The Revenue Commissioners has said it would challenge "any" scheme set up to avoid tax under a loophole shut last month by the Government.Its examination of a student housing scheme funded by AIB suggests beneficiaries of the loophole might face a tax liability on contracts already signed.
The purpose of the housing scheme was tax avoidance.
Though not tax evasion per se, an illegal activity, the Revenue has described the scheme as an "abuse" of a tax relief that was designed to promote student housing.
The scheme was based in an unnamed university.
According to a note to the Government from the Revenue, the avoidance mechanism involved the creation of four special purpose companies by the institution.
The note said: "The essence of the avoidance scheme involves the diversion of the rent-roll from the accommodation from the investor, in whose hands it would be subject to tax at 42 per cent, to a special purposes company which has charitable status for tax purposes and, thus, is exempt from tax on the rental income."
While a Department of Finance spokesman was unable to quantify the projected loss to the Exchequer under the loophole, a large amount of money is believed to be involved.
In a section that was underlined in the note to Government on July 13th, Revenue said any extension of schemes using the loophole would "obviously increase the Exchequer cost significantly".
AIB's link with schemes that were abusing the loophole emerged yesterday, about six weeks after the Government closed it down.
Revenue believed the schemes were operating "in a totally unacceptable way to the detriment of the Exchequer".
It advised closing off the loophole where investors in accommodation programmes had not entered contracts.
Such measures were designed "to avoid accusations of retrospection and messy transitional provisions", although Revenue said yesterday that it would pursue schemes already in operation.
A spokesman said: "We will examine and challenge any existing schemes that are out there.
"We can and probably will do that." Asked how this could be achieved, he said: "There is general anti-avoidance legislation that we can look at in this context."
AIB said the scheme was operating "entirely legitimately".
Claiming the "structures were devised by accountancy firms and tax consultants" to "optimise" use of the relief, the bank said it rejected any allegation that it had abused the taxation code.
The bank made a €114 million payment to Revenue in 2000, settling its liability over widespread deposit interest retention tax (DIRT) evasion.
It was the State's biggest tax settlement, although AIB had disputed its liability. Of the Section 50 scheme, it said: "AIB organised the funding of some of these transactions, all of which were carried out fully in accordance with legislation."
But Revenue said the scheme was bringing additional costs to the Exchequer "over and above" the original purposes of the relief. It said: "If the abuse is not closed off, it will undoubtedly be used (if it is not already being used) by other third-level colleges for all new Section 50 projects."
When closing the loophole on July 18th, the Government said the closure would "affect lessors who have not entered into final binding contracts" before that day. Other actions that Revenue might take were not prejudiced by the announcement, it said.
But the Green Party finance spokesman, Mr Dan Boyle TD, questioned the move.
He said: "Until the Minister and the Government are prepared to admit that a very fine line exists between tax avoidance and tax evasion, then it must be prepared to accept the political responsibility for the creation of a culture where people pay minimal tax."
