AN ELABORATE scheme by which two construction company directors received £600,0000 in tax-free dividends can be disallowed by the Revenue on grounds it was a tax-avoidance transaction involving a misuse of export sales tax reliefs, the Supreme Court has ruled.
The decision involves important findings on the meaning of section 86 of the Finance Act 1989 – the only anti-avoidance measure in Irish law.
By a three-to-two majority yesterday, the Supreme Court dismissed an appeal by Cork-based O’Flynn Construction Ltd (OFC) and its directors, brothers Michael and John O’Flynn, Kilcrea, Ovens, Co Cork, against a High Court ruling that the scheme was a tax-avoidance scheme involving misuse of the export sales relief scheme (ESRS).
The Revenue in 1997 found the scheme was a disallowable tax-avoidance scheme entered into by OFC and the O’Flynns to extract funds from OFC so as to avoid liability for advance corporation tax by the company and payment of income tax on dividends by the O’Flynns.
The Revenue appeals commissioners in 2002 upheld OFC’s appeal against that Revenue finding but in 2006, the High Court overturned the appeals commissioners’ decision.
The disputed scheme involved export relief reserves in a company in the Dairygold group being transferred via 40 separate steps to OFC. The O’Flynns each received £298,000 in January 1992 in tax-free ESR dividends, funded by the write-off of a loan of £650,000 by OFC.
Giving the majority judgment, Mr Justice Donal O’Donnell, with whom Mr Justice Nial Fennelly and Mr Justice Joseph Finnegan agreed, said the scheme was “highly artificial” and contrived, involving more than 40 steps over 50 days between December 5th, 1991, and January 24th, 1992.
The scheme involved profits of OFC, which would attract tax if distributed to shareholders, being paid by a “circuitous route” to those shareholders without attracting tax, all done via “a series of steps devised for the sole purpose of achieving that result”. This was “the antithesis” of the export reliefs scheme.
“It is possible to admire the ingenuity with which the scheme was devised and efficiency with which it was executed but lament the fact that such skills are put to use for the sole objective of avoiding tax.”
This was a tax avoidance transaction which could be disallowed as it was a misuse and/or abuse of the export relief scheme, Mr Justice O’Donnell ruled.
The ESRS itself made no provision for the sale or trade in export sales relief reserves, he noted. The case centred on the construction of section 86 of the Finance Act 1989, a provision he described as “of almost mind-numbing complexity”.
The main issue was whether section 86 permitted the Revenue to find the disputed transaction was a tax-avoidance transaction which could be disallowed.
Section 86.3.b allows the Revenue to withdraw a tax advantage where a transaction could be said to result directly or indirectly in “misuse or abuse” of the relevant relief – in this case, the ESRS.
Mr Justice Liam McKechnie and Ms Justice Fidelma Macken dissented.
