Revenue Commissioners v O'Flynn Construction Company Ltd and Others

• Jurisdiction: Ireland
• Judge: MR. JUSTICE T.C. SMYTH
• Judgment Date: 25 April 2006
• Neutral Citation: [2006] IEHC 143
• Court: High Court
• Date: 25 April 2006

[2006] IEHC 143

THE HIGH COURT

Record no. 403 R/2005

REVENUE COMMISSIONERS v O'FLYNN CONSTRUCTION CO LTD & ORS

(REVENUE)

BETWEEN:-

THE REVENUE COMMISSIONERS

APPLICANT

-and-

O'FLYNN CONSTRUCTION CO. LTD, JOHN O'FLYNN AND MICHAEL O'FLYNN

RESPONDENTS

FINANCE ACT 1989 S86

TAXES CONSOLIDATION ACT 1997 S811

TAXES CONSOLIDATION ACT 1997 S811(1)(b)

TAXES CONSOLIDATION ACT 1997 S811(2)

TAXES CONSOLIDATION ACT 1997 S811(3)

TAXES CONSOLIDATION ACT 1997 S811(4)

TAXES CONSOLIDATION ACT 1997 S811(3)(a)(i)

TAXES CONSOLIDATION ACT 1997 S811(3)(a)(ii)

ASHBOURNE HOLDINGS LTD v BORD PLEANALA & CORK CO COUNCIL 2003 2 IR 114 2003 2 ILRM 446

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

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

MCGRATH & ORS v MCDERMOTT 1988 IR 258 1988 ILRM 181

TAXES CONSOLIDATION ACT 1997 S811(5)(a)

TAXES CONSOLIDATION ACT 1997 S811(5)(b)

TAXES CONSOLIDATION ACT 1997 S811(5)(e)(ii)

IRC v DUKE OF WESTMINSTER 19 TC 490 1936 AC 1 1935 AER REP 259

O'SULLIVAN v P LTD 3 ITC 355

WT RAMSEY LTD v INLAND REVENUE COMMISSIONERS 1981 STC 174 1982 AC 300 1981 1 AER 865 1981 2 WLR 449

CHARLES MCCANN LTD v O CULACHAIN (INSPECTOR OF TAXES) 1986 IR 196

INSPECTOR OF TAXES v KIERNAN 1981 IR 117 1982 ILRM 13

REVENUE COMMISSIONERS v DOORLEY 1933 IR 750

TAXES CONSOLIDATION ACT 1997 S811(3)(b)

CANADA TRUSTCO MORTGAGE CO v CANADA 2005 259 DLR (4TH) 193

FINANCE ACT 1989 S86(3)(a)

Abstract:

Revenue law - Case stated - Finance Act, 1989 - Whether the transaction entered into by the appellant company was a tax avoidance transaction having regard to s.86 of the 1989 Act.

Both parties in these proceedings appealed by way of case stated from a decision of the Appeal Commissioners holding that the transaction entered into by the taxpayers was not a tax avoidance transaction by virtue of section 86(3)(B) of the Finance Act, 1989 and that the transaction gave rise to a tax advantage to the appellant company and was not undertaken with a view to the realisation of profits in the course of the business activities of the business. The effect of the scheme entered into by the appellant company and another company was that the shareholders of the appellant company, which was a non export sales relief (ESR) company ultimately received tax free, export sales relief dividends originally earned by an ESR Company but funded by the appellant company. The Revenue Commissioners contended that the transaction was a tax avoidance transaction which was caught by the general anti-avoidance provision of the Irish Tax Code, section 86 of the Act of 1989. The question for the court was whether the aforementioned transaction was a tax avoidance transaction that was the subject of section 86 of the Finance Act, 1989.

Held by Smyth J.: That the acquisition of the export sales relief by the appellant company was considerably outside the ambit of their business in the construction area. The transaction the subject of these proceedings was completely at odds with the purpose for which the ESR was provided. Payment of the export sales relieved profits in the present case did amount if not directly, certainly indirectly, to a misuse of the relief having regard to the purposes for which such relief was enacted and to the nature of the relief afforded to those dividends. The transaction was a tax avoidance transaction by virtue of section 86(3)(b) of the Act of 1989 and therefore the appeal commissioners were incorrect in their conclusion in that regard. However the appeal commissioners were correct in determining that the transaction gave rise to a tax advantage for the company and for John O’Flynn and Michael O’Flynn and furthermore that the transaction was not undertaken or arranged primarily for purposes other then to give rise to a tax advantage.

Reporter: L O’S

1 MR. JUSTICE T.C. SMYTH ON TUESDAY 25TH APRIL 2006

APPEARANCES

For the Applicant:

Mr. T. Aston SC

Ms.. U. Tighe BL

Ms. U. Tighe BL

Instructed by:

Ms. Etain Crossdale

solicitor for Revenue

Commissioners

Dublin Castle

For the Respondent:

Mr. McCann SC

Instructed by:

AAAAA

JUDGEMENT DELIVERED BY MR. JUSTICE T.C. SMYTH ON TUESDAY 25TH APRIL 2006.

2 This is an appeal by way of case stated (the full text of which is set out in the appendix to this Judgement) from a decision of the Appeal Commissioners and the relevant questions of law in which the opinion of the Court is requested are set out at paragraph 13 (in the case of the Revenue Commissioners) and in paragraph 15 (in the case of the taxpayers) of the case stated dated 13th July 2005.

3 The Appeal Commissioners accepted that the transaction outlined in the notice of opinion issued on behalf of the Revenue Commissioners did not consider the transaction, as so defined, required any amendment (paragraph 9(ii) of the case stated). No evidence was adduced at the appeal hearing by the taxpayers. The component steps of the transaction are not in issue in the case before the Court: the question is whether it is a tax avoidance transaction that is the subject of Section 86 of the Finance Act, 1989.

4 The scheme may be briefly stated to be one whereby two companies, the Appellant company (O'Flynn Construction company Limited) and another company, (O'Brien & Flynn Limited) was designed to allow each companies' shareholders to access the export sales relief reserves of a member of The Dairygold Group. Mitchelstown Export Company Limited, a member of The Dairygold Group, had accumulated export sales relief reserves in a number of subsidiaries. This meant that tax free dividends could be paid out of those reserves to individual shareholders. A structure involving a number of steps was designed and carried out so that these reserves were sold to an unconnected non-export sales relief company - O'Flynn Construction Limited - for cash consideration. Appendix 3 to the case stated clearly indicates that the total cost of the acquisition of the export sales relief (ESR) from The Dairygold Group was IR£117, 668, which cost was shared equally between O'Brien & O'Flynn Ltd. and O'Flynn Construction Company Ltd. The total amount of ESR reserves utilised was IR£1, 200, 000. After taking into account accountancy fees of IR£10, 000, the shareholders in O'Brien and Flynn Ltd. received tax free dividends of IR£590, 000. After taking into account accountancy fees of IR£4, 000, the shareholders of O'Flynn Construction Company Ltd. - the individual taxpayers - received tax free dividends of IR£596, 000: Again, which was paid by O'Flynn Construction Company Ltd. to them as its shareholders.

5 In short, the effect of the scheme (which is not disputed by the taxpayers) was that the shareholders of a non-ESR company (O'Flynn Construction Company Ltd.) ultimately received tax free, export sales relief dividends originally earned by an ESR company (Mitchelstown Export Company Limited) but funded by O'Flynn Construction Limited.

6 It was contended by the Revenue Commissioners that the taxpayers had entered into the scheme or arrangement for the purpose of extracting funds from the non-ESR company - O'Flynn Construction Company Limited - in a manner which avoided a liability to Advance Corporation Tax (ACT) by the company and avoided income tax by Michael o'Flynn and John o'Flynn on the receipt of the dividends funded by the said company. A 'tax advantage' was secured by the company in avoiding liability to ACT on a distribution of its assets to its members and a tax advantage was secured by Michael O'Flynn and John O'Flynn by the avoidance of a Schedule F charge on a distribution of funds by the company. The scheme involved three different phases, to wit:-

7 1. The isolation within The Dairygold Group of ESR reserves of IR£1, 200, 000.

8 2. The utilization of IR£600, 000 of the reserves by unconnected parties.

9 3. The utilization of the balance of the ESR reserves of £600, 000 by Michael O'Flynn and John O'Flynn.

10 (Each phase is also detailed in Appendix 3 to the case stated and is found at paragraphs 1(a) and 3(m) of the Notices of opinion).

11 By notices of 12th August 1997, a nominated officer of the Revenue Commissioners concluded that the transaction specified were each a tax avoidance transaction within the meaning of Section 86 of the Finance Act 1989. It was contended by the Revenue Commissioners that various transactions or steps in the overall transaction have little or no commercial basis as identified at paragraph 6(ii) of the case stated and that the transaction as a whole is a tax avoidance transaction which is caught by the general anti-avoidance provision of the Irish Tax Code, Section 86 of the Finance Act 1989.

12 The Appeal Commissioners (at paragraph 9(x) of the case stated) stated that they were not satisfied that the transaction was undertaken or arranged with a view to the realisation of profits in the course of the business activities of the business.

13 Section 86 of the Finance Act 1989 (now Section 811 of the Taxes consolidation Act, 1997) provides specific anti-avoidance measures which are clearly intended to block particular schemes that are considered unacceptable by the legislature. The general anti-avoidance provisions are intended to counteract 'artificial schemes", i.e. transactions which have little or no commercial reality but are carried out primarily to create an artificial tax deduction or to avoid or reduce a tax charge.

14 Throughout the course of the hearing, I have had the benefit of elaborate detailed written submissions from both parties which were spoken to by Counsel for the parties engaged. It was common case that whether or not a tax avoidance transaction existed, such muse be determined objectively. Accordingly the taxpayers' motivation in entering into the transaction is absolutely irrelevant. Mr. McCann on...