Revenue and Customs Commissioners v Droog
|Mr. Justice Clarke
|06 October 2016
| IESC 55
|[Appeal No: 218/2011]
|06 October 2016
 IESC 55
[Appeal No: 218/2011]
THE SUPREME COURT
Tax – Time limits – Taxes Consolidation Act 1997 – Appellant seeking to implement procedures designed to allow for the reversal of the effects of a tax scheme in the case of the respondent – Whether time limits which apply generally in respect of certain types of action by the appellant have application to the relatively specific process which is provided for in s. 811 of the Taxes Consolidation Act 1997
Facts: The appellant, the Revenue Commissioners, sought to implement procedures designed to allow for the reversal of the effects of a tax scheme in the case of the respondent, Mr Droog, but made the first formal step in that process, being the formation of a relevant opinion under s. 811 of the Taxes Consolidation Act 1997 and its communication to Mr Droog, at a time which was clearly outside the four year time limit. The net question was whether that time limit applies in the context of s. 811. The Appeal Commissioners held that it did. The High Court (Laffoy J) agreed and the Revenue Commissioners appealed to the Supreme Court.
Held by Clarke J that he was persuaded that the trial judge was correct to conclude that the time limits contained in s. 955 of the 1997 Act apply in the case of s. 811 and are not dis-applied by any sufficiently clear and unambiguous language in that section. Clarke J held that as the only purpose of the raising of an opinion under s. 811 in this case would be to require Mr Droog to pay additional tax and as the obligation to pay any additional tax which might become payable as a result of the Nominated Officer’s opinion becoming final and conclusive would necessarily arise outside the four year time limit, the commencement of that process by the raising of the opinion in question could have no lawful objective. Clarke J held that it must, therefore, itself be regarded as being legally impermissible.
Clarke J held that he would dismiss the appeal.
The introduction, through s.86 of the Finance Act, 1988, of a general anti-avoidance provision into our tax code represented a radical departure in the Irish tax code. Up to that point the general position was that identified by this Court in . Provided that a set of arrangements had the technical effect of reducing a person's liability to tax in accordance with the Taxes Acts as properly interpreted then the person concerned was entitled to the benefit of that reduction in tax irrespective of the motive for, or substance of, the transaction concerned. A clear distinction was made between what was called tax evasion, which involved the improper concealment of facts from the tax authorities so as to unlawfully reduce tax, on the one hand, and tax avoidance, which involved structuring ones affairs in a manner which minimised tax, on the other. Tax avoidance itself might perhaps be described as having operated on a spectrum which ranged from cases where persons simply conducted their affairs in a manner which had regard to tax law to, at the other end of the spectrum, cases where persons engaged in activity which, to a greater or lesser extent, might be said to have been artificial for the principal purpose of reducing their liability to tax. The general anti-avoidance measures originally found in s.86 and now to be found in section 811 of the Taxes Consolidation Act, 1997 (‘section 811’) (‘the TCA’) were intended to prevent persons towards the ‘artificial’ end of that spectrum from gaining the benefit of the tax reduction which might technically otherwise be available while at the same time allowing persons the reasonable opportunity to conduct genuine economic activity in a manner which was considered to be most tax efficient.
The net issue which arises on this appeal is as to whether time limits which apply generally in respect of certain types of action by the appellant (‘Revenue’) have application to the relatively specific process which is provided for in section 811 which is designed to seek to deprive a tax payer of the benefits of what is defined in that section as a tax avoidance transaction.
As will appear later in this judgment a general time limit of four years is applicable in respect of some (but not all) taxes but in particular applies in the case of the tax which underlies the issue in this case being income tax covered by the self-assessment regime. Subject to certain exceptions, where it can be said that a tax payer acted fraudulently or negligently, Revenue are not entitled to seek additional income tax from a self-assessed tax payer more than four years after the tax year concerned. In circumstances which will be outlined in early course Revenue sought to implement the procedures designed to allow for the reversal of the effects of a tax scheme in the case of the respondent (‘Mr. Droog’) but made the first formal step in that process, being the formation of a relevant opinion under section 811 and its communication to Mr. Droog, at a time which was clearly outside that four year time limit. The net question is as to whether that time limit applies in the context of section 811.
The Appeal Commissioners held that it did. The High Court (Laffoy J.) agreed and Revenue have appealed to this Court. For the reasons set out in this judgment I have also concluded that the time limit applies. I should firstly turn to the relevant facts which can be briefly stated and are not in dispute.
This case relates to income tax for the fiscal year 1996/1997. In his return for that year, which was filed under the self-assessment system, Mr. Droog claimed relief for a loss of IR£50,046 in respect of his share of the losses of a partnership called Taupe Partners which was involved in the acquisition, distribution and licensing of films. On the 25th February, 1998 Mr. Droog received an assessment for that tax year which was in accordance with his return and which allowed relief in respect of that loss.
On the 22nd February, 2007 a nominated officer of Revenue (‘the Nominated Officer’) gave notice in writing of an opinion under s.811(6) of the TCA to Mr. Droog. That notice stated first that an opinion had been formed that the transaction set out in the notice was a tax avoidance transaction within the meaning of section 811. Second, the Nominated Officer expressed the opinion that a tax advantage of IR£24,022 had arisen as a result of the transaction in question. That advantage represented 48% of the relevant loss and thus represented the reduction in income tax which had arisen from the initial allowance of relief in respect of that loss. In other words by virtue of his involvement in Taupe Partners and the losses thereby suffered Mr. Droog had, initially, paid IR£24,022 less tax. Third, the notice stated that, in the event that the Nominated Officer's opinion should become final and conclusive, that benefit, being the loss relief claimed by Mr. Droog, would be withdrawn.
None of those facts are in and of themselves controversial although, of course, the question of whether the transaction specified in the notice involving Taupe Partners actually was a tax avoidance transaction has never come to be determined precisely because both the Appeal Commissioner and the High Court took the view that the initiation of the process by the service of that notice was out of time. Mr. Droog, in accordance with s. 811(7) of the TCA, appealed against the relevant notice on a range of grounds including a contention that the notice of opinion was out of time by reason of ss.924, 955 and 956 of the TCA. The Appeal Commissioner decided to conduct an initial hearing which was to deal solely with the question of the time limit. That hearing took place on the 20th October, 2009 and thereafter the Appeal Commissioner issued a determination on the 18th December of that year which was to the effect that the four year time limit set out in ss.955 and 956 of the TCA applied to the formation of an opinion under section 811 so that the opinion in this case was, in the view of the Appeal Commissioner, out of time. Thereafter a case stated on that issue was sent by the Appeal Commissioner concerned to the High Court. It should also be recorded that the case stated found as a fact that there was no suggestion of fraud or neglect on the part of Mr. Droog in relation to the matters at issue. That latter finding is of relevance for, even if the four month time limit does apply, that time limit is inoperative where the return of the tax payer concerned is affected by fraud or neglect.
Thus the net issue which was before the High Court on the case stated was whether, on a proper construction of the Taxes Acts as a whole, the formation of an opinion under section 811 is caught by the general time limitations contained in ss. 955 and 956 of the TCA.
In order to understand both the reasoning by which Laffoy J. agreed with the overall conclusion of the Appeal Commissioner and also the arguments made before this Court on that same issue, it is necessary to turn first to the relevant legislation. What follows is an analysis of the legislation in the form which applied in 2007 being the time when Revenue sought to invoke section 811. I will first examine section 811 itself.
This Court has already given some consideration to section 811 in The Revenue Commissioners. In that case O'Donnell J., giving the judgment of majority, said that
‘…the essential starting point to the application of [s.811] is a determination that absent its provisions the taxation charge would not apply, or in the case of an...
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