The Revenue Commissioners v Stewart

• Jurisdiction: Ireland
• Judge: Ms. Justice Butler
• Judgment Date: 10 October 2022
• Neutral Citation: [2022] IEHC 558
• Court: High Court
• Docket Number: [Record No. 2021/38 R]

Between

The Revenue Commissioners

Appellant

and

Robert Stewart

Respondent

[2022] IEHC 558

[Record No. 2021/38 R]

THE HIGH COURT

Case stated – Questions of law – Taxes Consolidation Act 1997 s. 949AQ – Appeal Commissioner raising a number of questions of law for the opinion of the High Court – Whether the Appeal Commissioner erred in law in holding that the taxpayer was not liable to capital gains tax on the relevant disposal

Facts: In an appeal by way of case stated under s. 949AQ of the Taxes Consolidation Act 1997 (TCA), the Appeal Commissioner, at the request of the appellant, the Revenue Commissioners, raised a number of questions of law for the opinion of the High Court arising out of a determination delivered by him on 21st May 2021. The questions concerned the interpretation of s. 571(5), (7) and (9) of the TCA. The issues raised queried whether the specific collection mechanism provided for under s. 571 in circumstances where a capital gain is made on the disposal of an asset by way of forced sale by a person (often a financial institution) entitled to a security or charge over the asset is an exclusive one or, alternatively, whether the Revenue Commissioners have a discretion to elect between the use of this machinery and the recovery of the taxes due directly from the owner of the asset.

Held by Butler J that the questions of law set out in the case stated should be answered as follows: (a) The Appeal Commissioner did not err in his interpretation of ss. 537 and 571 of the TCA. It was not incorrect to find that when “referable capital gains tax” became assessable on and recoverable from an accountable person in relation to a disposal when, under s. 571(5), the debtor/taxpayer is no longer assessable to capital gains tax in relation to that disposal. (b) The Appeal Commissioner did not err in finding that when referable capital gains tax becomes assessable on and recoverable on an accountable person under s. 571(5), the debtor as a consequence is not assessable to capital gains tax in relation to that disposal. The Appeal Commissioner did not find, as a consequence of s. 571(5) or otherwise, that the debtor was not chargeable to capital gains tax. Further, Butler J could not locate anything in the Appeal Commissioner’s determination which qualifies his conclusion that as a result of s. 537 and 571 the tax cannot be assessed on or recovered from the debtor, by making the debtor’s potential liability somehow contingent (“until and unless”) assessments to referable capital gains tax are first raised on the accountable person. The determination not only finds that s. 571(5) imposes an obligation on the Revenue to raise an assessment on and recover the tax from the Bank, but also held that s. 571 did not contain a provision for which permits the taxpayer to be pursued for secondary liability. Given the ambiguous terms of the question, Butler J confirmed that she agreed with the Appeal Commissioner’s conclusion in that regard. (c) The Appeal Commissioner did not err by incorrectly applying or failing to apply s. 571(9). Section 571(9) cannot be read in isolation from the balance of s. 571. It does not create or reserve a stand-alone entitlement on the part of Revenue to pursue the debtor for the capital gains tax in respect of which he is the chargeable person. Rather, it is a provision directed at ensuring that the amount of chargeable gains upon which capital gains tax is to be assessed is not affected by the provisions of s. 571.

Butler J held that the more general question as to whether the Appeal Commissioner erred in law in holding that the taxpayer was not liable to capital gains tax on the relevant disposal should also be answered “No”.

Case stated.

JUDGMENT of Ms. Justice Butler delivered on the 10 ^th day of October, 2022

Introduction

1 . This is a judgment on an appeal by way of case stated under s. 949AQ of the Taxes Consolidation Act 1997 (“ TCA”) in which the Appeal Commissioner, at the request of the Revenue Commissioners, raised a number of questions of law for the opinion of the High Court arising out of a determination delivered by him on 21 ^st May 2021. The questions, which are set out in full below, concern the interpretation of s. 571, subs. (5), (7) and (9), of the TCA. In brief, the issues raised query whether the specific collection mechanism provided for under s. 571 in circumstances where a capital gain is made on the disposal of an asset by way of forced sale by a person (often a financial institution) entitled to a security or charge over the asset is an exclusive one or, alternatively, whether the Revenue Commissioners have a discretion to elect between the use of this machinery and the recovery of the taxes due directly from the owner of the asset.

2 . Mr. Stewart (whom I will refer to as “the taxpayer”) contends that s. 571 precludes the Revenue Commissioners from seeking to recover directly from him in lieu of the bank which sold his asset, albeit as his agent. The Revenue Commissioners (or “Revenue”) contend that the mechanism provided under s. 571 is in addition to and not in substitution for the powers otherwise provided for in the TCA. Consequently, not having recovered the taxes in question from the bank, Revenue claims an entitlement to recover directly from the taxpayer and a consequent liability on his part to pay. From this brief overview, it is clear that the parties take diametrically opposed positions as to the meaning and effect of s. 571. Needless to say, there is also a large sum of money at stake, as the amount of the taxes in issue, which is undisputed, is nearly €1.7 million.

3 . Notwithstanding these significant differences, the parties are largely ad idem on the approach the court should take on a case stated such as this and also as to the principles of statutory interpretation that should be applied to the interpretation of the TCA as a revenue statute. Since the questions raised are pure questions of law there is no need for the Court to address the limited extent to which findings of fact made by the Appeal Commissioner can be overturned on an appeal of this nature. As it happens, there have been two recent, definitive decisions of the Supreme Court on the interpretation of revenue statutes, leaving little scope for disagreement as to those principles. Instead, the parties differ as to what should be the result when those principles are applied to the facts of this case.

Background to the Case Stated

4 . Section 571 of the TCA was introduced to deal with the specific circumstances where an asset is sold by a liquidator, or other person having a security or charge over the asset, to meet the indebtedness of the taxpayer to that person – although as Counsel for the taxpayer pointed out it has a potentially broader application in that the owner of the asset might not be actually indebted before a third party has the right to dispose of the asset. It had become apparent and is evident from the decision of Carroll J. in ( Bank of Ireland Finance Ltd v. Revenue Commissioners Unreported, 13 October 1989) that although an impecunious taxpayer on whose behalf an asset is sold by a liquidator or a charge holder in theory remains liable to pay tax on any capital gain made as a result of such sale, as the proceeds of sale will usually be in the hands of the liquidator or charge holder it may prove difficult, if not impossible, for the Revenue to actually recover the tax due from the taxpayer. Consequently, provision was made for the recovery of any capital gains tax due directly from the liquidator or charge holder who, having sold the asset, is in possession of the proceeds of sale. A corollary obligation is imposed on such person to pay the tax out of those proceeds.

5 . As there is no dispute between the parties as to the facts, these can be stated briefly. In 2007 and 2008, the taxpayer, who was resident and domiciled in Ireland, entered into a series of loan agreements with a French bank, Société Générale, which carried on business in Ireland through an Irish branch (“the Bank”), under which he ultimately drew down the sum of approximately €7.4 million. The loans were entered into for the purpose of financing the purchase of shares in a publicly listed French company, namely Veolia (“the Company”). In addition to shares purchased by the taxpayer, he also received shares issued by the Company by way of scrip dividend and, at various times, he held a total of over 400,000 shares. It was a term of the loan agreements that the shares would be held by the Bank as security for the loans and formal pledges and guarantees were entered into in parallel with the loan agreements. It was a term of these security agreements that all taxes would be paid by the client (i.e. the taxpayer) and that the sums repayable by the borrower (i.e. the taxpayer) would be net of tax.

6 . The taxpayer fell into arrears with his loan repayments as a result of which the Bank enforced its security. A tranche of shares was sold in 2008, another tranche in 2010 and, finally, in April 2011, the bank activated a guarantee provided by the taxpayer in respect of a 2008 loan and sold a sufficient number of shares to ensure that the loans could be repaid in full. The Bank sold the shares as the nominee of the taxpayer but did so under the terms of the security and not on the taxpayer's express instructions. Each of the sales was a forced sale.

7 . It is not disputed that each of the sales of the shares or the disposals resulted in a capital gain giving rise to a capital gains tax liability under Irish law. As it happens, the taxpayer made returns and paid capital gains tax on the disposals in 2008 and 2010 and Revenue has retained the amounts paid. The taxpayer states that this was done in error as his agent was unaware of the circumstances and of the fact that the shares had been sold through the enforcement of a...