Author Archives: aislingdonohue

Airbnb and Rent-A- Room relief. Were there legitimate expectations it would apply?

As we can see there is much furore around whether the hosts of Airbnb can claim Rent-A-Room relief.  I can’t help but think that the company are either handling this very badly, or they are happy with the free publicity in silly season, or are hoping that the ensuing uproar could generate calls for legislative changes making their business model more attractive.

Bear in mind that Revenue issued the new guidance in February to specifically reference the Airbnb model and it was barely mentioned in the press.  Now, in August, the traditional press silly season, the story is everywhere.

The company are saying that they have not yet ruled out litigation.  So let’s consider what options might they pursue?

Data Protection

 As a tech company they are probably uncomfortable with the data protection angle around handing data over to the Irish Fisc.  But they are a payment processor.  The law allows Revenue to demand details of payments they processed in respect of Irish taxpayers since they have their headquarters here.  Our Supreme Court was clear that Irish tax law applies to all companies with their headquarters here, regardless of whether they hold the data here, in Walsh v National Irish Bank.

If they chose to challenge the Revenue use of s891D of the Taxes Consolidation Act to gather the data, Revenue could simply apply to the High court under s902A of that Act for an order forcing them to hand it over.  The Supreme Court already ruled in the National Irish Bank case that the comparable court enforcement rules relating to Banks are very broad.  That jurisprudence suggests the High Court would grant the order easily.

Our history of massive non-compliance in relation to offshore bank accounts explains why our tax authorities have had draconian data collection rules, the likes of which HMRC are only now seeking, for years.  And our Supreme Court is comfortable with them using those rules. I don’t see this avenue as a runner.

Judicial Review

It is possible that the avenue for litigation to be pursued is that Revenue have somehow unfairly changed their view on the tax law in this area.  Except that they haven’t.  Any one who read Tax Briefing 44 which was introduced at the same time as the legislation in 2001 can attest to this.  It clearly states that “Rent-a-room relief applies where an individual receives sums in respect of the use, for residential purposes, of a room or rooms in the individual’s sole or main residence.”

 It has always been a condition of the relief that the room be used for residential, as distinct from business, or guest accommodation purposes.

Even if you disagree with Revenue’s view of the law, without evidencing that they changed that view, there is no decision for the Court to review.

Revenue updated their guidance to refer to Airbnb as a new phenomenon which could affect many taxpayers.  But Revenue are simply treating the Airbnb hosts the same way that they have been treating B&B hosts for years since the rules came in.

I see great difficulty with mounting a challenge here.  It is not possible to argue that Revenue’s view is wrong, one must prove that their view changed and there is simply no evidence of this.

Additionally Revenue updated their guidance for this in February.  The normal time limits for making a Judicial Review application have passed, and there is no obvious reason why they ought to be extended in this instance since the Revenue guidance has been in the public domain for all affected to see since that time.

Again I don’t see this being a runner.

The Substance of the Tax Rules

It may sound obvious to say, but how income is taxed depends upon what you do to generate that income.  And this will depend on the facts.

So the idea that Airbnb can have an opinion from EY and an opinion from a Senior Counsel causes me some concern.

Looking at the Airbnb website, rentals can vary from 1 night to several months.  The properties can vary from a room in someone’s house to a self contained Granny flat or even a holiday cottage.

With so many potential fact patterns it is impossible, as a tax adviser, to give any definitive advice as to how the income will be taxed in all cases.

Can any Airbnb host claim Rent-A-Room relief? The answer may actually be yes!

Mary is a widow and lives in a house in Dublin.  She advertises a room in her house on a B&B basis on Airbnb.  Ideally she wants people who will stay for more than one month.  Stephanie from France books the room for the summer from May to September as she is coming to Ireland to take a course.  Mary is delighted and stops looking for guests.

It is not definitive, but there is a strong argument that Mary could claim Rent-A Room relief.  However, let’s review some of the issues which she must address before she can claim that relief.

Is the income rental income or something else?

The first question to ask is what the source of the income is for tax purposes.  The default position tends to be that income from the renting of property is taxed as rental income unless there are some other activities which change its nature.

In this case Mary provides breakfast, cleaning and laundry services which go beyond the mere rental of a property.

The next question to ask is whether those services are merely ancillary to the renting of the room, or whether they go beyond that.  If I rent a flat for a year I expect it to be clean when I move in.  I expect the landlord to fix a broken lock, or mend a broken boiler.  As a result these things are not considered to be additional services above and beyond the renting of the flat; they are part and parcel of renting the flat.

If the flat is part of an apartment block it is to be expected that the landlord will keep the communal areas clean.  The cleaning of those communal areas is really just part of renting the flat rather than a distinct service.

In this case, the answer is that Mary’s services including cooking probably go beyond the mere renting of a room.

Mary’s son Daithí registered with Airbnb to let out his flat to Jerome while he was on holidays for three weeks.  He left milk, juice, bread and teabags so that Jerome did not have to find a shop on his arrival.  He cleaned the flat on his return.  These were small matters which were merely ancillary to the provision of the accommodation.  All Daithí’s income would likely be taxable as rental income.

If something else, is it trading or “other”?

The next question to ask is whether the income is taxable under Case IV as “other income” or Case I as “trading income”.  There are a number of tests but the main one here would be “frequency of transactions” i.e. how often a transaction is repeated.

In this case Mary only has one lodger.  There is only one transaction.  As a result it is likely that Revenue would accept that the income is not a trade, and is taxable as other income.

But, later transactions can impact on the definition of an earlier transaction for these purposes.

So, if at the end of the summer Mary is happy with the money which she has made and takes in no more lodgers that would be the end of the matter.  If, instead, Mary goes on to take in Chloe for one month, Emily for one month, and Elodie for one month it is arguable that all of the activities, including the original rental to Stephanie, are now trading.

Ann, Mary’s neighbour, takes guests for shorter periods and had ten guests stay for periods between one night and one week over the summer period.  Ann is clearly trading.  For Ann the issue of Rent-A-Room relief can never arise because she is not taxed under the “rents and other income” rules to which that relief can apply.

If the income is “other” what are the Rent-A-Room tests?

  1. Main Residence

Moving on to the next test, Rent-A-Room relief can apply to rents and other income which arises from letting a room in “your main residence”.

Sinead, Mary’s cousin, has a granny flat over her garage which is not attached to her house, which she rents out to one guest for six months.  The Granny flat has its own entrance and kitchen and Sinead provides no other services.  The guests rarely enter Sinead’s house, other than for the occasional cup of tea and chat.  While Sinead’s income is clearly rental income as she is providing no other services, Rent-A-Room relief cannot apply as she is not renting out a room in her main residence.

If the garage was attached to the house, or the unit was a basement flat in the house albeit self-contained, the relief could be available.

But as Mary is renting out a room in her main residence so the relief may be available.

  1. Residential Accommodation

The next test which Mary must meet is that the room must be used as “residential accommodation” by Stephanie.  There is case law on this point and the Court of Appeal in England & Wales decided that the question of whether the occupation of a property was sufficient to make a person “resident” there for tax purposes was a question of fact and degree in each case.  For a person to be “resident” there must be some evidence of permanence, some degree of continuity or expectation of continuity.

Stephanie only plans on being in Ireland for three months.  As a university student she is used to living out of a rucksack.  The room is entirely suitable for her needs while she is here and she is pleased not to have to move about.  The college post her forms to Mary’s house. Her friends call there and sometimes stay for dinner.  She purchases an Irish mobile phone which is cheaper than roaming.  It is very arguable that she is using the accommodation as residential accommodation in order to qualify for the relief.

Mary told her friends Sorcha & Neil about how she thought Airbnb was brilliant.  They decided to try it.  They had Jamie and Pippa, a British couple, stay with them for three nights while attending a festival.  After Jamie & Pippa left they decided that they didn’t like having strangers in their house and so removed their advertisement.  While Sorcha and Neil only had one lodger, and in many other respects were similar to Mary, it is clear that Pippa & Jamie used the accommodation as guest, and not residential, accommodation so there is arguably no question of the relief being available.

The EY view seems to be that the case of Owen v Elliott (H M Inspector of Taxes) is authority for the proposition that “the expression ‘residential accommodation’ does not directly or by association mean premises likely to be occupied as a home. It means living accommodation, by contrast, for example, with office accommodation. I regard as wholly artificial attempts to distinguish between a letting by the owner and a letting to the occupant; and between letting to a lodger and letting to a guest in a board house; and between a letting that is likely to be used by the occupant as his home and one that is not.”

This view is likely to be challenged by Revenue, but in any event a significant number of Airbnb users will fall outside the rules for Rent- Room either by having income which constitutes trading income due to the frequency of hostings, or because the property used is not their main residence.

To suggest that Sorcha & Neil (as the only example I have given exactly on this point, being one or two short term hosting in their main residence) should litigate a point, not just before the Appeals Commissioners, but potentially through the superior courts, given the known strength of Revenue’s views on this matter seems somewhat aggressive.  Such litigation could take many years, and if Counsel are to be instructed could cost many multiples of the income likely generated given the required fact pattern.

Generally on the Airbnb model

Mary, depending on what she does after Stephanie leaves, may well qualify for Rent-A-Room relief.  But everything about the Airbnb model is stacked against this conclusion.  It will be the exception rather than the rule.

A holiday cottage won’t qualify; the space must be in your main residence.  Guests staying for short periods of time won’t qualify.  Too many guests staying won’t qualify.

If you’re providing meals and have any number of guests Revenue would likely treat you as carrying on a trade.  The tax rules would then be the same as they are for B&B owners, or hotels.  Even if you only have two or three guests, if you keep advertising and hoping to appeal to more guests this analysis is likely correct.

If the guests are not staying in your house, and you don’t provide meals etc the chances are that the income is rental income.  Expenses such as food which is left on the premises on arrival may not be tax deductible, but Revenue are unlikely to challenge this aggressively, especially if that service is advertised as part of the offering.

It is only with a long term rental to just one or two lodgers that the relief is likely to be available.  But this is not the Airbnb model.  If Stephanie decided to stay on with Mary for a further six months to complete another course, the chances are that she would not book this through Airbnb but would make an agreement directly with Mary.  In fact Stephanie probably only booked one month with Mary to begin with via Airbnb to determine if she liked living there and later extended it without the involvement of Airbnb.

Under the Airbnb payments model Stephanie pays Airbnb up front, but Mary is not paid until Stephanie leaves.  It therefore makes little sense for Mary to advertise a long term arrangement, which involves her incurring costs of food along the way, via that platform.

The percentage fee arrangements used by many such online sites would tend to encourage users seeking longer term agreements within the Rent-A-Room rules to look elsewhere for their advertising options.

If Stephanie’s friend Amélie decided to come and stay with Mary for six months after Stephanie returned to France she would be unlikely to organise this via Airbnb but by phoning Mary.

So the restrictions inherent to the tax relief would tend to point people for whom the tax relief is important, away from Airbnb, which may provide for monthly rentals, but which any savvy homeowner in need of cash, would eschew in favour of a site which allowed them to be paid on a regular basis for longer term arrangements.

Back to Airbnb “not ruling out litigation”

Even if a significant number of people with Mary’s profile were using Airbnb, it is clear that Airbnb still would not have standing to challenge the actual application of the law.  It simply does not affect them.

Airbnb may be prepared to fund some of its hosts’ professional fees.  But I doubt this.  It seems more likely that the company is not overly upset by the publicity which is being generated once it is seen to be trying to be as helpful as possible.  The refusal to confirm that they won’t litigate when there is no obvious basis for them to do so, fits in with this pattern.

In one sense it begs the question why Airbnb have sought an opinion not only from EY, but also from Senior Counsel, in a situation where they cannot litigate.  Their hosts who are affected cannot either see the totality of, or rely on, that advice.  If that advice is targeted to the many different fact patterns which might arise; it seems unusual that the company would hold it out as supporting the application of Rent-a-Room relief in all scenarios. Yet the company has been very careful not to do this, merely to give the impression of doing this.  If you read their statements they have specified that the income should always have been treated as potentially taxable income. A cynic might think that appearing to be helpful while creating no risk for themselves or their advisers is the aim here.

Other Taxpayers

In the interim lots of small taxpayers are in a blind panic, not just Airbnb hosts, but also those who host summer students or operate traditional digs.

It is clear and always has been clear that this relief is designed for those operating digs on a medium to long term basis and Revenue guidance supports this.  A person who takes into their home a university student or worker for six months to a year clearly qualifies for the relief.  If they take in two they can still qualify but once the rents exceed €12,000 per annum they become taxable on a normal “income less expenses” basis for all of their income.

The family taking in a Spanish student of a similar age to their own children who then use the money to take the whole family to cultural events and encourage their kids to be exposed to a child from a different background for three weeks in the summer are clearly not trading.  Nor are they engaged in a letting business since the care of a minor is far more important than the provision of a bed.  It is unlikely that Revenue would even seek to tax any small profits which arise as “other income” on the basis that in many cases such arrangements will result in a loss.  Any remuneration should therefore be treated as expenses.  Just as tax free travel expenses may slightly exceed the actual costs incurred, the same arguments could be made here.  In the event that the student missed their flight home, or lost their jacket it is likely any small profit would be wiped out by exceptional child care costs.

By contrast, a person who takes in multiple foreign students, on a short term basis, in a commercial operation, would likely be viewed as trading.

What to do now?

If a person is trading then they are taxable on their profits rather than their revenues.  They can claim a deduction for any costs incurred wholly and exclusively for the purposes of the trade.  This would include a proportion of their bills, a proportion of their groceries etc.  If receipts were not kept, and how many of us keep receipts for a box of tea-bags and a litre of milk, a case can be made to Revenue that if the advertisement stipulated that an Irish breakfast was included that a reasonable cost for the provision of that breakfast was €X.  For overheads, if bills weren’t retained, bank statements can be used to evidence the costs.

For a person with a rental business, or an “other income” business, similar rules will apply.  Deductions for items not specifically mentioned in the rental agreement may not, however, be allowed.  If the advertisement doesn’t mention fresh flowers then the cost of those flowers would not be deductible.  If the advertisement mentions basic groceries being available on arrival, the cost of those groceries would be deductible.

Claiming relief for medical expenses and work related expenses which are often otherwise missed by PAYE taxpayers could result in a tax refund for many hosts with low levels of income who don’t normally file returns or claim relief for such allowable expenses.

For 2014, the return is not due until mid November if filed electronically so there is plenty of time.  No penalties or interest will apply.

Many may be able to apply to Revenue to have the income coded rather than having to file a return.

If an individual finds that they have an unexpectedly large tax bill which they cannot afford to pay, they should contact Revenue as soon as possible to agree an instalment arrangement.  But many smaller scale Airbnb users could find that the scale of the problem has been blown out of all proportion, simply because the story broke during silly season.

Aer Rianta’s Non-Denial in relation to VAT

There is a consumer strike going on in the UK .

It was recently reported that many retailers in the airports are charging a single price regardless of whether the traveler is flying to an EU or non-EU destination.  Since the traveler flying to a non-EU destination can have their purchases zero rated for VAT purposes the price, logically, should be lower in many cases.  In some cases the retailer is simply pocketing the difference.  In others they appear to be adjusting the price for all travelers.

Yesterday we saw an Aer Rianta “denial” which is actually a confirmation they are doing the same thing that the UK public are up in arms about.  The UK anger is righteous but in part is possibly missing the point at who the victim(s) are here, and the consumer response of not showing the boarding passes will ultimately hurt the consumers, and hugely help the tax man.  

Tommy McGibney is also annoyed at this.  His blog assumes that Aer Rianta are pocketing all the VAT on the RoW sales as some UK retailers seem to be doing.  To be fair with the wording of Aer Rianta’s non-denial he may be right (and is well worth a read).  I’m choosing to take the denial at face value and work from there.

In the UK the retailers in question are WH Smith & Boots many of whom make low level supplies many of which are zero rated in any event e.g. a newspaper or a sandwich.

In Ireland the main retailer is Aer Rianta selling perfume, jewelry, expensive cosmetics all of which would be standard rated.

The question an Irish journalist should ask Aer Rianta to answer is

Do you pay the same VAT to Revenue you would do if you didn’t average prices and accounted for VAT properly?

If they answer yes and don’t obfuscate about sales volumes etc I would be shocked for the following reasons.

Let’s say that Aer Rianta sell widgets (standard rated) in the airport departure area. 

They buy it for €10 + VAT of €2.30 so €12.30. 

It’s supposed to sell for €20 + VAT of €4.60  so €24.60 for EU travelers and is zero rated for RoW travelers so it should sell to them for €20. 

Let’s assume that 2 EU and 1 ROW travelers is an average ratio for widget purchases in Dublin airport.. (I will engage in minor rounding to keep the numbers manageable)

What they are actually saying is that they are charging one price (2 x €24.60 + 1 x €20 = €69.20) and averaging it by dividing by three meaning that they’re selling it to everyone for €23.  They’re saying that every one (besides the RoW travelers) wins accounting for €4.30 of VAT on the two EU sales on VAT exclusive proceeds of €18.70.  They’re reverse engineering the VAT from the average price at 23%.

So at face value their denial is true.  They’re charging one price and the price for VAT suffering EU travelers is lower than it would be if they charged two prices.  They are passing the savings on, although how accurately they are doing that may be questioned.

But.  If they charged the VAT on the normal €20 on the two EU sales they would have to account for output tax of €4.60 x 2 = €9.20 from which they could deduct their input tax of €6.90 (€2.30 x 3 as the zero rating means the input tax is recoverable on the widget sold to a RoW traveler) meaning that they would pay Revenue €2.30 in VAT in relation to the above 3 widgets sold.

Doing what they are doing they are accounting for output tax of €4.30 x 2 = €8.60 from which you deduct the €6.90 meaning they have to pay Revenue €1.70.

So they’re saving €0.60 VAT on the above 3 widgets sold.

I made the margins big on widgets to illustrate the point but given the amount of sales Aer Rianta make small VAT adjustments can rapidly add up.  I’m assuming that there is normal input tax on all sales, in many cases there may not be, but as the tax advantage is in the output tax this point is not relevant.

The savings are being shared with the customers, but at a cost to Revenue by pushing down the consideration on the VATable EU sales.  They are claiming that it simplifies things for their customers but I can’t see a risk of any confusion given they manage it for cigarettes & alcohol.  If their tills can handle the duty their tills can handle the VAT.

The customer sees one price and thinks nothing of it.  Revenue see one price and think nothing of it.  But today’s denial is an admission that they are using their VAT exempt sales to deflate the VAT on their EU sales and that is the difference which Aer Rianta appear to be pocketing, not the total VAT on the non EU sales.

So, if travelers refuse to show boarding passes Aer Rianta will register fewer RoW sales (only RoW travelers can actually hurt the retailers by refusing to show boarding passes, if EU travelers do it will have no impact).  If all of the RoW travelers refuse to show their boarding passes eventually Aer Rianta will have to charge everyone €24.60 and account for all of the VAT & Revenue would then collect VAT on the sales to the RoW travelers which should have been zero rated.

I can’t see any defense to it.  Customers won’t be confused.  The tills can handle it.  It’s not as though if the widget in Dublin Airport departure lounge suddenly got €0.30 more expensive that you could nip out to the Omni Park in Santry to buy a cheaper one.  There is also no reason to suspect that it would be cheaper in the Omni Park since they should be applying the correct VAT.

It may make the EU travelers think that Aer Rianta are cheaper than the Omni Park and thus buy more, but at the expense of both Revenue and the RoW travelers.  So in that sense the denial is a complete non denial. If it is helping sales then it is enriching Aer Rianta.  If the sales are stagnant then the Revenue and RoW travelers are causing them to be enriched.

Imagine if a small shop subsidized its VATable sales with its VAT zero rated sales in this way?  If it charged more for bread to subsidize chocolate?  It would lose bread sales and this strategy would not work.  

But the market in Dublin Airport are trapped.  If you’re travelling to the States and really want to buy shampoo because you forgot to pack it, and you’re paying the same price as a customer travelling to the UK, you’ll still buy the shampoo.  If you want to buy perfume because you promised yourself you would, and it is still cheaper than the Omni Park because of the VAT angle, you’ll still buy it.  By refusing to show your boarding pass the perfume will get to be the same price as in the Omni Park eventually (adjusted for other variables of course).

If one retailer decides to account for VAT properly they will gain RoW travelers and lose EU travelers as customers.  But there is very little competition in the airport.  This strategy means that there is a VAT subsidy for every retailer who uses the same strategy over accounting for the VAT properly.

In any event, an Irish Semi State should not be engaged in price manipulation at a cost to both some consumers and to the Revenue.  It breaches the code of conduct for State owned enterprises.

Can Revenue do anything?  With yesterday’s denial I would think so.  Revenue could challenge them on the basis that they have now admitted they are manipulating the prices of the VATable sales to EU customers.  If the VAT subsidy is taken away and is replaced with a VAT cost (of being forced to account for VAT on the unmanipulated price to EU consumers while charging the manipulated price) then that will remove a key benefit of the strategy.  They may still engage in the strategy but the prices should rise and the State (otherwise than as a shareholder) would be square.

Which still leaves the customer manipulation issue, which also does not sit well with a State owned company.

The Irish GAAR 2015 – Tax Nerd Version

To the world we’re a tax haven.  In fact we have quite onerous anti-avoidance legislation most notably our GAAR, but we’ve traditionally eschewed talking about anti avoidance legislation, especially outside Ireland lest it contradict our intention to be perceived as a friendly tax regime.  I don’t think either Revenue, or the Department of Finance, understand the risk that they are creating for inbound investors in this regard.  I’m actually not so certain that Revenue are unaware.  But the Department of Finance cannot be.

So what does the Irish GAAR actually say?

From the 24th of October 2014 the GAAR says the following.

TCA 1997 s811C(3) states that

“A person shall not be entitled to any tax advantage arising out of or by reason of a tax avoidance transaction to which this section applies”.

In the past a nominated officer had to deny the tax advantage, but now the tax payer cannot self-assess the tax advantage.

Subsection four of that section states

“Where a person submits any return, declaration, statement or account or makes any claim which purports to obtain the benefit of a tax advantage arising out of or by reason of a tax avoidance transaction, a Revenue officer may at any time deny or withdraw the tax advantage.”

I would draw your attention to the phrase “at any time”.  There are no time limits here.

So what is a “tax advantage”?

‘tax advantage’ means—

(i) a reduction, avoidance or deferral of any charge or assessment to tax, including any potential or prospective charge or assessment, or

(ii) a refund of or a payment of an amount of tax, or an increase in an amount of tax, refundable or otherwise payable to a person, including any potential or prospective amount so refundable or payable,

arising out of or by reason of a transaction, including a transaction where another transaction would not have been undertaken or arranged to achieve the results, or any part of the results, achieved or intended to be achieved by the transaction;

As one can see this is a very broad definition of a tax advantage, but this is a General Anti-Avoidance Rule so that point is hardly surprising.

So the last technical definition which we need to consider is what is meant by a “tax avoidance transaction” and this is defined by subsection 2(a) and then 2(b) carves some transactions back out of the scope of the GAAR.

(2) (a) Subject to paragraph (b), for the purposes of this section a transaction shall be a ‘tax avoidance transaction’ if having regard to the following matters—

(i) the form of that transaction,

(ii) the substance of that transaction,

(iii) the substance of any other transaction or transactions which that transaction may reasonably be regarded as being directly or indirectly related to or connected with, and

(iv) the final outcome of that transaction and any combination of those other transactions which are so related or connected,

Okay, so one can look at the form of the transaction, the substance of the transaction, the substance of connected transactions and the final outcome…  At this stage we’re not looking at the taxpayer’s intention.  But the first thing that worries me is the talk of related or connected transactions.  This suggests that one doesn’t look at the totality but that the legislation can hone in one any one step.  A takeover may be commercial and not a tax avoidance transaction, but if it is a public transaction there could certainly be steps included to secure a particular tax outcome, especially if there is a cross border element to it since Irish tax rules relating to tax exempt takeovers assume that they’re being done under Irish company law.

Niggle one, so let’s continue

and having regard to any one or more of the following matters—

(I) the results of the transaction,

(II) its use as a means of achieving those results,

(III) any other means by which the results or any part of the results could have been achieved, it would be reasonable to consider that—

(A) the transaction gives rise to, or but for this section would give rise to, a tax advantage, and

(B) the transaction was not undertaken or arranged primarily for purposes other than to give rise to a tax advantage.

Let’s stop again.  Again we’re looking at the results of the transaction (but which transaction? To use my above example the cross border public to public or the tax planning step interposed to ensure that it fell within the Irish tax rules and negate difficulties caused by foreign corporate law?), its use of achieving those results “it would be reasonable to consider that”.  A couple of issues.

The first is that “reasonable to consider” is a significantly lower burden of proof than a conclusion.  But the larger issue is who is doing the considering?  Is it the tax adviser structuring the transaction?  The tax director in the group? The tax partner on the audit? A Revenue auditor?  The man on the DART heading to a protest about austerity?  There is scope for considerable confusion and differing of opinion here, especially given the different tax risk profiles of advisers, their clients, and indeed Revenue.  Ultimately a court would have to make the determination but the costs of going to court and delays associated with litigation in Ireland make this a very unattractive proposition.  The current climate vilifies companies seen to engage in tax avoidance such that the negative press alone could force directors to take the most conservative position.

Reminding you again that subsection three says that the taxpayer is not entitled to take the benefit of the tax avoidance transaction, so this issue is one of self-assessment.

But back to the legislation, after para (a) defined a tax avoidance transaction para (b) then contains two kinds of tax avoidance transaction which it carves out of the GAAR

(b) For the purpose of this section, a transaction shall not be a tax avoidance transaction if, having regard to the matters set out in paragraph (a)—

(i) notwithstanding that the purpose or purposes of the transaction could have been achieved by some other transaction which would have given rise to a greater amount of tax being payable by the person, the transaction—

(I) was undertaken or arranged by a person with a view, directly or indirectly, to the realisation of profits in the course of the business activities of a business carried on by the person, and

(II) was not undertaken or arranged primarily to give rise to a tax advantage, or

(ii) the transaction was undertaken or arranged for the purpose of obtaining the benefit of any relief, allowance or other abatement provided by any provision of the Acts and the transaction did not result directly or indirectly in a misuse of the provision or an abuse of the provision having regard to the purposes for which it was provided.”

I must admit to not being able to understand the first carve out in (i) because if we go back into the definition in s811C(2)(a)(III)(B) which defined a tax avoidance transaction it said

(B) the transaction was not undertaken or arranged primarily for purposes other than to give rise to a tax advantage.

So if it was designed primarily for purposes other than to give rise to a tax advantage it was not a tax avoidance transaction to begin with.  If it was undertaken or arranged primarily to give rise to a tax advantage then it is caught by para (a) and can’t possibly escape under para (b)(i)

So then we’re left with s811C(2)(b)(ii) which is the “abuse or misuse provision”.  So using my earlier example of a cross border public to public transaction I would think that any structuring required to ensure that a transaction which holistically fell within a relief did not involve an abuse of that relief because differing legal systems necessitated the interposition of an additional step.

But this position is not clear cut.  If one looks at the O’Flynn decision

74 The idea that any particular scheme can produce a result that the Oireachtas did not intend, is much more easily expressed than applied in practice. The legal intent of the Oireachtas is to be derived from the words used in their context, deploying all the aids to construction which are available, in an attempt to understand what the Oireachtas intended. But in very many cases, the Oireachtas will not have contemplated at all, the elaborate schemes subsequently constructed, which will take as their starting point a faithful compliance with the words of the statute. In some cases it may be that there is a gap that the Oireachtas neglected, or an intended scheme which was not foreseen.  In those cases, the courts are not empowered to disallow a relief or to apply any taxing provision, since to do so would be to exceed the proper function of the courts in the constitutional scheme.

In other cases the provision may be so technical and detailed so that no more broad or general purpose can be detected, or may have its own explicit anti-avoidance provision. In such a case there may be no room for the application of s.86 since it may not be possible to detect a purpose for the provision other than the basic one that the Oireachtas intended that any transaction which met requirements of the section should receive the relief. However, there are some cases of which this is one, where it may be possible to say with some confidence that though there has been compliance with the literal words of the statute, the result is not the sort of relief that the Act intended should result. In such cases, s.86 permits an evaluation of the particular transaction and a consideration as to whether it comes not just within the words, but also within the intended scheme, or is rather, a misuse or abuse of it. The fact that such an evaluation may be difficult and can create some uncertainty, is not a reason to avoid the task. Certainly in tax matters it is difficult to achieve and the desire to provide certainty to those who wish to avoid a taxation regime which applies to others similarly situated to them, is something which ranks low in the objectives which statutory interpretation seeks to achieve. The tax payer could, after all, achieve a high level of certainty, but at the price of paying tax on dividends received.

The confusion inherent in the above statement is that there were no restrictions in the rules on the receipt of tax free dividends out of export sales relief reserves.  The rules simply permitted that profits which were eligible for ESR were tax free, and dividends out of those profits were tax free.  It is easy to see the purpose for exempting the profits in order to make export sales more attractive (before the EU took issue with that tax regime) but it is impossible to fathom the purpose which allowed a dividend out of a listed company which engaged in export sales be tax free in the hands of an Irish taxpayer when a dividend out of a quoted company with domestic sales was not.  There is no direct link between the activity being promoted and the tax free dividend.  The Supreme Court in essence determined that the Oireachtas could not have intended that a construction firm could acquire old reserves and pay a dividend out of them, which falls within what I have artificially created into the first paragraph above, but then determined that in this instance

the result is not the sort of relief that the Act intended should result

Without ever pointing to that intention (an issue raised in the dissenting judgement).

Many Irish tax rules have no overt evidence of an intention, or at least an intention which can be clearly determined for Irish taxpayers to have sufficient certainty to plan.  The participation exemption is so widely drafted that it seeks to exempt many disposals yet before the EU took issue with it over State Aid it wanted to exempt only disposals of foreign subsidiaries.

The Dichotomy Inherent in the Irish Tax System

Many Irish tax provisions are begrudgingly extended to Irish situations for this reason, but the core intention was to make Ireland more attractive to inbound investors.

The “Irish solution to an Irish problem” then is to include in many of the relieving provisions a clause which disapplies the relief if the seeking of the relief was one of the main purposes!

But this is where the recent Revenue e-brief on an “Avoidance Disclosure Facility” is worrying.

In Appendix 1 they list planning which falls into two categories.  The first list are a number of “the transaction was undertaken for commercial reasons and the main purpose or one of the main purposes was not to secure a tax advantage” clauses within relieving sections, while the second list are specific anti-avoidance rules.

The first list is what concerns me, and one particular provision on that list being TCA s291A(7)(c).  This is the provision which allows the amortization and interest associated with the acquisition of specified intangible assets to erode 100% of the profits generated by those intangibles.

The purpose of the legislation is clearly to facilitate those groups with a double Irish structure to transfer their IP onshore into Ireland to protect against BEPS or unilateral action like the UK’s Diverted Profits Tax while maintaining a very competitive tax rate (of potentially 0%).  The legislation dispplies the relief from assets already within the charge to Irish tax unless CGT is paid on the acquisition of those assets, and so is clearly designed to facilitate tax planning by foreign groups transfering their IP into Ireland, and yet it contains a clause in s291A(7)(c) which states that

(c) that is not made wholly and exclusively for bona fide commercial reasons and that was incurred as part of a scheme or arrangement of which the main purpose or one of the main purposes is the avoidance of, or reduction in, liability to tax.

If a tax advantage is required to take into account a tax advantage outside Ireland (not the case presently but with the Duty to Co-Operate under EU law watch this space) then almost every transaction giving rise to the relief will be for the purposes of reducing a liability to tax.  Indeed if you’re collapsing your Double Irish into your Irish resident by selling the IP in then you may be seeking to reduce your liability to Irish tax.

Even assuming that your subjective intention of that step was not a tax avoidance motive, Revenue (or you, or your auditor, or an acquirer in diligence, or the man on the street) could then reassess the entire transaction, or any subset of transactions based on the GAAR which is only invoked if a Specific Anti Avoidance Rule (SAAR) hasn’t already applied to disallow the relief claimed.

Yet the IDA and other Governmental Departments are actively promoting this, based one assumes on the historic assumption that Revenue know that anti-avoidance rules are really only supposed to apply to “our own taxpayers especially HNWs” and not to, predominantly US, “inbound investors”.  Many of the provisions on the list in Annex one apply equally to inbound investors, and those provisions contain anti-avoidance clauses which were never applied, because to apply them in an inbound context could render the reliefs almost impossible to claim.

But with the D-G Competition looking over our shoulder Revenue can no longer simply refuse to apply the law to one category of taxpayers.  Yet with these clauses appearing in so many relieving provisions how can one possibly be certain that there is no abuse or misuse (indeed how can one be certain that the relief is available under first principals even without the GAAR applying)?

Consequences of the GAAR applying

If the GAAR applies and the transaction was not notified to Revenue under a protective notification then tax geared penalties of up to 30% can apply along with a reasonably penal rate of interest at any time.

If, rather than a GAAR applying, a SAAR applies then Revenue could argue that the claiming of a relief which was not available resulted in a materially incorrect return being filed which again results in no time limits being applicable.

Ireland, and to an extent, Irish advisers seem happy to continue as always was.  We sell the Department of Finance version of Ireland as a happy tax haven, we don’t mention the anti-avoidance rules and we assume that Revenue simply won’t apply them.  But this assumption seems shortsighted in the current climate meaning that the dichotomy must finally stop.

If Ireland really wants to actively engage in tax competition we must accept that our own taxpayers should be eligible for the same reliefs as inbound investors and make this obvious by removing the anti-avoidance rules.  Otherwise we must determine to follow a different path which doesn’t champion tax avoidance as a victimless crime and applies anti-avoidance legislation across the board.

But is unfathomable that a US MNC could be convinced to transfer their IP into Ireland to avail of a relief which either the European Commission via a State Aid action, or the Revenue Commissioners via the GAAR or SAAR could withdraw at any time.  Indeed a relief which the taxpayer may not even be entitled to claim on their return.

Ireland, a nation where we talk about tax, we talk about tax competition, but we don’t talk about the fact that in many instances we leave taxpayers living with unacceptable levels of tax risk because we don’t want our “own taxpayers” relying on the rules we bring in for “other people’s taxpayers”.

A Brief History of Anti Avoidance in Ireland

A Brief History of General Anti Avoidance in Ireland

This blog is intentionally general with no case references or legislative citations to give a history of anti avoidance in Ireland.  Additional Blog posts may be more technical in nature but this one was requested by a non tax person and may be interesting background reading for non Irish tax people trying to understand where Ireland is now in terms of taxpayer certainty.

“It is a truth universally acknowledged, that a single man in possession of a good fortune, must be in want of a wife.”

It must be almost as universally acknowledged that in times of economic contraction income tax rates tend to increase and the incentive to engage in tax planning increases correspondingly.  In such times there tends to be a greater level of sympathy for tax authorities from the Courts.  This is the situation which arose in the UK in the late ’70s and ’80s and resulted in what was understood at the time to be a judicial GAAR referred to as the “Ramsay doctrine”.

We now understand that “doctrine” to be no more than a more nuanced approach to statutory interpretation.

In 1989 in the case of McGrath v McDermott (Inspector of Taxes) the Revenue Commissioners failed to convince the Irish Supreme Court to follow the UK jurisprudence.  The Supreme Court felt that, as understood at the time, a judicial GAAR required judicial legislation in the sphere of taxation which is precluded under the Irish constitution.

Unsurprisingly in the Finance Act 1989 a GAAR was introduced into Irish law.  The GAAR required that a nominated officer (of which there has generally been one) make a determination that the GAAR applied to the transaction in order to cancel the tax advantage sought.

But the wheels of justice move slowly in Ireland.  At the end of 1991 and beginning of 1992 the O’Flynn Construction group engaged in a series of transactions designed to allow a tax free dividend to its shareholders via the acquisition of exempt “export sales relief” reserves from the Dairygold group.  In August 1997 Revenue informed the taxpayer that they were applying the GAAR to the transaction.  The taxpayer appealed to the Appeal Commissioners who upheld the taxpayers’ objections.

In 2006 Revenue’s appeal to the High Court was determined in their favour, and in December 2011 the Supreme Court split three two in favour of Revenue.

To date this has been the only substantive litigation in a court of record on the GAAR.

However, flushed with their High Court victory in 2006, that year’s Finance Act saw the introduction of “protective notifications”.  If a taxpayer or their adviser notified Revenue that a transaction potentially fell within the GAAR then Revenue had a reduced two year time limit in which to apply the GAAR.  If a transaction was not notified, and the GAAR either applied, or it was not unreasonable for Revenue to allege that the GAAR applied, a penalty of 20% of the tax advantage sought applied.  Introducing a tax geared penalty for tax determined by the courts not to be due was a whole new departure!

We know that from the debates on the Finance Bill 2014 since its introduction in 2006 Revenue have received 518 protective notifications in total.  75 of those cases are now closed.  But more interestingly, 427 of the open notifications relate to one tax scheme with 19 notifications in relation to that scheme being made in 2010, 40 in 2011, 129 in 2012, 136 in 2013 and 104 in 2014.  So it would appear that one scheme promoter is taking the PN rules seriously while for the most part the rest of the profession are ignoring the rule, generally on the basis that they expect the Courts to strike it down as an unjust attack on property rights if Revenue ever try to rely on it.

There have been two other procedural skirmishes in relation to the GAAR worth mentioning.  In Droog in 2011 the High Court held that the general times limits in the Taxes Acts apply to a challenge under the GAAR when Revenue had argued that the GAAR was not subject to any time limits.  Unsurprisingly while Revenue are appealing this decision they acted in seeking an amendment to the GAAR expressly stating that the normal time limit provisions are inapplicable to a transaction to which the GAAR applied.  Since Revenue believe that Droog was incorrectly decided the change in 2012 applies retroactively (if Droog was correctly decided).

The other skirmish involved a failed attempt by a taxpayer to judicially review Revenue’s decision to determine that the GAAR applied, and the taxpayer Ronan McNamee failed in this challenge in 2012.

However, since its introduction there has been much consternation as to whether the GAAR is in fact constitutional on two grounds.

The first is whether the GAAR is allowing Revenue to legislate which is reserved for the Oireachtas under the constitution.  In McGrath the Supreme Court held that to follow the English Courts in purposefully interpreting taxing statutes would involve judicial legislation which they are precluded from engaging in under the constitution.  If the Ramsay doctrine (as it was understood at the time) involved judicial legislation then surely a statutory equivalent allowed for Revenue legislation?

The second is whether the GAAR constitutes an unjust attack on property rights and to this end the point will be determined on its proportionality.

Over 25 years since its introduction the constitutional challenge to the GAAR is expected to materialise in the High Court in 2015.

But what about VAT?

During the property boom in Ireland VAT on property was a significant issue and an area of aggressive tax planning.  When Revenue were aware that HMRC in the UK were seeking to deny a tax advantage based on the doctrine of abuse of law they decided to follow suit.  After the Advocat General’s decision in Halifax but before the decision of the Court of Justice the Appeals Commissioners heard the case of Cussens v Brosnan and determined it in Revenue’s favour.  The taxpayer sought to have the case re-heard at the circuit court where they lost.  On appeal to the High Court in 2008 the following was determined.

  1. A lease which was a critical feature of the planning at issue was void having been made without the consent of the mortgagor as required by Irish law.  The planning thus suffered from an implementation failure.
  2. If the planning had worked then Halifax would have applied to negate the tax advantage.
  3. No evidence was offered on the point that a 10% interest rate on underpaid VAT is penal and thus precluded by para 93 of the Halifax decision.  The taxpayer argued this point but absent expert testimony the High Court refused to determine it.  The taxpayer can not have argued the point well since Ireland imposes a higher interest rate on underpaid fiduciary taxes than other taxes precisely to penalise their collection without a corresponding remittance!

It is believed that the Supreme Court has heard the appeal in Cussens but the judgement is still pending.  What will be interesting to see is whether the Supreme Court upholds the validity issue and whether Revenue can then seek penalties based on the return being submitted carelessly.  Penalties cannot be invoked under Halifax, but they can if the planning fails.  An additional point to note is that in any case where Revenue challenge tax planning as being based on an implementation failure they can allege that the return was materially incorrect and thus normal tax time limits for Revenue investigations do not apply which is a point forgotten by many.  In practice Revenue are unlikely to take it other than with a taxpayer who they view as being high risk given their limited resources.

Budget 2015 Changes

In the Finance Act 2014 Revenue changed the GAAR.  The removed the requirement for a nominated officer to make a determination that the transaction was a tax avoidance transaction.  In essence the GAAR is now self-assessment.  Any officer, at any time, can form the view that the GAAR applies but this calls into question whether tax payers can now expect to benefit from any transaction to which the GAAR could apply.

The rules on protective notifications were also changed, such that a protective notification no longer gives the taxpayer certainty after two years, but only after the normal fiveish years.  There are now a range of penalties reduced to 0% where the taxpayer notifies the tax authority in advance or voluntarily informs the tax authority after the event but before an investigation is opened.  The penalty is extended to a number of specific anti avoidance provisions in addition to the GAAR, and the top rate is extended from 20% to 30% but restricted to cases where the tax is determined to be due.

The Disclosure Facility

A more subtle change was introduced to create a “disclosure facility” operating from January 2015 through to 30th of June of this year.  Where a taxpayer has engaged in an avoidance scheme and settles with Revenue before the 30th of June a discount of 20% on the interest liability will apply and Revenue will not seek penalties.

At first glance this does not appear to be much of an opportunity but it must be considered in context.

If Revenue decide to litigate a case that litigation can take any where up to 20 years costing potentially hundreds of thousands in legal fees once the case hits the Superior Courts.  The cost of litigation is no disincentive to Revenue.

In addition, appeals to the Appeals Commissioners (where the majority of tax appeals end) are currently held in Camera in Ireland.  If the taxpayer loses they can apply to have the case reheard at the circuit court (if Revenue lose they must appeal to the High Court directly).  While Circuit Court proceedings are not in camera, they are rarely reported in the mainstream press, especially is the case involves something as dry as a tax assessment.

Legislation is about to be introduced to overhaul the tax appeals process in Ireland and the new legislation envisages the removal of both the in camera rule, but also the ability to have the case reheard at the circuit court.

Against this back drop the taxpayer must now be prepared to have their tax affairs in the public domain from the time they appeal, and be prepared to incur High Court costs if they are dissatisfied with the decision of the Appeals Commissioners.

This is the stick behind the current “disclosure opportunity”, and from the statistics offered in the debates on the changes the “leveraged financial trading scheme” to which 427 of the protective notification applied the total tax advantage sought was €30m meaning that the average taxpayer in that scheme sought to save a little more than €70k in tax.  That amount surely cannot warrant significant litigation risk given the absence of group litigation in Ireland and thus Revenue’s ability to force each taxpayer to fight their case.  Since this is a scheme it is likely that the promoter is representing all of the taxpayers and one wonders if they should, at this stage, be taking independent tax advice to determine whether they should be taking this opportunity to settle.

By contrast in O’Flynn the amount was close to £300,000 back in 1991, in McNamee the amount was €6m but the scheme participants in total sought to save €110m, and in Cussens the VAT at stake is €3m but as a test case it is likely that significant additional VAT could rest on the outcome.

The disclosure facility is not limited to schemes to which the GAAR could apply, but also to schemes which may fall foul of a number of specific and targeted anti-avoidance rules.  It remains to be seen whether many tax payers avail of it.

Other Budgetary Changes in 2015

In Budget 2015 Ireland significantly reformed the Mandatory Reporting rules.  These rules allow for penalties to be applied to tax advisers and other promoters (and their clients) who sell tax planning with certain characteristics without informing Revenue of the detail of the planning.

While the original rules were introduced in the Finance Act 2010 and loosely modelled on the UK rules anecdotal evidence suggests that there were very few disclosures made relative to the UK.  This years changes significantly tighten the rules and bring planning involving discretionary trusts into the rules.

Additionally this year rules were introduced (again loosely modelled on recent UK changes) allowing Revenue issue Payment Notices to other scheme users once they have defeated one scheme user at the Appeals Commissioners.  This will require scheme users to pay the tax which can be recovered with interest only in the event that the case is finally resolved in the taxpayers’ favour.

One final point to note is that the major outrage expressed by the profession in relation to all of the changes in Budget 2015 is that the profession were given no advance notice or opportunity to consult.  This is a marked departure by Revenue evidencing the level of their frustration with the profession.

What is clear is that there is a dichotomy between the tax haven Ireland which the world perceives and the Department of Finance wish to project, and the world inhabited by Irish advisers and Revenue.  While the GAAR was generally considered to be a risk for HNW individuals it is broader in its application than that.

With Revenue under pressure to collect taxes and the European Commission looking over their shoulder to ensure that they do their job fairly and without providing selective treatment to US MNCs, it is less uncommon for GAAR notices to be issued to large corporates than it once was.

While one can see why Revenue have felt the need to seek the legislative powers which they now have, those powers now mean that there is little certainty in the world of taxation in Ireland.  Unfortunately many tax advisers and their clients still don’t recognise this.

I’ll close this post with a worrying quote from the majority judgement of the Supreme Court in O’Flynn where O’Donnell J stated

“Certainly in tax matters it is difficult to achieve and the desire to provide certainty to those who wish to avoid a taxation regime which applies to others similarly situated to them, is something which ranks low in the objectives which statutory interpretation seeks to achieve. The tax payer could, after all, achieve a high level of certainty, but at the price of paying tax on dividends received.”