Revenue Commissioners v O'Flynn Construction Ltd & O'Flynn

• Jurisdiction: Ireland
• Judge: O'Donnell J.,Mr. Justice McKechnie
• Judgment Date: 14 December 2011
• Neutral Citation: [2011] IESC 47
• Court: Supreme Court
• Docket Number: [S.C. No. 264 of 2006]
• Date: 14 December 2011

Revenue Commissioners v O'Flynn Construction Ltd & O'Flynn

[2011] IESC 47

Between:

O'Flynn Construction Limited, John O'Flynn and Michael O'Flynn

Appellants

AND

The Revenue Commissioners

Respondents

[2011] IESC 47

Fennelly J.

Macken J.

Finnegan J.

O'Donnell J.

McKechnie J.

Record No.: 264/2006

THE SUPREME COURT

REVENUE

Taxation

Appeal against decision of High Court on case stated by appeal commissioners- Tax avoidance scheme - Whether scheme lawful -Whether scheme contravened Finance Act 1989, s 86 - Statutory interpretation - Whether transaction resulted directly or indirectly in "misuse or abuse" of provision - Whether scheme undertaken for purpose of obtaining benefit of expert sales relief - Determination of appeal commissioners - Whether transaction gave rise to tax advantage - Whether transaction not undertaken for purpose other than to give rise to tax advantage - Whether transaction not arranged with a view to realisation of profits in course of business - Standard of review - Assessment of purpose of relief - McCann v O'Culachain [1986] 1 IR 196; McGrath v McDermott [1988] IR 258; Ramsay v IRC [1982] AC 300; Furniss v Dawson [1984] 2 WLR 226; IRC v Duke of Westminster [1936] AC 1; O'Sullivan v P Ltd [1962] 3 ITC 355; Helvin v Gregory [1934] 69 F 2nd 501; IRC v McGuckian [1997] 1 WLR 991; MacNiven v Westmoreland Investments [2003] 1 AC 311; Barclays Mercantile Business Finance Ltd v Mawson [2005] 1 AC 682; Revenue Commissioners v Doorley [1933] 1 IR 750; Inspector of Taxes v Kiernan [1981] IR 117; Canada Trustco Mortgage Company v Canada [2005] 2 SCR 601; Lehigh v The Queen [2010] FCA 124; Saatchi & Saatchi Advertising Ltd v McGarry [1998] 2 IR 562; AG v Carlton Bank [1899] 2 QB 155; Partington v AG [1869] LR 4 HL 100; IR Commissioners v Wesleyan & General Assurance Society [1946] 2 All ER 749; Burmah Oil v Bank of England [1980] AC 1090; Cape Brandy Syndicate v IRC [1921] 1 KB 64; Ashbourne Holdings v An Bord Pleanála [2003] 2 IR 114; Mara v Hummingbird Ltd [1982] ILRM 421 and McNicoll v R [1997] 97] DTC 111 considered - Finance Act 1989 (No 10), s 86 - Finding that transaction tax avoidance transaction within meaning of s 86 and appeal dismissed (264/2006 - SC - 14/12/2011) [2011] IESC 47

O'Flynn Construction Ltd v Revenue Commissioners

FINANCE ACT 1989 S86

FINANCE ACT 1989 S86(3)(B)

FINANCE ACT 1989 S86(12)

FINANCE ACT 1989 S86(2)

FINANCE ACT 1989 S86(2)(II)

FINANCE ACT 1989 S86(3)

MCCANN v O'CULACHAIN 1986 1 IR 196

CARR THE O'FLYNN CASE: CLARIFICATION OF S811 TCA 1997 (IRISH ANTI-AVOIDANCE) 2006 ITR 37

MCGRATH v MCDERMOTT 1988 IR 258

RAMSAY v IRC 1982 AC 300

FURNISS v DAWSON 1984 2 WLR 226

IRC v DUKE OF WESTMINSTER 1936 AC 1

O'SULLIVAN v P LTD 1962 3 ITC 355

HELVIN v GREGORY 1934 69 F 2ND 501

IRC v MCGUCKIAN 1997 1 WLR 991

MACNIVEN v WESTMORELAND INVESTMENTS 2003 1 AC 311

BARCLAYS MERCANTILE BUSINESS FINANCE LTD v MAWSON 2005 1 AC 684

WALKER RAMSAY 25 YEARS ON: SOME REFLECTIONS ON TAX AVOIDANCE 2004 120 LQR 412

FREEDMAN INTERPRETING TAX STATUTES: TAX AVOIDANCE & THE INTENTION OF PARLIAMENT 2007 123 LQR 53

FINANCE ACT 1989 S86(3)(A)(II)

BARCLAYS MERCANTILE v MAWSON 2004 3 WLR 1383

FINANCE ACT 1989 S86(7)

TAXES CONSOLIDATION ACT 1997 S811

TAXES CONSOLIDATION ACT 1997 S811(A)

FINANCE ACT 1989 S86(1)

REVENUE CMSR v DOORLEY & ORS 1933 1 IR 750

INSPECTOR OF TAXES v KIERNAN 1981 IR 117

CANADA TRUSTCO MORTGAGE COMPANY v CANADA 2005 2 SCR 601

FINANCE ACT 1974 S54

LEHIGH v THE QUEEN 2010 FCA 124

INCOME TAX ACT 1985 S245

FINANCE ACT 1989 S86(2)(A)(I)

FINANCE ACT 1989 S86(2)(A)(II)

FINANCE ACT 1989 S86(2)(A)

FINANCE ACT 1989 S86(2)(B)

FINANCE ACT 1989 S86(2)(C)

INCOME TAX ACT 1985 S245(4)

SAATCHI & SAATCHI ADVERTISING LTD v MCGARRY 1998 2 IR 562

AG v CARLTON BANK 1899 2 QB 155

PARTINGTON v AG 1869 LR 4 HL 100

IR CMSR v WESLEYAN & GENERAL ASSURANCE SOCIETY 1946 2 AER 749

BURMAH OIL v BANK OF ENGLAND 1980 AC 1090

FURNISS v DAWSON 1984 AC 474

TEXACO (IRELAND) LTD v MURPHY 1991 2 IR 449

CORPORATION TAX ACT 1976 S21

CAPE BRANDY SYNDICATE v IRC 1921 1 KB 64

ASHBOURNE HOLDINGS v BORD PLEANÁLA 2003 2 IR 114

LOCAL GOVERNMENT (PLANNING & DEVELOPMENT) ACT 1963 S26(1)

LOCAL GOVERNMENT (PLANNING & DEVELOPMENT) ACT 1963 S26(2)

MARA v HUMMING BIRD LTD 1982 ILRM 421

FINANCE ACT 1974 S54

JUDGE IRISH INCOME TAX 2005 P9

FINANCE (MISC PROVISIONS) ACT 1956 PART III

FINANCE (MISC PROVISIONS) ACT 1956 S15

CORPORATION ACT 1976 S84

FINANCE ACT 1992 S52

INCOME TAX ACT 1985 S245

MCNICOLL v R 1997 97 DTC 111

INCOME TAX ACT 1985 S245(3)

1 This case has its origins in a complex series of transactions which were completed in the short period between the 5 ^th December, 1991, and the 24 ^th January, 1992. However the root of the issue goes back even further.

2 In 1958 the State sought to encourage the manufacture of products for export by introducing an Export Sales Relief Scheme ("ESR Scheme") whereby profits earned from qualifying exports would be exempt from corporation tax. Furthermore, dividends declared from such profits would also be relieved from income tax in the hands of shareholders. To this basic scheme there was one critical addition. From the outset it was recognised that the incentive in respect of dividends could be significantly devalued where the shares in an exporting company were held in a group structure by other companies. Accordingly, it was part of the scheme to ensure that the tax benefit of the scheme would be capable of being received by the ultimate individual shareholder. Thus, if income was received by way of dividend from an ESR company, a dividend declared in turn from such income would also be entitled to tax relief in the hands of that shareholder and so on until it came into the hands of an individual. The income, it was said, was "franked income" and retained its tax relieving status no matter how many companies it passed through.

3 It is to be presumed that the incentive scheme was successful in promoting exports. Certainly it was common place for companies during that time to set up specific exporting companies to ensure that the profits from such activity were isolated and that there could no dispute about the extent of tax relief available. One such company was Mitchelstown Export Company Ltd. (hereafter "Mitchelstown"), a subsidiary of the Dairygold Group. In late 1991, Mitchelstown had ESR reserved of IR£1.2 million which I understand to mean that it had generated profits from qualifying exports in that amount. However, for reasons which were not explained in these proceedings, Mitchelstown was not in a position to declare a dividend. Therefore, its shareholders or ultimate shareholders could not make use of the export sales relief to receive a tax free dividend. This state of affairs was particularly significant in late 1991 because Export Sales Relief was due to be phased out from the end of January, 1992.

4 While Mitchelstown, for its part, had a difficulty in exploiting its ESR reserves, there were many companies among the two companies at issue in these proceedings, O'Flynn Construction Limited ("OFCL") the principal shareholders which were the taxpayers in this case, Michael O'Flynn and John O'Flynn, and another company O'Brien and O'Flynn Limited ("OBOFL") which had profits capable of being distributed as dividends to their shareholder but in circumstances in which tax would become payable on such dividends in the hands of the shareholders. This state of affairs created a form of arbitrage opportunity for any person who could devise a scheme which would allow the export sales relief accumulated by Mitchelstown to take effect and provide tax relief to the distributable profits of companies such as OBOFL and OFCL, to the mutual benefit of the individuals, and sometimes companies. Thus it was that over the period of December, 1991, and January, 1992, three substantial businesses in the Munster region took a number of intricate steps to implement a tax avoidance scheme.

The Scheme

5 The scheme in this case was devised with some ingenuity and implemented with a precision which at a technical level is undoubtedly admirable. One of the features of a tax avoidance scheme such as this is that although it is presumably explained in some detail to the participants in order to encourage them to take part, only the mechanics of the transaction are disclosed to the Revenue. When this case made its way before the Appeal Commissioners, the tax payers and their advisors did not go into evidence. Accordingly, it is not always clear what exactly was involved in some of the steps, or why each individual step was taken. However, in sum, more that 40 individual steps were taken over a period of 50 days and the end result, as intended, was that the two companies OBOFL and OFCL, reduced their profit by making capital contributions to other companies (which contributions were later written off), while the shareholders of both companies received tax relieved dividends from other entities. The Dairygold Group, for its part, was, at the end of the transaction, better off by IR£117,668.

6 This case proceeded to some extent on the basis that since what was planned and executed here was a tax avoidance scheme, the only question was whether or not it contravened s.86 of the Finance Act 1989 ("the Act of 1989"), and for that purpose it was said, it was not necessary to understand in any detail how the scheme worked. That course has considerable attraction, but it seems to me that in order to resolve the question of the validity of the scheme by reference to the provisions of s.86, it is necessary to seek to understand the scheme at least in broad detail. Accordingly I have sought to set out in this judgment my understanding of what is a quite intricate...