Cussens and Others v Brosnan (Inspector of Taxes)

• Jurisdiction: Ireland
• Judge: Mr. Justice Charleton
• Judgment Date: 11 June 2008
• Neutral Citation: [2008] IEHC 169
• Court: High Court
• Date: 11 June 2008

[2008] IEHC 169

THE HIGH COURT

No. 659 R/2007

Cussens & Ors v Brosnan (Inspector of Taxes)

REVENUE JURISDICTION

BETWEEN

EDWARD CUSSENS, JOHN JENNINGS AND VINCENT KINGSTON

APPLICANTS

AND

T. G. BROSNAN (INSPECTOR OF TAXES)

RESPONDENT

TAXES CONSOLIDATION ACT 1997 S943

VALUE ADDED TAX ACT 1972 S25(2)

VALUE ADDED TAX ACT 1972 S12

VALUE ADDED TAX ACT 1972 S4

FINANCE ACT 2003 S17

TAXES CONSOLIDATION ACT 1997 S942

FINANCE ACT 2002

FINANCE ACT 2005

TAXES CONSOLIDATION ACT 1997 S941

ILLEGAL IMMIGRANTS (TRAFFICKING) ACT 2000 S5

TAXES CONSOLIDATION ACT 1997 S941(6)

COURTS OF JUSTICE ACT 1924 S29

PEOPLE (DPP) v GILLIGAN (NO 3) 2006 3 IR 273

MUIR v INLAND REVENUE COMMISSIONERS 1966 1 AER 295

MUIR v INLAND REVENUE COMMISSIONERS 1966 1 AER 38

O CULACHAIN v MCMULLAN BROTHERS 1995 2 IR 217 1995 2 ILRM 498 1995/10/2953

LYALL LAND LAW IN IRELAND 2ED 2000 822 - 823

CONVEYANCING ACT 1881 S18

IRON TRADES EMPLOYERS INSURANCE ASSOCIATION v UNION LAND & HOUSE INVESTORS 1937 CH 313

ICC BANK PLC v VERLING 1995 1 ILRM 123

WISE FINANCE CO LTD v O'REGAN UNREP LAFFOY 26.6.1998 1998/34/13353 1998 IEHC 105

BINSBERGEN v BESTUUR VAN DE BEDRIJFSVERENIGING VOOR DE METAALNIJVERHEID 1974 ECR 01229

EUROPEAN COMMUNITIES ACT 1972

KOFOED v SKATTEMINISTERIET 2007 I-05795

ALBATROS FEEDS LTD v MIN AGRICULTURE & FOOD & ORS 2007 1 IR 221

FURNISS v DAWSON; MURDOCH v DAWSON 1984 AC 474

MCGRATH v MCDERMOTT 1988 IR 258

MCCABE v SOUTH CITY & COUNTY INVESTMENT CO LTD 1995 ITR 1313 1995/3/1053

TAXES CONSOLIDATION ACT 1997 S811

COMMISSION OF THE EUROPEAN COMMUNITIES v BELGIUM 1992 ECR I-06757

VERENIGING VERONICA OMROEP ORGANISATIE v COMMISSARIAAT VOOR DE MEDIA 1993 ECR I-00487

QUEEN v HM TREASURY & COMMISSIONERS OF INLAND REVENUE, EX PARTE DAILY MAIL & GENERAL TRUST PLC 1998 ECR 05483

TREATY ESTABLISHING EUROPEAN COMMUNITY ART 52

TREATY ESTABLISHING EUROPEAN COMMUNITY ART 58

EMSLAND-STARKE GMBH v HAUPTZOLLAMT HAMBURG-JONAS 2000 ECR I-11569

EEC REG 2730/79

HALIFAX PLC, LEEDS PERMANENT DEVELOPMENT SERVICES LTD & COUNTY WIDE PROPERTY INVESTMENTS LTD v COMMISSIONERS OF CUSTOMS & EXCISE 2006 ECR I-01609

EEC DIR 77/388 ART 13

MINISTERO DELL'ECONOMIA E DELLE FINANZE v PART SERVICE SRL, IN LIQUIDATION UNREP EC 21.2.2008 (CASE NO C-425/06)

TREATY ON EUROPEAN UNION ART6(2)

TREATY ESTABLISHING EUROPEAN COMMUNITY ART 288

DE LA FERIA PROHIBITION OF ABUSE OF (COMMUNITY) LAW: THE CREATION OF A NEW GENERAL PRINCIPLE OF EC LAW THROUGH TAX 2008 CMLR 45 435

SINCLAIR COLLIS LTD v COMMISSIONERS OF CUSTOMS & EXCISE 2003 ECR I-05965

EEC DIR 77/388 ART 13(b)

BELGIUM v TEMCO EUROPE SA 2004 ECR I-11237

VALUE ADDED TAX ACT 1972 S23

MCDERMOTT CONTRACT LAW 2001 PARA 18.01

TWEDDLE v ATKINSON 1861 1 B & S 393 121 ER 762

DUNLOP PNEUMATIC TYRE CO LTD v SELFRIDGE & CO LTD 1915 AC 847

VALUE ADDED TAX ACT 1972 S3(1)(f)

VALUE ADDED TAX ACT 1972 S4(3)

VALUE ADDED TAX ACT 1972 S4(2)

EEC DIR 77/388 ART 5(3)(b)

INSPECTOR OF TAXES v KIERNAN 1981 IR 117

KEOGH v CRIMINAL ASSETS BUREAU (CAB) & ORS 2004 2 IR 159 2004 2 ILRM 481 2004/26/6080

CRIMINAL PROCEEDINGS AGAINST KOLPINGHUIS NIJMEGEN BV 1987 ECR 03969

MARSHALL v SOUTHAMPTON & SOUTH-WEST HAMPSHIRE AREA HEALTH AUTHORITY (TEACHING) 1986 ECR 00723

MARLEASING SA v LA COMERCIAL INTERNACIONAL DE ALIMENTACION SA 1990 ECR I-04135

VALUE ADDED TAX ACT 1972 S10(9)

CADBURY SCHWEPPES PLC & CADBURY SCHWEPPES OVERSES LTD v COMMISSIONERS OF INLAND REVENUE 2006 ECR I-07995

HAUSGEMEINSCHAFT JORG & STEFANIE WOLLNY v FINANZAMT LANDSHUT 2006 ECR I-08297

FINANZAMT GOSLAR v BREITSOHL 2000 ECR I-04321

EEC DIR 77/388 ART 13(b)

EEC DIR 77/388 ART 13(c)

EEC DIR 77/388 ART 13(d)

EEC DIR 77/388 ART 13(e)

EEC DIR 77/388 ART 13(f)

EEC DIR 77/388 ART 13(g)

EEC DIR 77/388 ART 3(a)

VALUE ADDED TAX ACT 1972 S4(1)(b)

MURPHY v TELECOM EIREANN 1989 ILRM 53

REVENUE

Value added tax

Lease - Attempts to reduce VAT liability by artificial lease and leaseback arrangements - Whether scheme of lease and leaseback exempted liability for VAT - Validity of lease in contravention of mortgage deed - Whether lease ineffective due to absence of prior written consent of the mortgagee - Whether lease and leaseback void - Abusive process - Whether lease and leaseback had no commercial reality - Whether abusive practice within doctrines identified of European Court of Justice - Jurisprudence of European Court of Justice - Powers of review of court - Applicability of doctrine of abusive practice in European law to scheme - True reality of situation - Principles of general application - Whether interest due - Muir v Inland Revenue Commissioners [1966] 1 All ER 295, Ó Culachain v McMullan Brothers Ltd [1995] 2 IR 217, Irontrades Employers Insurance Association v Union Land and House Investors [1937] 1 Ch 313, ICC Bank plc v Verling & Ors [1995] 1 ILRM 123, Wise Finance Co Ltd v O'Regan (Unrep, Laffoy J, 26/6/1998), Van Binsbergen v Bestuur [1974] ECR 1229, Kofoed v Skatteministeriet [2007] ECR 5795, Albatros Feeds Ltd v Minister for Agriculture [2006] IESC 52 [2007] 1 IR 221, Criminal proceedings against Pupino [2005] ECR 5285, Adeneler v Ellinkos Organismos Galaktos [2006] IRLR 716, Furniss v Dawson [1984] AC 474, McGrath v McDermott (Inspector of Taxes) [1988] IR 258, McCabe v South City & Country Investment Co Ltd [1997] ITR 107, Commission v Belgium [1992] ECR 6757, Vereniging Veronica Omroep Organisatie v Commissariaat voor de Media [1993] ECR 487, The Queen HM Treasury [1998] ECR 5483, Deutsche Milchkontor v Germany [1983] ECR 2633, Johnston v Chief Constable of the Royal Ulster Constabulary [1986] ECR 1651, FMC v Intervention Board for Agricultural Produce [1996] ECR 389, Chemie Nederland v Minister van Volkshuisvesting [2000] ECR 4475, Halifax plc v Commissioners of Customs and Excise [2006] ECR 1609, Ministero dell'Economia v Part (Unrep, ECJ 21/2/2008), Hans Markus Kofoed v Skatteministeriet [2007] ECR 5795, Transport Service [2004] ECR 1991, Schmeink, Cofreth and Strobel [2000] ECR 6973, Sinclair Collis Limited v Commissioners of Customs and Excise [2003] ECR 5965 and Belgium State v Temco Europe SA [2004] ECR 11237 considered - Taxes Consolidation Act 1997 (No. 39), ss 941 and 943 - Value Added Tax Act 1972 (No 22), s 25(2) - Council Directive 77/388/EEC - Appeal dismissed (2007/659R - Charleton J - 11/6/2008) [2008] IEHC 169

Cussens v Brosnan

Facts: A partnership claimed they were not liable to VAT on the sale of holiday cottages. The inspector of taxes rejected that proposition because the exemption from VAT arose from a series of artificial transactions. The partners appealed to the Circuit Court and this judgment constituted the opinion of the High Court on questions asked by the Circuit Court by a case stated pursuant to s. 943 of the Taxes Consolidation Act 1997 as applied to Value Added Tax by s. 25(2) of the Value Added Tax Act 1972, as substituted and amended.

Held by Charleton J. in answering the questions of law posed that the lease and leaseback had no commercial reality and constituted an abusive practice and even if they were valid - which they were not - they should be redefined for the purpose of VAT in order to reflect the true reality of the actions of the partnership. The European Court decisions as to abusive process were of general application and they required national courts to redefine abusive measures in accordance with reality.

Reporter: R.W.

1 1. This judgment constitutes the opinion of the High Court on questions asked by His Honour Judge Harvey Kenny, by a case stated, dated 22 ^nd October, 2007, pursuant to s. 943 of the Taxes Consolidation Act 1997, as applied to Value Added Tax by s. 25(2) of the Value Added Tax Act 1972, as substituted and amended.

2 2. Value Added Tax assessments were raised against the applicants, whom I will refer to as the partnership, and by similar expressions, for the periods January/February 2002 to November/December 2002 and for the period May/June 2004, by the respondent, whom I will refer to as the Inspector of Taxes. In essence, the partnership claimed they were not liable to VAT on the sale of holiday cottages. The Inspector of Taxes rejected that proposition because this exemption from VAT arose from a series of artificial transactions. The partners were unsuccessful in their appeal before the Appeal Commissioner on 21 ^st July, 2005. The partners then appealed to the Circuit Court, and Judge Kenny dismissed the appeal, stating this case for the opinion of the High Court as to whether he was correct in law on a number of legal issues. The full text of the case stated is appended to this judgment. The Value Added Tax Act 1972, as amended, implements the Sixth Council Directive on VAT, properly called the Sixth Council Directive 77/388/EEC of 17 ^th May 1977 on the harmonization of the laws of the Member States relating to turnover taxes - common system of value added tax: uniform basis of assessment, and is the Directive herein referred to, unless the context otherwise requires.

Case Stated

3 3. The basic facts need to be stated. The partners developed a site at Baltimore in County Cork where they built fifteen holiday homes for speculative sale. In order to reduce their VAT liability, which would arise by virtue of such a sale, the partners purportedly entered into a twenty year and one month lease "with a connected company", Shamrock Estates Ltd. The property was then purportedly leased back immediately to the partners by Shamrock Estates Ltd for two years. Then the lease and the leaseback were extinguished by a mutual surrender. Because the partners accounted for the VAT on the capitalised value of the twenty year and one month lease and had therefore paid VAT, pursuant to s. 12 of the VAT Act 1972 on those apparent transactions, they claimed to be entitled to dispose of their freehold interests in the...