.8% in 2014, up from 1.6% in 2012.  Growth in Turkey is expected to accelerate, to 3.4% in 2013 and 3.7% in 2014.
Oil and gas exports are projected to help Russia’s economy generate about 3.5% of growth annually in 2013 and 2014, about the same as in 2012. Energy exports are also expected to boost economic growth above 5% per year in Turkmenistan, Uzbekistan, Azerbaijan and Kazakhstan.
Middle East and North Africa. Political instability has affected several countries in the region, particularly oil importers such as Egypt, Sudan, Jordan, Syria and Lebanon. But several of the oil exporting countries are seeing robust economic growth despite a scaling back of oil production. Qatar is projected to generate GDP growth of 5.2% in 2013 and 5% in 2014. Saudi Arabia’s economy is projected to expand 4.4% in 2013 and 4.2% in 2014.
The entire region is projected to see economic growth of 3.1% in 2013 and 3.7% in 2014, down from 4.8% in 2012.
Related CGMA Magazine content
“Top Five Emerging Markets Capture Foreign Investors’ Attention”: Western Europe and North America are still attractive to foreign investors, but not as attractive as the top five emerging market hot spots. Even lesser-known emerging economies are gaining ground.
“How Corporate Expansion Strategies Can Target Emerging-Growth Powerhouses”: Rather than zeroing in on specific countries as they devise a strategy, companies should focus on cities – in particular the 440 cities in emerging markets projected to grow at double the global economic growth rate by 2025.
“Rapid-Growth Markets Hit a Temporary Lull”: Rising domestic demand will help reverse the slowdown in rapid-growth countries, an Ernst & Young projection suggests. To tap this emerging demand, companies will have to pay attention to the different challenges and opportunities shaping up in specific national and regional markets.
“Emerging Markets Prove Resilient During Global Economic Uncertainties”: The Chinese economic boom is weakening, tensions remain high in the Middle East and inflationary pressures weigh on India, but as a group emerging economies are expected to grow. That growth is likely to change trade patterns and expand middle-class populations.
—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.

S.W.O.T Analysis of the Agrifood Business in Ireland

S.W.O.T Analysis of the Agrifood Business in Ireland

Written by Frank McGivney BA ACMA CGMA

Date 02 May 2013                               

Introduction: Ireland has been a country of farmers for centuries we have the strong natural resources to both sustain ourselves and to export the balance of our agricultural produce to the outside world. In a dynamic and changing world what is the future of Irish agriculture? Agrifood is the business of selling our agriculture produce both domestically and internationally. 

(1)   Strengths

Ireland is one of the largest beef and dairy exporters in Europe. We have a long established agrifood business which is based on the many strengths that Ireland has as a agricultural country. We have a very productive natural resource in the land and the climate that we experience. There can be adverse climate effects over the course of a number of years such as the current lack of growth in feed and grass due to the cold weather we have experienced. Ground temperatures have failed to reach the 6degrees necessary for growth and animals are dropping in the fields from a lack of fodder. However in general over the longer term we have a very productive natural resource.

We also have a very strong reputation in foreign markets. Ireland is seen as a country that supplies high quality produce and this helps the Irish agribusiness to get a foot hold in the supply chain abroad.

We also are known for having a regulatory framework which ensures the quality and consistency of the agriproducts we produce. It was Ireland and its monitoring environment which highlighted the presence of equine meat in the human food chain throughout Europe. We have a very strong TB testing regime and the department of agriculture and the use of herd numbers and paper trails based on animal tagging ensures the traceability of all animal stock in the country.

We also have strong human skills and experience which are world class. We have been farming and involved at a high level in the agribusiness for many years. These skills are the foundation of the future growth and prosperity of the Irish agribusiness. After all you can have the greatest resources in the world but they are no good to you if you don’t know how to use them productively and efficiently in a manner that meets market demands.

(2)   Weakness

We also have some significant weaknesses which hinder our potential progress unless they are addressed properly.

We have an inherent constraint on our production capacity due to the size of the country. There is after all only so much land available to us. There is nothing we can really do about this however what we can do is operate the land we have available to us in the most efficient, effective and productive manner possible. One of the hindrances to this is the traditional ownership model in Ireland. The average farm size is 33 hectares owned by individual farmers on an owner occupier model. This model does not lend itself to efficient methods of production. Larger farm sizes if run properly could lead to significant economies of scale and marked increases in production and output. Of course this is a purely economic analysis and does not take account of the socio economic consequences of a complete divergence from traditional farm structures. Although listening to the recent outcry about the fodder shortages I feel a change may be no harm when the sadness, isolation and loneliness of a generation of bachelor men living on farms was brought to light.

Our existing model of agribusiness is based on selling our produce as a commodity or as a food ingredient. We do not sell to a large extent to the final consumer. The problem with this is that the margins on commodity sales are a lot lower than the margins on end user sales. Therefore although the volume of sales is high the profit margin can be low. It certainly isn’t optimized by ignoring our potential to sell directly to the final consumer either through ourselves or in partnerships. Any move up the supply chain may offer greater profit margins.

There is also a lack of resources allocated to investment in research and development of products and product innovations. Consumer demand is rapidly evolving and it is vital that any business recognizes the need for constant innovation in order to remain appealing to the final consumer

(3)   Opportunities

I feel that with all the talk of recession and gloom and doom that people can forget that there is always opportunities for business. It is just necessary to discover where the opportunities lie. If you are a plasterer and think you can continue to make money hand over fist by subcontracting into the construction business on housing estates then really you are only fooling yourself. If however you are a plasterer and you research consumer demand and discover a way of using your skills to offer premium services to the final consumer (such as for example restoration work) then you have the potential to develop a successful business. The same is true for the agri business.  The potential is two fold first of all investing in innovative products which meet the demands of the consumer and secondly moving into the markets which have the greatest potential for growth.

The agribusiness has to offer products that are demanded. In order to access the high margin levels of the supply chain we need to offer innovative products. This may be just a case of marketing existing products in a different manner or accessing the retailer directly or even entering the retail market ourselves.

Traditionally the Irish agribusiness has concentrated on existing markets which are largely developed countries. However it has started to make inroads to newer markets such as the BRIC countries of Brazil, Russia, India and China which are all considered to be at around the same level of development. Also the VISTA countries of Vietnam, Indonesia, South Africa, Turkey and Argentina are under going significant development and growth. It is these types of countries where we can differentiate the Irish agribusiness and avail of the opportunities that they offer. We can’t really produce the volume to feed the poorer countries food demands and we may not want to try. The high volume sales that poorer countries offer are usually at very low profit margins. Ireland however has a limited supply of agricultural produce so we need to maximize out profitability on this limited supply and this is achievable by targeting the growing middle classes in developing countries.

The opportunity is there to go to these countries and perform the due diligence and research needed to generate a market for Irish agrifood. We could foster partnerships both within our own economy in order to achieve economies of scale and to reduce costs such as marketing and transportation. We could also establish partnerships with retailers or producers in the developing countries to reach higher levels of the supply chain and sell high volume output at high margins.

Another major opportunity is to sell our skills set. We have some major agrifood businesses which have developed into world leaders. We can sell the skills we have obtained to other countries. Many countries may have great natural resources or machinery but they lack the people necessary to optimize these resources. By sending our talented people to these countries we can make a lot of money and help develop markets that we can then sell our products into.

(4) Threats

The world economy is currently in a major recession and this is a barrier and threat to the Irish agri business. The banking sector is very hesitant to give finance to business and this may prevent the necessary investment needed to access global markets. The recession has also resulted in weak demand through the world economies as unemployment levels rise and the disposable income of people falls dramatically.

The common agricultural policy is been renegotiated and this can be seen as a potential threat if the negotiations do not promote the growth of the agri business sector.

There are factors outside the control of the agribusness such as ever increasing energy costs and weak exchange rates for the euro. These have to be worked with and managed by the industry.

The biggest threat is the consumer itself. The consumer is constantly changing its behavior and demand patterns. People no longer are influenced so much by huge advertising campaigns. Increased access to the internet makes people aware of the full range of foods available and also allows them to judge the quality and source of the food they are buying. It is the objective of any agribusiness to keep up with the demand patterns and behaviors of consumers and to offer products which meet this demand.

In conclusion the agri business has potential to avail of the huge forecasted growth in global demand for food products. We just have to be aware of this potential and focus our efforts on the areas which will offer the greatest returns for the resources we have available to us.

Why the audit function is so important to larger public companies

Why do large companies need auditors?

Author Frank McGivney

Date 20 April 2013

The company structure is the vehicle by which people with resources can invest in different enterprises in order to increase the long term value of these resources (share capital growth) and to obtain some short term income from their investment(annual dividends) .The company structure allows investors to risk some of their resources while availing of the protection of limited liability. This means that the extent of any loss they will incur is limited to their investment. If a company fails then their other  resources and assets will not be affected. This is a vital prerequisite in order to encourage investors to take the risks involved in putting money into any enterprise. Before the advent of the principal of limited liability the investor could lose all of their wealth if an enterprise failed. 

As companies have developed over the centuries there has been a separation of management from the ownership of companies. In the modern world companies are owned by a large number of investors (shareholders) and the company is run by the directors. This means that the people who run the company are different from those who own the company. This has lead to the development of the agency theory. Essentially the directors act as agents for the owners. The objective of directors should be to maximise the return to share holders both in terms of long term growth and in short term revenue, while also protecting the interests of other stake holders, while still operating the business in accordance with company law regulations and requirements. Agency theory contends that directors however will be motivated to maximise their own salary, benefits, bonus and share options. While also maximising the short term share price so as to reflect favourably on their own personal success in operating the business. However the pursuit of these objectives does not necessarily lead to decisions that are in the best interests of shareholders. This conflict of interest is the reason that auditing is so vitally important. Once one man is entrusted with the resources of another for the pursuit of wealth then given the nature of man it is vital that the fidelity of the controller of the resources is checked and verified.

In Ireland and the UK there has developed an option for smaller private companies to claim audit exemption. This is because in a lot of small companies the above separation of ownership and control does not occur because the owners are also the people who run the company. Therefore the need for an audit is diminished. Also it allows small companies to avoid the high costs of audits, However even within these companies there are published guidelines as to how their accounts should be produced so that they still have financial controls to protect other stakeholders such as creditors and the revenue commissioners.

 Of course in most cases auditors and mangers are on the same side as they attempt to protect the assets of a company and identify anyone who is trying to commit fraud. However they can diverge when it is the managers/directors who are the actual ones who are trying to commit fraud or enrich themselves at the expense of the shareholders of the business. At this stage they separate as the auditors are the ones who will attempt to identify any such malpractice or fraud. The effectiveness of external auditors to actually identify such misbehaviour has been justifiably called into question. Most fraud is identified by whistleblowers and by other parties rather than the external auditors. Currently a lot of work is been undertaking in the accountancy field to rectify this situation. Of particular concern in my opionion is the fact that the four big accountancy firms are the only ones who perform audits in public companies quoted on stock exchanges. Also companies don’t change their auditors regularly and therefore a relationship develops which is not consistent with the off hand nature that auditors should operate in. Some suggestions are that public companies will have to change their auditors regularly. It is also suggested that the firms of a size just below the big four accountancy firms should be allowed to develop to order  to compete for public company audits, There are market forces which are an obstacle to these firms growing to the size where they can compete for public company contracts and these need to be removed in my opinion in order to give more credibility to the profession

 The Cadbury report was produced because of Robert Maxwells Mirror group scandal and the BCCI scandals. In 1992 it stated that “The central issue is to ensure that an appropriate relationship exists between the auditors and the management whose financial statements they are auditing.”

Prior to 1844 in the UK and Ireland only the crown could issue Charters of Incorporation. Examples of such charters were The Honourable East India Company and the South Sea company. The south sea Company was the Enron of its day where false claims of potential profits lead to huge investments in the company. The business proposals proved to be fraudulent and the company collapsed leading to the ruination of many of the investors. The industrial revolution lead to a huge increase in the level of trade and manufacturing in the UK and  an Act of Parliament was passed in 1844 that allowed the incorporation of Joint stock Companies. This was followed in 1855 with the passing of the Limited liability Act which allowed for investors to quantify the risk of loss they were taking in their investments. This resulted in the divergence of ownership and control in large public companies as discussed above.

In 1900 the push towards accountability took a big step with an act that required the publication of a audited balance sheet and thus began the steps to the modern situation of producing full audited accounts by large public corporations in a way to ensure transparency and accuracy in the accounts and information presented to the public.

In Summary audits of large companies are necessary in order to protect the interests of all its stakeholders. These stakeholders include the owners of the business. The auditors function is to ensure the owners investment is safe and that the directors aren’t diverting the resources to their own gain. The auditor also protects creditors to ensure that the assets of the business are preserved to allow it to pay its debts. The auditors’ objectives are extremely complex in the modern business environment and hopefully all of the current developments will give confidence back to people in the work of the auditor.  

We specialise in producing audit exempt accounts for small and medium size companies in Ireland to the high standard required by the Companies acts 1963 to 2013 and accounting standards.
Frank McGivney & Co. Chartered Management Accountants Kells, Co Meath

Fraud Prevention in SME's

Fraud in Small and Medium size enterprises

Author Frank McGivney BA ACMA CGMA

Date: 14 April 2013

Every business owner should be aware of the risks that their business can face in relation to fraud by any party that is involved with the business. The biggest risk of been subject to fraud is the complacency that it will not happen to your firm. This complacency allows fraudsters to operate with ease. A lot of people start their business in good faith and it is easy for them to be unaware of all of the risks involved in running a business as they strive to build a fledging business idea into a success. Historically the following enterprises are most at risk:

(1)   Where the business owners are not aware of the dangers of fraud.

(2)   Where staff are not managed properly

(3)   Where members of staff have unresolved personal issues such as gambling problems, who suffer from alcoholism etc

(4)   Industries which have traditionally been subject to corruption

(5)   Industries which are in decline or which are subject to poor trading conditions.

(6)   Business where proper control and risk assessment systems are not implemented

Of course no matter what controls you put in place there is always a risk of someone committing a fraud on you.

There are three costs associated with fraud

(1) The cost of the fraud itself. This can add up to a significant amount. Take for instance an employee in a retail outlet who pockets Euro100 a week from the till every week. Even a small retail shop may have a turnover of over a million euro a year and so 100 a week out of a turnover of 19000 a week may seem nothing to the fraudster but it adds up to 5000 a year and given the low percentage profit on many retail outlets and the high rental costs this adds up to a high   percentage of the firms overall profit. If the overall profit margin is 15% then the gross profit of the business on a million is 150,000. If you take away rental costs of say 30000 a year and electricity costs of 12000 and staff wages of 50000 a year then the profit is down to 58000. Then take away rates and other expenses and the profit on a million euro turnover is soon down to 30,000 a year and then the 5000 of defrauded money can clearly be seen as a huge percentage of the firms profit

(2) The cost of discovering and quantifying the loss. Forensic accountants may have to hired or an investigator and these all add to the cost of the firm

(3) The cost of putting in place systems to prevent the fraud from reoccurring.

Internally to a firm there are two forms of fraud

(1)   employee fraud this is where an employee defrauds the firm of money

(2)   Financial statement fraud This is here a firm produces financial statements which reflect a better position than reality in order to influence external stakeholders. I will have a future article exploring this area.

Externally other parties can also commit fraud on a firm. This can be done by external contractors, customers and suppliers. This can include double billing for supplies or services. Supplying goods of a quality or value much lower than invoiced, looking for refunds on high value sales with fake sales invoices, etc. Some of the frauds from external parties rely on collusion with employees of the firm. Controls need to be put in place to prevent as much as possible of such collusion. One of the most fundamental controls is ensuring segregation of duties to ensure no one person is in full control of any area of a business on their own. Also managers should not be capable of overriding internal controls on their own

 Fraud prevention and detestation has a lot to do with the culture of the firm. An attitude that fraud is not acceptable and will be fully and firmly dealt with should permeate from the business owners down to every level of the firm. All employees should be aware that fraud is not acceptable and a whistleblowing policy should be established and implemented in a way that will protect the whistleblower.

While every one in an organisation can prevent and detect fraud there are specific people who should be utilised to minimise the risk of fraud been committed. Internal and external auditors should always perform there duties with an awareness of the need to detect and investigate any potential instance of fraud. Auditors can use various tools and analysis to highlight potential areas of risk. Often times analysis which shows skewed results are the pointers to fraud, Simple indications such as employees who never take holidays or staff who will not delegate responsibilities or duties are suspicious. In my experience when employees who go missing when you try to audit them or who can’t explain the operation of their jobs in clear terms are areas to investigate. Of course this can also just be due to factors such as incompetence or resistance to having their work assessed. While doing investigative work for one of the Irish semi-state bodies I found a lot of resistance from older employees as there seemed to be a culture of resistance to change in the company and really a resistance to management in general that I haven’t experienced to such a level in private industry. However I overcame this with proper communication of the objectives of the investigation which was purely commercial in nature. It did highlight areas of concern and lead to a lot of improvements beyond the core work I was contracted to work on.

On occasions where there is suspicion of a fraud then a specialist such as a forensic accountant may have to be used. The forensic accountant’s functions are to

(1)   Determine if a fraud has been committed by using various different techniques and methods of analysis

(2)   Determine the scope of the fraud and how much of a loss has been incurred

(3)   Determine who is responsible for the fraud. In larger firms there is often more than one employee involved and often times there are outside parties also involved

(4)   Determine how the fraud operated and then put in place controls that will prevent it been repeated.

As with everything in life the experience of someone committing a fraud against your firm can be used in a positive manner to learn lessons and to allow the business owner to improve the business. Often times during the forensic accountants work other information and data comes to light. This may relate to how tasks are perfumed and these can lead to more effective and efficient systems bee put in place, as in my example of the semi state body above.

If you feel you have been the subject of a fraud or you want to analysis the ability of your firm to detect or prevent fraud then you can contact Frank McGivney & Co. Ltd on 0469293891 or fmcgivney@live.com. I have experience of forensic analysis for any number of small firms. I have also experience of preparing fraud investigations for the High Court involving cases against among others the banks. I have also produced forensic reports for criminal cases which have been provided to the Criminal Assets Bureau. I also work extensively in forensic reports for divorce cases.