The Revenue Commissioners v Droog

• Judgment Date: 06 October 2016

Taxes Consolidation Act 1997 – income tax – time limits – use of the phrase “at any time” in TCA 1997, s 811(4) – whether time limits contained in TCA 1997, s955 apply in the case of TCA 1997, s 811

Subject to certain exceptions, the Revenue Commissioners are not entitled to seek additional income tax from a self-assessed taxpayer more than four years after the tax year concerned save where it can be said that a tax payer acted fraudulently or negligently. The Revenue Commissioners formed a relevant opinion under s 811 in respect of the respondent at a time which was outside the four year time limit. The net issue in this case is whether the time limits which apply generally have application to the specific process which is provided for in s 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. The Supreme Court noted that there was no suggestion of fraud or neglect on the part of the respondent in this case.

The respondent claimed relief for a loss of IR£50,046 in respect of his share of the losses of a partnership in his income tax return for the fiscal year 1996/97. On 22 February 2007 a nominated officer of Revenue gave notice in writing of an opinion under s 811(6) of the Taxes Consolidation Act (“TCA”) 1997 to the respondent. The respondent appealed against the notice on a number of grounds to include that the service of the notice was out of time. The Appeal Commissioner conducted an initial hearing to deal solely with the question of time limit. The Appeal Commissioner and subsequently the High Court held that the four-year time limit set out in TCA 1997, ss 955 and 956 applied to the formation of an opinion under s 811. The Revenue Commissioners appealed to the Supreme Court.

Section 811(4) of TCA 1997 speaks of the Revenue Commissioners forming a relevant opinion “at any time”. TCA 1997, s 955(2) on the other hand expressly states that an assessment for a period shall not be made after the end of the period of four years commencing at the end of the chargeable period in which the return is delivered.

The Revenue Commissioners made a number of arguments in the Supreme Court on appeal including that the court should have regard to the anomalies which would flow from the court adopting the interpretation that the four-year time limit applied to the formation of an opinion under TCA 1997, s 811. That [259] interpretation, it was argued, would have the effect of imposing, in practice, a four-year time limit on the operation of s 811 in the case of self-assessed persons in relation to income tax, corporation tax and capital gains tax only and would have no application to persons or bodies who are either within the PAYE system or had liabilities in respect of other taxes such as value added tax or capital acquisitions. Revenue Commissioners further argued that the opinion formed under TCA 1997, s 811 does not amount to the raising of tax or an assessment to tax.

The Supreme Court considered that the issue was a very net question, ie does the phrase “at any time” in TCA 1997, s 811(4) amount to a sufficiently clear and express exclusion of the time limits set out in TCA 1997, s 955 so as to dis-apply those time limits in the context of a s 811 opinion. TCA 1997, Pt 41 overrides any other provision of the TCA 1997 unless “expressly provided”. The Supreme Court considered whether the phrase “at any time” in TCA 1997, s 811 is a sufficient express exclusion of the operation of the time limits contained in TCA 1997, Pt 41 to meet the requirement that there be an express contrary provision.

Held by Clarke J in dismissing the Revenue Commissioner’s appeal of the decision of the High Court:

• 1. The time limits contained in s 955 of the Taxes Consolidation Act, 1997 apply in the case of s 811 and are not dis-applied by any sufficiently clear and unambiguous language in that section;
• 2. As the only purpose of raising an opinion under s 811 in this case would be to require the respondent to pay additional tax, the commencement of the process of raising an opinion under s 811 in this case in question must be regarded as being legally impermissible as the obligation to pay any additional tax which might become payable as a result of the opinion becoming final and conclusive would necessarily arise outside the four-year time limit.

Legislation

Finance Act 1988, s 86

Finance Act 2008, s 140

Taxes Consolidation Act 1997, ss 811, 924, 950, 951, 954, 955, 956

Cases referred to in the judgment

Cronin (Inspector of Taxes) v Cork and County Property Company Ltd [1986] IR 559

McGrath v McDermott (Inspector of Taxes) [1988] IR 258

O’Flynn Construction v The Revenue Commissioners [2011] IESC 47 [260]

Supreme Court – 6 October 2016, [2016] IESC 55

Clarke J

1. Introduction

1.1 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 McGrath v McDermott (Inspector of Taxes) [1988] IR 258. 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.

1.2 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.

1.3 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 [261] 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.

1.4 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.

2. The Facts

2.1 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.

2.2 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.

2.3 None of those facts are in and of themselves controversial although, of course, the question of whether the transaction...