Deeds of Covenant - open to abuse

[Daddy]

If one is giving 5% of their income to a parent over 65 by way of covenant and the over 65 is under the threshold is this not open to abuse by the parent giving the money back together with tax refunds the parent gets and the tax refunds the individual who is covenanting the money gets. What safeguards do Revenue have in place so that this sort of thing cannot happen ?

 

[ClubMan]

It is a condition of [broken link removed] that the donor does not receive any benefit from the recipient - e.g. by the latter returning money to the former.

Payments under a Deed must be made without
any benefit being received from the covenantee in
return, either directly or indirectly

I suppose the normal safeguards apply - e.g. the possibility of an audit. Lots of tax rules are not explicitly checked to make sure that people comply with them and the law.

 

[Daddy]

Thanks Clubman.

The possibility of an audit doen'nt carry much weight if one is handing over a few grand and getting it back from the parent over 65 at the end of the day. I presume the parent is'nt obliged to keep records of expenditure and could just say it went in day to day expenditure. As far as I can see it is open to abuse. A son or daughter handing over 5,000 can in effect get a tax refund of 2,050 (41% taxpayer)if the parent is willing to go along with the scam and I believe some parents would to help out.

What prompted this question is an article written by Colm Rapple in today's Irish Examiner - on covenants but I should add he made no reference to this abuse.

 

[ClubMan]

Yes - it is probably open to abuse but so are lots of tax rules. Revenue [broken link removed] that people are generally tax compliant/honest:

We operate a self-assessment ethic – we assume people are honest and allow them to claim their due. A small proportion of claims are checked.

 

[Newby]

And if your claim is valid then you have nothing to worry about in the case of a Revenue Audit. Revenue Audits are usually only a problem for individuals with something to hide (or bad records).

 

[ClubMan]

Also - the potential cost of evasion in this area is probably a lot less than in other areas that are more common or involve higher figures. That's not to condone any evasion in this or any other area. For someone on €100K covenanting 5% and then having the money returned to them in order to evade tax is costing the taxpayer €100K x 5% @ 41% = c. €2K. Unless such evasion and the take up of covenants in order to do this was rife the total cost would presumably be small. I would imagine that most people are not on €100K and most people are not using such covenants.