Alongside the shiny, new Ireland, the old culture of tax evasion and worker exploitation goes on as before, writes Fintan O'Toole
These are the boom times for builders. Seventy-seven thousand new houses were finished last year, and planning permission was granted for more than 100,000 others. The Irish public took out as much money in housing loans in each three-month period last year as it did in all of 1998, and we are now borrowing around €16 billion a year to buy houses. Investment in the construction industry was up by 8 per cent last year. Since late 2000, an average of four million square metres of commercial property has been built annually. Vast amounts of public money are going into the pockets of builders: the public capital programme spent €8.4 billion in each of the last two years and will dish out €9.8 billion this year.
All of this is the tangible reality of a literally new Ireland. The countryside that Eamon de Valera rhapsodised as "bright with cosy homesteads" gleams with new housing estates, apartment blocks, motorways and office blocks. But underneath them is an old, unreconstructed Ireland. The Ireland of cowboys and chancers, of artful dodgers and fly-by-nights, hasn't gone away. And it is nowhere more obviously present than in the construction industry itself.
Most builders may be decent and honest, but a significant minority still operates outside the law, dodging taxes and refusing their workers basic entitlements to pensions and death benefits. More to the point, they get away with it.
The brazenness can be breathtaking. On Tuesday, for example, Dublin District Court heard of a new twist to tax fraud that involves not the passive scam of evading taxes but the higher art of claiming tax refunds for fictitious jobs. Four building subcontractors who faked tax refund claim forms pleaded guilty to deception and theft during 2003. They submitted forms to the Revenue claiming refunds on the 35 per cent which main contractors must automatically deduct from payments to subcontractors. But the jobs they were claiming for did not exist and when the offenders received the refund cheques, they simply passed them on to the builders who organised the fraud, keeping a small cut for themselves.
These were the little criminals, cogs in a machine that turned out tens of thousands of euro for the bigger boys. None of them got a custodial sentence and the larger building contractors who benefited most from the scam were said to be "not yet before the courts". But even if they are brought to justice, those bigger players will be just the unfortunate few from the many who are engaged in similar rackets. For the Dublin court case happened to coincide with the release of the Comptroller and Auditor General's annual report, which showed, among other things, widespread abuse by builders of the same system, which is known as Relevant Contracts Tax (RCT).
The RCT system was introduced in 1970 to counter tax evasion by subcontractors in the construction industry. Yet 35 years on, the cowboy culture it was intended to obliterate is alive and kicking. The chairman of the Revenue Commissioners, Frank Daly, told the Comptroller and Auditor General (C&AG) that "the serious compliance problems that RCT was introduced to tackle still exist today and are compounded by the highly competitive nature of the industry where non-payment of tax debts is seen by some as a way to gain a competitive advantage". The honest builders, in other words, are still having to compete with the chancers who cut costs by evading tax.
The C&AG looked at a sample of 65 annual returns submitted by principal contractors. Half of these were submitted late, but no penalties for late submission were applied by the Revenue. In eight of the 65 returns, subcontractors who should have had 35 per cent of their payments retained in fact had no RCT deducted. Yet even though it has been obvious from previous C&AG reports that there has been a serious problem with the collection of RCT for many years, there is no real sense that compliance is being rigorously enforced.
The Revenue has admitted that accurate monitoring of compliance only began in January this year, when it was found that just over half of contractors submitted their forms properly and within a month of their due date. In recent years, and before the case in Dublin on Tuesday, just one case of serious RCT fraud has actually been prosecuted all the way to a conviction. The sentence was 240 hours of community service.
ONE OF THE reasons why builders and others take the risk of tax fraud is that the risk is not all that great. There is still a blatant contrast between the way the State treats social welfare fraud and the way it treats tax evasion. Objectively, both have the same effect of depriving the Exchequer of money that could be spent on useful social projects. But tax fraud is committed for the most part by well-off and respectable people, while diddling the dole tends to be the preserve of those on the margins. There may not be a conscious bias in the justice system, but the results are stark.
Look at the list of tax defaulters released by the Revenue this week. Builders, farmers, publicans, company directors, shopkeepers, hauliers, dentists, vets, landlords - they are people of substance. The tax each withheld from the State tends to range from €200,000 to €1 million. Much of this crime was part of a wider conspiracy - many of these people held Ansbacher or bogus non-resident accounts at times when the Exchequer was bare and vulnerable people were suffering the consequences of severe cutbacks in basic services. Yet even when they are caught, these people merely pay (admittedly heavy) financial penalties. The financial blow is cushioned by the fact that they've had the use of these unlawful funds for many years. A penalty of €2.4 million on a cattle dealer who held a bogus non-resident account and evaded nearly €1 million in tax may seem severe. But it is perfectly possible that €1 million invested in property in 1986 could have yielded at least €10 million in the meantime. Apart from the embarrassment, the tax dodger could still come out ahead.
The scale of tax evasion is vast - investigations of the various organised scams have so far brought in €2 billion. But the Revenue completed 300 fewer comprehensive audits of tax returns in 2004 than in 2003, even though 27 such audits last year yielded at least €1 million each. And just 31 cases of probable tax fraud were investigated by the Revenue's Investigation and Prosecutions Division last year. In the entire course of 2004, one single individual was convicted of a tax offence. The conviction, for making incorrect capital gains tax returns, resulted in a three-month prison sentence, but it was suspended in favour of community service and a €5,000 fine.
Social welfare scams, however, are treated very differently. During 2004, the Department of Social and Family Affairs forwarded 476 criminal cases to the Chief State Solicitor's Office for prosecution. A total of 259 criminal prosecutions involving social welfare recipients were finalised in court in 2004. The amount of money that these people had claimed or obtained was, relative to the scale of tax fraud, a pittance. Between April and June this year alone, the Revenue's investigations uncovered €135 million in unpaid tax. The loss to the Exchequer from all the social welfare scams that came to court in all of 2004 was just €1.1 million - that's an average of €4,247 each. Yet while no one went to jail last year for tax fraud, 38 people were imprisoned for welfare offences. Steal a few thousand euro from the State by claiming unemployment assistance when you're doing a few nixers, and you could well end up in Mountjoy. Steal a million by operating a bogus non-resident account and you will get some financial pain and some embarrassment.
The low chance of suffering serious consequences is one of the reasons why the cowboy culture persists in partsof the construction industry. But there is a wider sense of fecklessness too. Fifteen people died in accidents on building sites in 2004, and 16 have died so far this year. A major blitz of site inspections by the Health and Safety Authority in 2003 found that just 2 per cent were fully compliant with the safety regulations, while in 15 per cent of cases, things were so bad that all work had to be stopped.
Yet this lawlessness is compounded by a further widespread flouting of the law which has disastrous consequences for those who are injured or bereaved as a result of building-site accidents. On Wednesday, the Pensions Board published a report into persistent complaints from Siptu about the operation of the Construction Federation Operatives Pension Scheme. By law, around 80,000 building workers should be covered by the scheme, which entitles them to pensions and life assurance. In fact, it covers just 65,000 construction workers. And even this may be an understatement of the problem, since many of the 70,000 workers who are classified as self-employed subcontractors and therefore exempted from the scheme, are really employees. Legal obligations are being ignored with impunity.
CONSTRUCTION IS NOT just a wild frontier. It is the biggest, most dynamic part of the current economy, and accounts for the bulk of domestic growth. Aside from the huge private investment in housing, vast amounts of public money are going into the industry. The Government has committed itself to spending 5 per cent of GNP on capital projects each year. Between this year and the end of 2009, the Exchequer will spend at least €32.6 billion on infrastructure. According to A&L Goodbody Consultants this week, as much as €140 billion will have to be invested over the next 15 years.
Given this level of State involvement, it is obvious that governments could do a lot to shape a culture in which high standards prevail and decent operators are not under pressure from the lower costs that can be attained by cheating.
Yet, if anything, the State has tended to encourage competition based on the cutting of corners. The controversial Turkish construction company, Gama, has secured €200 million worth of State contracts since its arrival in Ireland in November 2000, even though there have been persistent allegations that it exploits its workers. Gama has been the overwhelming beneficiary of a Government scheme to exempt employees from the payment of PAYE and PRSI, which was intended for workers who travel between different EU countries. Last May, Chris Dooley reported in The Irish Times that a total of 1,867 workers had been covered by the scheme since the beginning of 2003 and that, of these, 1,324 (more than 70 per cent) were employed by Gama Construction. Despite these considerable incentives, the Department of Enterprise, Trade and Employment ignored and then explicitly dismissed allegations that the company flouted Irish labour laws.
The Taoiseach this week denounced a company in another sector, Irish Ferries, for its plans to replace its Irish workforce with cheaper migrant labour. But the Irish Ferries plan is part of a wider race to the bottom, in which standards are driven downwards and rights are eroded, all in the name of competition. The Government has encouraged this trend in some areas but seems to decry its consequences in others. It might now reflect on the lessons of the construction industry: that in a cheap and shoddy working culture, everybody gets ripped off, including the State itself.