State helps rich to save €3 billion

It is a highly profitable, privately owned company that can make payments of up to €100 million within a few years to one of its main shareholders.

But it seems that two such companies exist in Ireland, according to documents released by the Department of Finance on Monday 7 February, and that there are also at least two such lucky individuals.

The figures were estimated and identities not disclosed, to protect the confidentiality of the residents who benefited from an extraordinary tax-driven pension scheme, introduced in 2000 by Charlie McCreevy when he was Minister for Finance. There are many other shareholder/directors who have received payments of over €10 million-plus from their companies.

Some 6,200 people have taken advantage of these self-administered pension schemes and the construct that is known as an Approved Retirement Fund. While the average fund is worth €235,000, the reality is that this masks vast disparities. Some, such as those described above, have retired, taken the lump sum and are watching the remainder accumulate further riches. Others have been funding in preparation for imminent retirement.

Here's how it works. Let's assume a woman is a shareholder and director in one of Ireland's largest and best-known companies. Had she taken €100 million in dividends out of her company, she would have paid tax at 42 per cent. Instead, her company pays the money into an approved retirement fund, where she is effectively allowed to manage her own money.

Upon retirement, a quarter of the money in the fund can be drawn, tax-free. That's €25 million at least, tax-free and probably a lot more if the money in the fund has been invested successfully. She can then draw an income from the rest of the fund, again tax-free. Tax can be applied to the balance when she dies, although this is reduced according to the distribution to those who inherit her estate. A widowed spouse will pay no tax, children will be able to reduce their liability.

It is an extraordinary, tax-efficient way of getting one's hands on the cash in a company.

Or was, until changes to the rules were introduced by Finance Minister Brian Cowen. There is now a limit on tax-free contributions to such funds of €5 million, which is still highly generous.

And there is nothing that can be done to levy tax on over €1.1 billion that was invested in approved retirement funds in recent years since McCreevy modified the rules in 1999 and 2003.

Given that generosity, it's a wonder some people bothered to go into tax exile in recent years, especially as APRs are allowed to invest in any sort of projects and could borrow a multiple of the sums involved as well to increase the potential rewards.

If they controlled their own companies, as many property developers and builders do for example,

 shareholder/directors could have moved profits from their ventures into their pension funds rather than paying dividends that would attract tax. The only catch is that a high salary would have to be paid – that would attract tax – but overall that would be a small price to pay. Whereas most people are restricted to a percentage of their salary that can be invested in a pension tax free, according to their age and a maximum salary of €246,000, this did not apply to elite directors.

Monday's reports, voluminous tomes that take some considerable time to read on the Department of Finance website, exposed the details of a range of tax incentives available to the very wealthy.

Cowen's clampdown on the various reliefs available, as announced in the Budget and expanded upon in the Finance Bill, now seems more limited than it could have been, and the extent to which the rich availed of the benefits far greater than had been believed. In total, it has become clear that the rich saved about €3 billion in tax because of various schemes and have another €850 million or so still to draw down.

The property tax breaks for example amounted to about €2 billion in tax foregone. The loss of revenue is not the only problem: it is arguable that, as well as facilitating necessary development in certain areas, they also contributed to unnecessary construction in unsuitable locations, solely so that interested parties could claim tax relief. They also contributed to rampant inflation in prices at the same time as they conferred unnecessary tax benefits to rich individuals.

That it was all legal and above board is not the fault of those who have availed of the law. It is the fault of the legislators who introduced these tax breaks. They either did so in the belief that this redistribution of wealth in favour of the already rich had greater economic benefits for the common good or simply because they didn't realise the amount of tax lost in doing so.

Either way, the tax revenues had to be gathered elsewhere. Which explains why, at the same time as McCreevy was making things more convenient for the rich, he failed to index-link movements in tax credits and tax bands for ordinary taxpayers. He also hiked indirect taxes, such as VAT, which tend to act disproportionately against those on lower incomes. After all, there is only so much that even the rich can spend.

Matt Cooper presents The Last Word on 100-102 Today FM, Monday to Friday, 5pm to 7pm