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Home / ... / December 2007 / Recent Irish High Court Decisions

The number of tax cases heard by the High Court in any one year varies, but 2007 has been a relatively busy year, with five tax cases to date being decided – two dealing with VAT, and the remaining three separately dealing with Capital Gains Tax, Stamp Duty and exemption of patent distributions. They explore not just the tax legislation itself, but also, for example, the impact of EU Directives and Double Taxation Agreements when applying the law. Three of the five cases were found in favour of the taxpayer.

Importance of Irish High Court Decisions

Irish High Court tax decisions are very important for any Chartered Accountant working in the area of tax in business or practice. The main reason for their importance is that any decision by a Court in Ireland becomes part of the tax law of Ireland unless either the decision is overturned by a subsequent decision on the same point, or the law itself is changed.

This position contrasts with UK Court decisions which are not binding on Irish Courts, but may have persuasive authority. The persuasive value will depend on the similarity between the UK legislation in question and the equivalent Irish legislation.

Therefore, the issues in each of the five cases have been specifically dealt with in the Irish High Court and take the meaning assigned to them unless another Irish High Court case on the same issue overrules the decision, which would be unusual, or the decision is overturned by the Supreme Court. Very few tax cases make it as far as the Supreme Court.

Journey to the High Court

Firstly, a taxpayer who is aggrieved by any assessment to Income Tax or Corporation Tax must appeal to the Appeal Commissioners, by notice in writing, within 30 days from the date of the notice of assessment; any assessment to VAT must be appealed within 21 days. The notice of appeal must include the amount or matter with which the taxpayer disagrees, and the grounds for appeal.

Immediately after the determination of an appeal by the Appeal Commissioner, the taxpayer or the Revenue may declare their dissatisfaction on a point of law to the Appeal Commissioner. The party must then make a request in writing, within 21 days of the determination, that the case be stated for the opinion of the High Court.

The taxpayer (but not the Revenue) also has the option of requesting a rehearing at the Circuit Court, on either a point of law or a point of fact, and this request must be made in writing within 10 days of the determination. If the Circuit Court is chosen first by the taxpayer, then an appeal of the Circuit Court decision can be made to the High Court only on a point of law.

Summary of Recent Cases

Hagemeyer Ireland plc v The Revenue Commissioners ([2007] IEHC 49)

Tax: VAT

Key Issue: Whether the activities of Hagemeyer, a financial services company, are subject to VAT, and so the taxpayer can claim input VAT.

Decision: Found in favour of the taxpayer.

Hagemeyer purchased debt and then outsourced the collection of the debt back to the vendor. Following on from the ECJ decision in MKG-Kraftfahrzeuge-Factoring GmbH (Case C-305/01), Revenue were of the view that Hagemeyer’s activities were not regarded as debt factoring, but were exempt financial services, and so were not vatable.

The key issue in the decision was the lack of a definition of “factoring” in the EU Sixth Directive. The Judge analysed the salient features of a standard bundle of transactions of Hagemeyer.

It was held that the activities of Hagemeyer were vatable and hence Hagemeyer could claim input VAT. One of the deciding factors in the decision was that the risk passed to Hagemeyer and it had retained discretion to withdraw the debt collection service from the seller of the debts.

The Revenue Commissioners and Wen-Plast (Research and Development) Limited ([2007] IEHC 66)

Tax: Exemption of patent distributions

Key Issue: Whether the patented invention of a fire-resistant, hygienic door set, which included a fire resistant strip encased in a plastic material, “involved radical innovation” within the meaning of TCA 97 s141, and was therefore a qualifying patent for tax exemption purposes?

Decision: Found in favour of the taxpayer.

If a distribution is made from income from a qualifying patent “which (I) involved radical innovation, and (II) was patented for bona fide commercial reasons and not primarily for the purpose of avoiding liability to taxation”, then Revenue will make a determination whether the distributions are made out of disregarded income and hence not taxable.

The key issue in this case revolved around the meaning of the “involved radical innovation”. According to the judgement, there are three stages in the process which leads to a qualifying patent, based on TCA 97 s234, first the process leading to the invention, the second being the actual invention and the third being the patenting of the invention.

The Court agreed with the decision of the Special Commissioners which found in favour of the taxpayer, i.e. “it is not necessary that radical innovation is capable of being demonstrated as part of the process leading to a patent but that it is sufficient that a combination of known technology could, and does in the instant case, result in an invention which involved radical innovation.”

Cadbury Ireland Pension Trust Limited and CMF Trustees Limited and The Revenue Commissioners ([2007] IEHC 190)

Tax: VAT

Key Issue: Whether the services provided by a company established in Scotland in relation to managing the investments of the Cadbury pension schemes, being fourth schedule services, were received by the trustees for the purposes of any business carried on by them. If so, the trustees would have to account for the VAT.

Decision: Found in favour of the Revenue.

The taxpayers, companies limited by guarantee, were pension trustees for Cadbury’s pension schemes – one for employees and the other for executives. The trustees’ functions were of a fiduciary nature, imposed on them by the trust deeds and they received the services of the Scottish company for the purposes of those functions. Therefore, the issue was whether the taxpayers’ functions constituted “business” or “economic activity”.

Miss Justice Laffoy stated that a test consisting of six issues in a UK case, Customs and Excise Commissioners v Lord Fisher, was one which could be usefully deployed in Ireland to determine whether the supply of a service was received for the purpose of business carried on by the recipient. The High Court ruled that the trustees’ functions constituted “business” within the VAT Act and “economic activity” within the meaning of the EU Sixth Directive, and therefore the services were supplied to the trustees for the purposes of business carried on by them. In making her decision, the judge looked at the entirety of the activity which each trustee was involved in.

This means that the trustees are deemed taxable persons and have to account for VAT on the services under the reverse charge rules.

For a more in-depth analysis of this case, see Fergus Gannon’s article in this issue of Accountancy Ireland.

Kinsella v The Revenue Commissioners ([2007] IEHC 250)

Tax: Capital Gains Tax

Key Issue: Whether the Ireland/Italy Tax Treaty applies to Irish Capital Gains Tax. A secondary issue which was considered is the meaning of “day” within the relevant provisions of the treaty.

Decision: Found in favour of the taxpayer.

The taxpayer had sold shares in an Irish company to a third party while tax resident in Italy. She had acquired the shares from her husband earlier in that tax year.

It was the taxpayer’s view that based on the Ireland/Italy Tax Treaty, she was tax resident in Italy for the tax year and that the sale of shares was subject to Italian tax only. It was the Revenue’s view that the treaty did not apply to Irish Capital Gains Tax and so the sale of shares was subject to Irish Capital Gains Tax.

It was decided that: • The Ireland/Italy tax treaty applies to Irish Capital Gains Tax pursuant to the provisions of Article 2 of the treaty. • For the purpose of computing the period or periods of days in the relevant fiscal year, presence in Ireland is to be determined in accordance with TCA97 s819(4), i.e. an individual is deemed to be present in the State for a day if that individual is present in the State at the end of the day.

Therefore, based on the application of the treaty, the taxpayer was resident in Italy in the tax year and so the sale of shares was subject to Italian tax only.

The Revenue Commissioners and Glenkerrin Homes Limited ([2007] IEHC 182)

It is important to note that this case deals with “old” legislation and is included for the sake of completeness. The relevant legislation was amended as respects instruments executed on or after 2 March 2005.

Tax: Stamp Duty

Key Issue: This case deals with interpretation of section 40 of the Stamp Duties Consolidation Act, 1999 prior to its amendment in Finance Act 2005.

Decision: Found in favour of the Revenue.

The taxpayer had acquired land in Dublin for €31.6m. The payment for the land was arranged as follows: €3.16m cash deposit and an undertaking signed by the purchaser, together with a guarantee, on completion of the sale. The taxpayer presented the transfer for stamping.

The Revenue assessed the stamp duty as €2.844m, i.e. 9% of the entire purchase price. The taxpayer argued that the stamp duty should only be chargeable on the deposit of €3.16m as the undertaking should be treated as a non-marketable security which had no value at the date of the transfer. The basis for the taxpayer’s argument was that there was no amount due on the security at the date of the transfer - the undertaking and guarantee resulted in the balance being payable to the vendor six days after the completion of the sale.

The High Court ruled in favour of the Revenue that stamp duty was due on the entire purchase price of €31.6m. One of the deciding factors in the case was the judge’s view that the linking of the “amount due” to a particular date in the legislation was entirely neutral.

As the relevant legislation was amended by FA05 as respects instruments executed on or after 2 March 2005 and the case deals with the section 40 prior to the amendment, the judgement must be seen in this context.

Where to next?

If the taxpayer or the Revenue are dissatisfied with the above High Court decisions, they may appeal to the Supreme Court. It should be noted that the Supreme Court may not alter any decision on a point of fact.

If an appeal is not made to the Supreme Court, the issues in each of the five cases take the meaning assigned to them for the purposes of Irish tax law.

Good summary of important tax cases in 2007.