Cussens & Ors -v- Brosnan, [2008] IEHC 169 (2008)

Docket Number:2007 659 R
Party Name:Cussens & Ors, Brosnan
Judge:Charleton J.




JUDGMENT of Mr. Justice Charleton delivered on the 11th day of June, 2008

1. This judgment constitutes the opinion of the High Court on questions asked by His Honour Judge Harvey Kenny, by a case stated, dated 22nd 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. 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 21st 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 17th 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. 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 holiday homes without paying VAT on a sale amount totalling approximately 3million. The Inspector of Taxes raised a VAT assessment on the basis that the partners were obliged to account for VAT in respect of the freehold sales of the holiday homes, without the exemption claimed by them as a result of the purported leasing arrangements, and this is what is disputed. Shortly put, under the Value Added Tax Act 1972 as amended, the scheme of lease and leaseback, as described, giving rise in itself to a liability in relation to VAT, exempted them, they claimed, for liability for VAT in respect of the ultimate sale by the partners of the individual holiday homes. Crucial to the issue of payment of VAT on the sale of the holiday homes is whether there was any reality to the purported scheme of lease and lease back that the partnership claimed had preceded it.

4. The indenture of lease between the partners and Shamrock Estates Ltd is for a term of twenty years and one month and dates from 8th March, 2002. The memorandum of agreement whereby Shamrock Estates Ltd let to the partners that same interest for a term of two years is dated 8th March, 2002. When a relevant transfer was registered in the Land Registry on 19th March, 2002, the partners signed as alleged vendors, in the name of the applicants herein, and then two of the applicants signed as Directors of Shamrock Estates Ltd in their alleged capacity as purchasers of the leasehold interest. On 20th March, 2002, Shamrock Estates Ltd purportedly surrendered the twenty year and one month lease to the partners. On 20th March, 2002, the partners, purportedly acting as tenants, surrendered the two year lease. All of this was done expressly for the purpose of tax avoidance. It is improbable, at the least, and I so hold, that the partners or Shamrock Estates Ltd ever intended to do what any ordinary party entering a lease intends to do; namely, to exclusively occupy and use the property for a fixed term of years as determined by the lease and perform the covenants therein set out, including the payment of rent. It is also improbable that Shamrock Estates Ltd and the partners by entering into these transactions ever intended to create binding legal relations with each other.

5. The land on which these holiday homes was built, and in respect of which these transactions were effected, was owned as to the legal interest by the ACC Bank plc pursuant to a mortgage dated 12th March, 2001. The equitable interest in the property, that of redemption on payment of the loan for the purchase of the land, was held by the partners, two of whom signed the mortgage deed. Clause 6.1 thereof contains a negative pledge in the following form:-"The Borrower shall not except with the prior written consent of the Bank (a) create, extend or permit to subsist any Encumbrance over the Secured Assets or any of them ranking in priority to or pari passu with or after the security hereby created, or (b) part with, sell, convey, assign, transfer, lend, lease or otherwise dispose of, whether by means of one or of a number of transactions related or not and whether at one time or over a period of time, the whole or any part of the Secured Assets or any interest therein." 6. Since the mortgage deed barred the partners from entering into the purported lease transactions to which I have referred, the first issue before Judge Kenny was the validity of the twenty year one month lease by the partners in favour of their own company Shamrock Developments Ltd. The second issue before Judge Kenny was whether the two purported leases, with subsequent surrender, should be disregarded for the purposes of VAT assessment because this process constituted an abusive practice in accordance with European law. To these issues have been added a third issue before this Court, which is as to the extent of the powers of review of the High Court on such an appeal.

Finding of Fact

7. Judge Harvey Kenny had the advantage of hearing evidence in the appeal before him in the Circuit Court. The only evidence offered by either side was that of Edward Cussens, who is an accountant as well as being one of the partners. Having heard that evidence, Judge Kenny reached a conclusion which is binding on me and which informs all that follows in this judgment. It is as follows:-"It was for the applicants to satisfy the Court that their transactions were not abusive, and they had failed to do so. The Irish Court had to consider what was the real substance and significance of the transactions concerned, and could take into account the purely artificial nature of these transactions and links of a legal, economic or personal nature between the operators involved in the scheme for a reduction of the tax burden: the real substance and economic significance of the transactions was solely for the purpose of creating a tax advantage: there was no possible economic sense in the partnership disposing of the property at an annual rent of 66,100 and having to pay a higher rent on the leaseback: there was no cash flow advantage, no change in de facto occupation and no economic benefit; in the interim, the partners had an unmarketable title. As a result the whole arrangements was an artifice; no more than a device, which may have been within the letter of s. 4 of the 1972 [Value Added Tax] Act, but certainly not within the spirit of the section or of the [Sixth European VAT] Directive and constituted an abusive transaction. There was no element of penalty involved [in the tax assessment by the Inspector of Taxes], because the assessments took full account of the input VAT and of the output VAT already accounted for by the partners. (The interest issue had not been raised at this point [in the appeal before Judge Kenny])."

Scope of the Appeal

8. Judge Kenny held that the leasing transactions between the partners and some of themselves acting as Shamrock Estates Ltd were not void. He reasoned that as there was no privity of contract between the bank, which then owned the legal interest in the property pursuant to the mortgage deed, and the lessees, the lease for twenty years and one month was valid. The partners, as taxpayers, had therefore succeeded on that issue. It was only on the issue of abusive practice in European law that Judge Kenny was found against the partnership. The partners have appealed to this Court and argue that the sole issue which the Court is entitled to determine is that of the applicability of the doctrine of abusive practice in European law to their scheme. If this were so, I would not be entitled to revisit any issue as to the effect of the legal ownership by the bank of the property subject to the leasing scheme.

9. This appeal is based on s. 941 of the Taxes Consolidation Act 1997, as amended by s. 17 of the Finance Act 2003, which provides as follows:-"941.-(1) Immediately after the determination of an appeal by the Appeal Commissioners, the appellant or the inspector or such other officer as the Revenue Commissioners shall authorise in that behalf (in this section referred to as "other officer"), if dissatisfied with the determination as being erroneous in point of law, may declare his or her dissatisfaction to the Appeal Commissioners who heard the appeal. (2) The appellant or inspector or...

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