Tax-dodging boat-owners

33. Ireland has not claimed to have taken measures to combat that instance of tax evasion. […]

34. […] the Commission has adduced evidence of a failure by Ireland to fulfil its obligation to ensure the effective application of the rates of excise duty laid down by Directive 2003/96 on gas oil intended for use in the engines of private pleasure craft, which failure is, to some degree, of a consistent and general nature, within the case-law referred to in paragraph 29 of the present judgment.

I have been complaining, for many years, that owners of diesel-powered private pleasure boats in Ireland were not paying the tax they should have been paying on their fuel and that the Revenue Commissioners were not taking the matter seriously. I think I could say that very few other people were at all interested in or concerned about this.

However, one body, the European Commission, did take an interest. It initiated a case against Ireland; the European Court  has recently ruled in the Commission’s favour — the quotation above is from its judgment — and Ireland has finally been forced to do what it should have done at least twelve years ago: to ban the use of cheap diesel in pleasure boats.

This page, which replaces an earlier page on the subject, attempts to set out and comment on the events leading up to, and some that might follow from, the European Court judgment.

Diesel derogations

In 1992 Ireland, along with the rest of the members of the European Communities, agreed to a taxation regime under which [inter alia] owners of diesel-engined private pleasure craft [leisure boats, yachts, motor cruisers …] would no longer be allowed to use cheap diesel [green diesel, marked gas oil, rebated diesel …] for boating. However, Ireland said that it would need time to make the necessary arrangements and, along with the United Kingdom, it was given a seven-year derogation.

At the end of the seven years, Ireland suddenly realised that it had been sitting with its thumb in its national bum and had made no arrangements for the new regime. Accordingly, it sought and was granted a further seven-year derogation. At the end of that time, Ireland realised that it had nodded off like Rip van Winkle and had unaccountably failed to make the necessary arrangements: it had spent fourteen years failing to draft a simple piece of legislation. It therefore sought a third derogation — but this time it was told to get stuffed.

The Irish Sailing Association is thus, I think, not entirely accurate when it says

For many years leisure vessels in the EU have been required to use only fully-taxed “white” diesel. Three countries — the UK, Belgium and Ireland — had a derogation that allowed their leisure sailors to buy and use marked diesel — red in the UK and Belgium, green in Ireland. That derogation was withdrawn in 2008.

The derogation was not “withdrawn”. Derogations are for a limited period; the second period of derogation, during which Ireland and others were to prepare to implement the law, came to an end, on schedule — and in 2006, not 2008.[1] Ireland’s request for a third derogation — was its submission a confession of administrative incompetence, of contempt for the EU or of mere arrogance, stupidity and cupidity? — was refused. What happened in 2008 was that the Irish Government, in the Finance Act 2008, introduced a Potemkin tax-scheme: something that might look like an attempt to comply with EU law but that did not actually force yacht-owners[2] to pay more for their diesel.

Potemkin’s honour

The Department of Finance could, of course, have introduced simple regulations requiring that “white diesel” [full-price, road, auto … diesel] be used in yachts. Instead, for reasons that are obscure to me, it introduced what Cantillon, a pseudonymous columnist at the Irish Times[3], called an “honour system”: voluntary taxation for the well-heeled. Yacht-owners would be allowed to continue to use cheap green diesel [marked gas oil, rebated diesel]; they would keep records of the amount of diesel they had bought and, at the end of each year, they would pay to the Revenue Commissioners, for that amount, the difference in duty between green and white diesel.

Cantillon said “the fact is that there is already a system in place requiring leisure boat owners to pay tax on the diesel they use”. Cantillon was disturbed to find that the European Commission intended to take Ireland to court but seems not to have wondered why the Commission was dissatisfied with the “honour system”. The Commission knew more than did Cantillon: it knew that the “honour system” was a complete failure. That information was readily available from the Revenue Commissioners press office (and on this website).

The European Commission’s press release said that

While Irish law requires craft owners to pay to the Revenue the difference between the tax paid on marked gas oil and that due if the gas oil had been charged at the standard rate, the low number of [Mineral Oil] tax returns indicate that the minimum level of taxation is not applied.

The Commission had given Ireland a chance to mend its ways:

On 22 April 2014, the Commission sent a request taking the form of a reasoned opinion to Ireland on the subject in question (MEMO/14/293). The European Commission officially asked the Irish authorities to amend the relevant legislation. As there have been no changes to the legislation, the Commission has decided to bring the matter before the Court of Justice.

Incidentally, the Irish Sailing Association says that the Commission’s action followed an audit but I believe — I could be wrong — that it followed the receipt of a complaint.

Mineral Oil Tax returns[4][5]

The “honour system” simply did not work. Here are the numbers of returns made in each year of the “honour system” [updated to include returns made in 2018 for 2017].

Year	Payers	Litres	Amount
2010 for 2009	38	n/a	n/a
2011 for 2010	41	n/a	n/a
2012 for 2011	22	141,503	€53,399
2013 for 2012	23	301,674	€113,841
2014 for 2013	20	279,842	€105,562
2015 for 2014	26	289,151	€108,935
2016 for 2015	18	371,666	€140,022
2017 for 2016	21	384,150	€144,725
2018 for 2017	18	405,500	€152,766

By 2014, Ireland had had two seven-year derogations followed by eight years spent devising and implementing an obviously unworkable system. By 1 March 2014, just before the European Commission’s reasoned opinion arrived, the Revenue Commissioners had received five sets of returns from the yacht-owners of Ireland; the numbers of returns were 38, 41, 22, 23 and 20. Any member of the Revenue or Department of Finance staff who had ever walked on Kingstown pier might have wondered at the disparity between the number of returns and the number of yachts tied up there, but nobody seems to have been bothered about it — apart from the European Commission [and me].

The Commission’s reasoned opinion “formally requested Ireland to amend its legislation to ensure that private pleasure boats can no longer buy lower taxed fuel intended for fishing boats”.[6] Ireland stuck its thumb back in its bum and did nothing. The Commission then (unlike Ireland) did what it had said it would do and issued proceedings against Ireland in the European Court.

The Irish Sailing Association takes action

At around the same time as Cantillon was wittering about honour, the Irish Sailing Association issued a press release on the subject. A correspondent to Practical Boat Owner responded to it:

Thank you for publishing the Irish Sailing Association’s press statement about the European Commission’s threat to take Ireland to court “for not properly applying the rules on fiscal marking of fuel”. I haven’t had such a good laugh for years.

I was particularly amused by the ISA’s view that “The issue is not the colour of the diesel but the payment of taxes”, which is precisely why the European Commission is taking action. […]

I do not know how many private pleasure craft there are in Ireland, but I suspect that the number is over 10,000. However, even if it is only half that, the current rate of compliance with the tax is less than one half of one per cent. The vast majority of Irish owners of diesel-powered boats have been dodging the tax.

If they had really been worried about fuel supplies, I would have expected them to make their returns and pay up cheerfully. They had five years to make the system work; instead they treated it with contempt. Which is what the ISA’s own pleadings now deserve.[7]

The court case

On 17 October 2018, European Commission -v- Ireland was heard in the Eighth Chamber. Ireland was represented by M Browne, G Hodge, J Quaney and A Joyce “acting as Agents” [I don’t know what that means] and by two barristers, F Callanan SC and B Doherty BL.

The Irish case, as set out in the Judgment of the Court, looked weak to me. Consider, for instance, these gems. On the Commission’s first complaint against Ireland:

33. Ireland has not claimed to have taken measures to combat that instance of tax evasion. It has, admittedly, described in detail the considerable efforts it made to combat tax fraud, but in a different area, namely that of gas oil used for road transport, which is not the subject of the action for failure to fulfil obligations.

“Yes, teacher, I admit that I didn’t do my homework, but I did take the dog for a walk.”

And on the second complaint:

62. Contrary to what Ireland contends, [part of a sentence] cannot be interpreted as meaning that it authorises Member States to permit, in specific cases, the use of [green instead of white diesel], a fortiori where that use does not relate, as is the case of private pleasure craft, to ‘a road-going motor vehicle’.

Ireland was, it seems, claiming that a boat was the same as a car, thus reversing the argument of the defendant in Rumpelheimer -v- Haddock.[8]

Little weight is to be attached to my opinion of the weakness of the Irish case. On the other hand, it also looked weak to the three judges of the European Court, who threw out every one of the Irish arguments and concluded:

On those grounds, the Court (Eighth Chamber) hereby:

1 Declares that, by not ensuring that the minimum levels of taxation applicable to motor fuels laid down by Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity were applied to gas oil used as fuel for propelling private pleasure craft,

and by permitting the use of marked fuel for propelling private pleasure craft, even where that fuel is not subject to any exemption from, or reduction in, excise duty, Ireland has failed to fulfil its obligations under Articles 4 and 7 of Directive 2003/96 and Council Directive 95/60/EC of 27 November 1995  on fiscal marking of gas oils and kerosene respectively;

2 Orders Ireland to pay the costs.

As the ISA put it

In October 2018 the Court found in favour of the Commission. The verdict was accepted by the Department of Finance, who have instructed the Revenue to implement it.

And about bleeding time too, after losing over 25 years of revenue and incurring the costs of defending a hopeless case. No doubt Ireland’s current reliance on help from its fellow-members in coping with Brexit, and the possibility of more important battles ahead on corporate taxes, helped the Department of Finance to decide to push the yacht-owners off the plank.

The implications and the current ISA view

That most recent ISA press release at least suggests that there is now an adult in the room: someone is taking practical steps to find out where legal diesel will be available and what can be done to fill gaps in supply. All of that is very laudable, but there are some points in the press release that merit comment.

Principle

The ISA says

In principle this means that supply and use of green diesel for leisure craft will be illegal, just as it is in road vehicles, and possibly subject to similar heavy penalties.

Why “in principle”? It is illegal. The ISA was wrong in its earlier press release when it said

The issue is not the colour of the diesel but the payment of taxes.

The European Court’s ruling makes it plain that the issue is both: the full rate of tax, as applicable to road diesel, is to be paid — and, furthermore, marked fuel cannot be used in yachts, even if the full rate of tax has been paid. No more green diesel in private pleasure craft.

Implementation

The ISA regrets that Ireland has been forced to drop the Potemkin scheme.

The loss of the case now poses serious problems. We are now seeking creative ways of addressing the situation, and maintaining communication with harbours, marinas and oil suppliers.

It sets out the difficulties it expects to face the “leisure sailor”, especially on the west coast of Ireland and shows what is known about the availability of legal diesel around the coast. This is what should have been done before the expiry of the second derogation in 2006, but better late than never.

Happily, road diesel is widely available throughout the country, and I expect the free market to solve the problem of transporting it from filling stations to those harbours lacking waterside supplies.

Enforcement

[…] and possibly subject to similar heavy penalties.

As for the heavy penalties, we must look forward to their imposition: inspections and heavy penalties will be essential if there is to be that effective enforcement whose absence the ISA bewails in the Potemkin scheme. Some changes to the law may be required[9]; I look forward to seeing squads of customs officers visiting all the main marinas and harbours, preferably during popular events. A few high-profile raids would, I imagine, have a salutary effect.

Such visits might also allow the Revenue Commissioners to accumulate information about the ownership of assets, information that could be checked against the tax returns of those using the vessels, just in case yacht-owners have made any mistakes. After all, on the evidence of the Mineral Oil Tax, it seems that the vast majority of owners of private pleasure craft are tax-dodgers.

It might also be useful to have a system like this.

If no provision is made for inspections, we might predict that compliance would be low and that a further complaint to the European Commission might be necessary.

Price

The ISA says

The price (where available) will of course be road equivalent, or more likely higher.

That won’t be a problem: those compliant leisure boaters who have been making annual returns (and those who already use white diesel) are quite accustomed to paying “road equivalent” prices, while the tax-dodgers can use their accumulated ill-gotten gains to subsidise their future purchases.

Safety

There is of course a major safety issue involved.

The “major safety issue” is not specified. Anyway, that fox was shot a long time ago. As the European Commission remarked in 2006

Against this background an authorisation under Article 19 [for a further derogation] should not be granted for reasons which are merely inherent in the switch from the derogation to standard taxation. This applies obviously to the administrative burdens and compliance and/or enforcement difficulties, including safety issues resulting from the change itself.

And in a footnote:

As regards environmental and safety aspects, these are dealt with in corresponding legislation. They are unrelated to the rules of the Energy Tax Directive.[10]

Ireland did not present any argument about safety before the European Court.

Inland waterways

The final problem noted by the ISA is this:

Inland waterway craft are facing exactly the same problems.

Not so. There are scarcely any boats on the inland waterways other than private pleasure craft, so the waterside diesel-sellers will find it in their interests to sell only “white diesel”.

In summary

Overall, I expect that more yacht-owners will pay the proper price for their fuel. There will no doubt be continued evasion, especially in more remote areas. Revenue may well concentrate its enforcement efforts [assuming that it makes any] on those places where it will get the highest returns: those with more and larger, more valuable boats. Assuming that any necessary powers are provided by legislation, a few raids on marinas and harbours should raise the level of compliance. And given that Revenue is starting from [on the European Court’s figures] a rate of one tenth of one per cent, it should be fairly easy to improve compliance.

Down with this sort of thing

The annoying part of the ISA article is the attempt to blame the Revenue Commissioners for the failure of Irish boaters to pay their taxes:

This [the Potemkin scheme] was extremely poorly publicised — the great majority of leisure sailors were (and still are) unaware of it — and the annual returns averaged 25 in number, probably one percent of users. The Revenue took no action. […]

At 25 returns a year, that’s not one per cent: it’s one tenth of one per cent.

Irish Sailing had worked closely with the Department of Finance to defend the interests of leisure sailors, but the defence (on the basis of safety and availability) fell in the face of the patently dysfunctional system of tax collection.

The Potemkin scheme was invented some time between 2006, when a third derogation was refused, and 2008, when the scheme was introduced in the Finance Act 2008. As I pointed out earlier, the safety fox was shot in 2006 and it should have been clear to ISA and the Department of Finance that “safety and availability” would not be accepted as the basis for a scheme that did not meet the EU rules.

Thus the “defence” did not “fall” because tax collection did not work: the “defence” was doomed because the scheme’s design was wrong, and that should have been obvious even before the Finance Act 2008 introduced it. Furthermore, even if all Irish yacht-owners had been willing to pay, the scheme would have fallen on the Commission’s second ground of complaint: marked fuel cannot be used in yachts, even if the full rate of tax has been paid. The scheme’s legal basis was flawed, even before questions of implementation arose.

Voluntary tax

On the European Commission’s first complaint, the failure “to ensure the effective application of the rates of excise duty laid down by Directive 2003/96 for diesel supplied to private pleasure craft”, the Potemkin scheme was woefully inadequate. Indeed, were I a cynic, I might say that the design had three aims:

• to look slightly plausible
• to avoid inconveniencing the yacht-owners of Ireland by forcing them to pay more
• to require an absolute minimum of administration — assuming that you didn’t care whether any tax was actually paid.

A voluntary tax scheme might have had a chance of working in Switzerland or Germany, places where citizens often obey the law even when nobody is looking, but it had no chance at all in Ireland. The way to get people to pay tax is to strap them down, attach electrodes to their delicate bits and start flicking the power switch, meanwhile asking whether they prefer to pay by cash or by card. Or, putting it another way, grab them by the balls and their hearts and minds will follow.

Short of that, what would have been required to make the Potemkin scheme work? A register of the owners of all private pleasure craft, some statistics on normal fuel usage to provide a way of spotting under-reporting, a way of checking purchases against sales, the power to take money directly from owners’ bank accounts and to seize and sell their boats in case of non-compliance, the power to withdraw licences or otherwise to punish sellers aiding non-compliance …. No such conditions existed or were likely to exist and the scheme was unworkable from the start. The alternative, requiring that yachts use white diesel, was quick, easy and cheap, but those virtues did not commend it to the Powers That Be.

The ISA’s remit

According to Harry Hermon of the ISA

It is not the ISA’s remit to regulate or to enforce regulation.[11]

At the time, the ISA was studiously ignoring the low rate of compliance with the Potemkin scheme. But it was also lobbying for the retention of the scheme, under which tax evasion was rampant. And at the same time the ISA, which took no interest in whether tax was paid or evaded, was keen that taxpayers’ money should be spent on the ISA.

According to the most recent annual report I can find on the website of the Irish Sports Council [aka “Sport Ireland”], that for 2016, the ISA received in that year just over one million euros of public money: €323000 for its national governing body, €635000 in high performance grants, €132000 to nine named individuals as “international carding scheme grants” and €18000 for women in sport. That was about seven and a half times the amount of Mineral Oil Tax paid in 2017 for 2016.

Promoting a scheme under which tax evasion is rampant, while at the same time accepting money from compliant taxpayers, is deplorable behaviour.

Self-interest

Nonetheless, the ISA soon discovered a reason to encourage boaters to comply with the law:

It may already be too late to save the present diesel supply system in Ireland, but the very least we can do is to strengthen the country’s case by paying the tax. If we don’t do that, we won’t have a leg to stand on.

The ISA’s plea to the boat-owners of Ireland may[12] have helped to increase the number of returns by 30% between 2014 (for 2013) and 2015 (for 2014) — but that was only from 20 to 26, and in the three following years the numbers were down again to 18, 21 and 18.

As a persuasive exercise, then, it wasn’t very successful, despite the fact that the ISA has channels of communication with clubs, organisations and individual boaters; it has a website  with FaceTweet and all that stuff; there is a magazine called Afloat  that is published “in association with Irish Sailing”; ISA has relations with journalists in the MSM. Yet with all those channels at its disposal, it was unable to persuade Irish boaters to pay their taxes, even when it sought to save the Potemkin scheme.

I do not mean to suggest that the ISA was wholly, or even mostly, to blame for the almost universal evasion of the Mineral Oil Tax; I intend rather to suggest that the Revenue Commissioners, lacking those channels, are not wholly, or even mostly, to blame either.

A bas les aristos!

The fault lies with whoever designed the Potemkin scheme. Once that was set up, failure — widespread tax evasion — was inevitable.

As far as I can tell, the design was done within the Department of Finance. If I am wrong, I would be delighted if the Department would send me copies of all its files, including the records of all discussions with lobbyists. Did they include the ISA? Is that what “worked closely with the Department of Finance” means?

V I Lenin wrote of Russia

The bourgeoisie are today evading taxation by bribery and through their connections; we must close all loopholes.[13]

I do not suggest that there was any bribery involved in Ireland, but nonetheless we got a scheme full of loopholes — or rather a scheme that was one big wide open loophole. That is bad in itself, but what is worse is that it undermines the authority and credibility of the state apparatus, especially in tax-gathering.

There have been difficulties in recent years in getting hoi polloi to pay various taxes and charges on some of the basics of everyday life: the household tax, water charges, rubbish collection charges. The leaders of the sans-culottes are ever eager to seize on causes for popular agitation. The Potemkin scheme, under which the vast majority of a group of relatively well-to-do folk evaded tax on a luxury, and suffered no punishment, is a near-perfect excuse for class war.

When the yacht-clubs of Kingstown are surrounded by howling proletarian mobs, and the supplies of Pimms are running out, the members will at least — like the Earls of Tyrone and Tyrconnell or the Wild Geese — be able to escape by taking to their boats and (unless the rebels have cannon on the piers) sailing off to nearby tax havens. The rest of us will be left here to face the Committee of Public Safety and the ride in the tumbril, consoled only by the thought that the buggers have got away with it again.

Notes and sources

[1] Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity (Text with EEA relevance) Article 18 and Annex II

[2] I say “yacht” as shorthand for “private pleasure craft”: I include motor-only boats as well as motor-and-sail boats. Boats without diesel engines were unaffected by all of this

[3] Irish Times 29 November 2014; see also a reply in the Letters column 3 December 2014

[4] Source: annual requests to the Revenue Commissioners Press Office

[5] The average amount of fuel per return is high, so I believe that several of the returns are from hire fleets. I suspect that much of the increase in the amount of money being collected and in the number of litres being returned reflects a recovery in the boat-hire industry. I did ask the Revenue Commissioners for a breakdown of the figures by form used: form PPN1 is for private owners and forms PPN2 and PPN3 are for hire-boats, so that would have enabled me to check my suspicion. However, Revenue said “A further breakdown of this number by return type cannot be provided for reasons of taxpayer confidentiality”

[6] European Commission press release dated 16 April 2014, about three quarters of the way down the page

[7] Practical Boat Owner March 2015. Reproduced by permission of the letter’s author

[8] Readers will not be surprised that A P Herbert’s father was from Co Kerry. They might, however, be interested to learn that his brother, Captain (E) Sidney Jasper Herbert, went down with HMS Hood

[9] On a quick glance, the Finance Act 1999 might have to be amended to classify boats as conveyances or otherwise have them included as vehicles. However, IANAL and especially not a tax lawyer, and I have not attempted to read most of the legislation

[10] Communication from the Commission to the Council in accordance with Article 19(1) of Council Directive 2003/96/EC (operation of private pleasure craft) COM(2006) 743 final

[11] Practical Boat Owner March 2015. See also here. Links to older ISA press releases now point to http://www.flyingfifteen.ie, which is about a type of sailing dinghy

[12] Post hoc non ergo propter hoc

[13] V I Lenin Report To The All-Russia Congress Of Representatives Of Financial Departments Of Soviets 18 May 1918