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.
- 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.
- If the planning had worked then Halifax would have applied to negate the tax advantage.
- 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.”