46 taxation revenue policy a n t i a v o i d a n c e 262659

Taxation Revenue Policy
A n t i – A v o i d a n c e – R e s t r i c t i o n s i n Ta x
P l a n n i n g
Conor Kennedy and Daragh O’Shaughnessy provide an overview of the historical and
current approach taken by Revenue and the Department of Finance in combating tax
One particular change will ensure
that those going temporarily offshore
to avoid capital gains tax
liability will no longer be able to use the
loophole in question. I will continue to act
quickly to close down tax avoidance schemes
as they come to my attention
(Minister for Finance, Charlie McCreevy,
Budget 2003 speech)
This (anti-avoidance measure) will deal
with an unacceptable interpretation of VAT
law being propounded by some tax
(Minister for Finance, Charlie McCreevy,
Budget 2004 speech)
I am closing off two particular loopholes in
the tax system relating to Capital Gains Tax
and interest relief in groups of companies
(Minister for Finance, Brian Cowen, Budget
2006 speech)
As the above extracts illustrate, a regular
feature of the annual Finance Act is the
amendment of specific sections of legislation
to combat what the Minister for Finance and
the Revenue Commissioners perceive to be
abuses of the tax system. Such specific
amendments are introduced only after the
deemed shortcomings of the existing
legislation are brought to the attention of the
Minister and the Revenue Commissioners
due to taxpayers minimising their tax liabilities
within the existing law. Lord Wilbeforce
referred to such amendments in his
judgement in Ramsay –v- Inland Revenue
Commissioners [1982] AC 300 as the “hole
and plug” solution to tax avoidance. However,
if the introduction of such specific antiavoidance
measures is considered the “cure”
for aggressive tax planning, then a general
pre-emptive approach to prevent the need for
amendments in the first place is obviously the
ideal for the Government and tax authorities
This pre-emptive approach to tax avoidance
is codified in current Irish legislation in Section
811 of the Taxes Consolidation Act 1997,
which was originally introduced in Finance Act
1989. The introduction of this general antiavoidance
provision became necessary after it
became clear that the judiciary could not be
relied upon to assume as aggressive a stance
towards tax avoidance, as would be preferred
by Revenue and the Government. The history
of the conception and birth of Section 811 is
best illustrated by reference to the relevant
case law.
Form over Substance
The case of Duke of Westminster -v- Inland
Revenue Commissioners (1936) 19 TC 490
[1936] AC 1, concerned the characterisation
of certain payments made by the Duke to his
domestic employees. Payments made under
deeds of covenant could reduce his liability to
a surtax; payments made as wages to his
employees could not. The Duke executed
deeds of covenant in favour of his employees,
and reduced their wages accordingly, and
thus mitigated his exposure to the surtax.
Taxation Revenue Policy
The Inland Revenue contended that the
payments under the deed were, in substance,
salaries or wages and should therefore not be
considered deductible for the purposes of
calculating the Duke’s exposure to the surtax.
This opinion was upheld in the High Court but
overturned in the Court of Appeal.
The House of Lords dismissed the appeal
of this decision by the Inland Revenue. In
delivering his opinion, Lord Tomlin said:
“ … it is said that in revenue cases there is
a doctrine that the Court may ignore the
legal position and regard what is called
“the substance of the matter,” … This socalled
doctrine of “the substance” seems
to me to be nothing more than an attempt
to make a man pay notwithstanding that
he has so ordered his affairs that the
amount of tax sought from him is not
legally claimable.”
This doctrine of depending only on the
legally enforceable “form” of a transaction,
instead of its economic “substance” or
financial result when determining liability to
tax, was approved by the Irish judiciary in the
case of O’Sullivan –v- P Limited, the
judgement in which referred to the Duke of
Westminster case.
Doctrine of Fiscal Nullity
The general application of the doctrine of
“form over substance” as laid down in the
Duke of Westminster case continued to hold
until two important UK cases in the early
In the 1982 case of Ramsay –v- Inland
Revenue Commissioners [1982] AC 300, the
House of Lords rejected a claim for relief for
capital losses generated by the taxpayer
through a series of pre-arranged artificial steps
which served no commercial purpose other
than the reduction in a Capital Gains Tax
liability. The core of the decision essentially
rested with the fact that the taxpayer had not
suffered an actual commercial loss, but a
capital loss technically generated by the
structure of the tax law. The series of artificial
steps had left the taxpayer in essentially the
same commercial position as before, but with
the benefit of a capital loss for tax purposes. It
was decided that in such circumstances, the
actual effect of the transactions taken as a
whole should be studied, and the taxpayer’s
liability decided accordingly, applying a
principle known as the “doctrine of fiscal
nullity”, where a series of “self-cancelling” or
“circular” transactions are ignored for tax
In 1984, the case of Furniss (Inspector of
Taxes) -v- Dawson [1984] AC 474 further
extended this principle. The Dawson family
had sought to defer a Capital Gains Tax
liability on the sale of their shares in two
family companies by selling them via an Isle
of Man company incorporated for that
purpose. Even though this series of
transactions had a commercial effect, with the
proceeds of the sale now owned by the Isle
of Man company as opposed to the Dawson
family personally, the House of Lords applied
the principle of the Ramsay case on the basis
that artificial steps had been inserted into the
sale of the companies for a non-commercial
purpose, i.e. the deferment of the Capital
Gains Tax liability.
These judgements were reconciled with
that of the Duke of Westminster case by virtue
of the fact that, while each individual
transaction could be judged on the merits of
its legal form, the totality of a series of
transactions could be viewed differently.
The McGrath Case
In Ireland, the Appeal Commissioners
applied the doctrine of fiscal nullity in rejecting
a claim for loss relief for artificial losses in the
case of P.W. McGrath –v- J.E. McDermott
(Inspector of Taxes) [1988] IR 258.
In brief terms, McGrath had purchased
shares in a company for Stg£900, from a
company with which he was connected.
Upon selling the same shares to an
unconnected purchaser for Stg£900, McGrath
crystallised a significant loss for Capital Gains
Tax purposes due to a technicality in the
“market value” rules governing disposals
between connected parties, that deemed his
acquisition cost to be significantly higher that
the Stg£900 actually paid.
Therefore to address this apparent lacuna in the
law, a new all-embracing anti-avoidance provision
was introduced which is now encompassed as
Section 811 Taxes Consolidation Act 1997
Taxation Revenue Policy
As McGrath had not made any actual loss,
Revenue refused the loss relief claim and the
Appeal Commissioners upheld the refusal. This
decision was rejected by the High Court and then
unanimously by the Supreme Court.
In rejecting Revenue’s argument, Finlay CJ
stated that the “function of the courts in
interpreting a statute of the Oireachtas is ….
strictly confined to ascertaining the true meaning
of the each statutory provision, resorting in cases
of doubt or ambiguity to a consideration of the
purpose and intention of the legislature to be
inferred from the provisions of the statute
involved, or even of statutes expressed to be
construed with it. The courts have not got a
function to add to or delete from express
statutory provisions so as to achieve objectives
which to the courts appear desirable. In rare and
limited circumstances words or phrases may be
implied into statutory provisions solely for the
purpose of making them effective to achieve their
expressly avowed objective.”
He concluded that “…for this court to avoid the
application of the provisions of the [Capital Gains
Tax Act 1975] to these transactions [by the
application of the doctrine of ‘fiscal nullity’] could
only constitute the invasion by the judiciary of the
powers and functions of the legislature, in plain
breach of the constitutional separation of
Section 811 and the Constitution
Following this decision, the Revenue feared
open season in the manifestation of tax avoidance
schemes. Therefore to address this apparent
lacuna in the law, a new all-embracing antiavoidance
provision was introduced which is now
encompassed as Section 811 Taxes Consolidation
Act 1997. This legislation enables Revenue to recharacterise
any transaction where they form an
opinion that a transaction gives rise to a tax
advantage or “…was not undertaken or arranged
primarily for purposes other than to give rise to a
tax advantage.” The formulation of an opinion by
Revenue as to whether or not a transaction
comprises a ‘tax avoidance transaction’ could be
regarded as the making of law. If litigation ensues,
it would be open to the applicant to argue that the
Revenue has exceeded its Constitutional authority
to the extent that Article 6.2 provides that no body
can exercise the powers vested exclusively in
another body. However, notwithstanding the
judgement in the McGrath case, the general
attitude of the Irish judiciary towards the
constitutionality of tax legislation should be
considered before any such litigation is pursued.
Personal & Property Rights
The State is required to ensure that the property
rights of every citizen are protected from unjust
Article 40.3.2 of the Constitution provides that
“The State shall, in particular, by its laws protect
and as best it may from unjust attack and, in the
case of injustice done, vindicate the life, person,
good name and property rights of every citizen”. In
Daly v Revenue Commissioners & AG 5 ITR 213,
a medical doctor challenged the basis upon which
professional services withholding tax was levied.
The repugnant provision attempted to prevent a
taxpayer obtain a full refund of one year’s tax on
a switch from the prior year basis to the current
year basis. It was held that such a provision failed
the proportionality test because it was manifestly
unfair and caused hardship. As such the effect on
the taxpayer’s property rights was not
proportionate to the objectives to be achieved.
However, in PJ Madigan and P Madigan v The
Attorney General (1986) IRLM 136, the
applicants sought a determination that the
manner in which Residential Property Tax was
imposed upon them infringed the rights of the
person, privacy and property in contravention of
Articles 40.1, 40.3 and 41 of the Constitution.
O’Hanlon J, in dismissing the applicants’ claims
said that “ … so far as the courts are concerned
this is a taxation measure. As such it necessarily
interferes with the property rights of affected
citizens. However, such interference cannot be
challenged as being unjust on that account, if
what has been done can be regarded as action
by the State in accordance with the principles of
social justice and having regard to the exigencies
of the common good as envisaged by Article
43.2 of the Constitution.”
Authority to Make Law
The Irish Constitution advocates a tripartite
separation of powers involving the legislature, the
executive and the judiciary. This doctrine instils a
certain degree of independence between the
parties whereby a system of checks and balances
can operate.
The Oireachtas or legislature makes the laws.
Article 15. 2. 1° of the Constitution provides that
the sole and exclusive power of making laws for
the State is vested in the Oireachtas and no other
legislative authority has power to make laws for
the State.
…the general attitude of the Irish judiciary towards the
constitutionality of tax legislation should be considered
before any such litigation is pursued.
Taxation Revenue Policy
Article 28.2 provides that the executive power of
the State “shall be exercised by or on the authority
of the Government”. Therefore the Government is
the executive organ of the State and collectively
responsible for all the Departments of the State
which are administered by individual members of
the Government.
The function of the courts is to interpret the law.
Article 34.1 requires that justice shall be
administered in courts established by law by
judges appointed in the manner provided by the
Constitution, and, save in such special and limited
cases as may be prescribed by law, shall be
administered in public.
To this extent, in Maher v Attorney General
[1973] IR 412, the Supreme Court refused to
remove words from a piece of legislation in order
to render the legislation constitutional. The Court
held that such intrusion would involve “law
making”, and therefore this responsibility could
only be performed by Parliament.
In Deaton v Attorney General [1963] IR 170, it
was held that a law allowing the Revenue
Commissioners choose what type of penalty tax
offenders would face was declared
unconstitutional on the grounds that only judges
may make such a decision
Difficulties in Challenging Tax
Article 15.4.1 states that “the Oireachtas shall
not enact any law which is repugnant to this
Constitution or any provision thereof.” In Pigs
Marketing Board v Donnelly [1939] IR 413 Hanna
J said “When the Court has to consider the
Constitutionality of a law it must, in the first place,
be accepted as an axiom that a law passed by the
Oireachtas, the elected representatives of the
people, is presumed to be constitutional unless
and until the contrary is clearly established.”
Courts have been particularly reluctant to hold
that tax laws amount to an unjust attack on
property rights. Such laws enjoy the benefit of a
very strong presumption of constitutionality and
will only be considered repugnant if they are
discriminatory or arbitrary in their operation. In
Madigan v The Attorney General (1986) IRLM
136 O’Hanlon J said that while Article 40.3 can be
invoked against a tax law which amounts to an
unjust attack on property rights, he stated that is
recognised “that tax laws are in category of their
own, and that very considerable latitude must be
allowed to the legislature in the enormously
complex task of organising and directing the
financial affairs of the State”
ECJ Matters – VAT Avoidance
Three UK cases recently before the European
Court of Justice concerned taxpayers entering into
arrangements designed to mitigate irrecoverable
VAT. Halifax Plc, BUPA and University of
Huddersfield were all concerned with the denial by
UK Revenue Authorities of VAT on arrangements
to recover VAT. The UK Revenue Authorities took a
view that VAT avoidance schemes should be
discarded resulting in no entitlement to recover
the VAT. However, the Advocate General rejected
the view of the UK Revenue Authorities, stating
that the transactions undertaken by Halifax Plc,
BUPA and the University of Huddersfield were
economic activities. The Advocate General
endorsed the view that the taxpayer may structure
economic activities in a manner conducive for the
reduction of tax, and this basis was not justification
for the UK to disregard the transaction accordingly.
The Advocate General published his opinion on
7th April 2005.
On 21 February 2006 the ECJ handed down
judgement in the three cases before it. Amongst
the findings, it held that “each of the transactions
at issue must be considered objectively and per
se. In that regard, the fact that a supply is made
with the sole intention of obtaining a tax
advantage is immaterial.” It will take some time to
digest the full findings from the Court and its
implications for the future of general tax planning
in Ireland.
The creation of the High Wealth Individuals
Business Unit within Revenue represents a
fundamental recognition of the need to monitor
and police tax avoidance schemes. This
monitoring process is further augmented by the
introduction in this year’s Finance Bill of a
requirement to give “protective notice” to Revenue
furnishing full details of the tax planning
arrangement. The failure to make such a
“protective notice” declaration to Revenue of a
transaction that falls foul of S.811 TCA 1997, will
give rise to interest and a 10% surcharge.
As such, it is now of particular importance for
practitioners to be aware of Revenue’s tolerance of
acceptable tax planning arrangements. One
cannot say for sure if the proposed Finance Bill
amendments to the general anti-avoidance
provisions will become law in their current form,
but the result should be anticipated and prepared
for by any practitioner involved in the provision of
advice on tax planning.
Conor Kennedy is a Barrister-at-Law and Daragh
O’Shaughnessy is Manager, Tax & Legal Services
with KSi Faulkner Orr
CPE Programme
Conor Kennedy will be
speaking on the One Day
Update Series 2 in May on
“Anti-Avoidance – Restrictions
in Tax Planning” in Dundalk,
Dublin West, Galway and
Cork. See CPA website for full

Submit a Comment