Directors appeal misuse of tax relief ruling

TWO directors of a construction company have appealed to the Supreme Court against a decision that a scheme under which they received some £600,000 in tax-free dividends was a tax avoidance scheme involving a misuse of export sales tax reliefs.

The appeal by John O’Flynn, Pinewood, Kilcrea, Ovens, Co Cork; Michael O’Flynn, Kilcrea, Ovens and their company, O’Flynn Construction Co Ltd (OFC), will involve the five-judge Supreme Court giving its first interpretation of the meaning of Section 811 of the Taxes Consolidation Act, the general anti-avoidance provision of that act.

The Revenue Commissioners had claimed a scheme which involved the brothers receiving payments of £298,000 each in 1992 was “far from being a normal use” of tax-free export sales relief (ESR) provisions. However, the Appeals Commissioners of the Revenue later found the scheme was not a tax avoidance transaction.

The Revenue challenged the Appeals Commissioners finding before the High Court which in 2006 upheld that challenge.

Mr Justice Thomas Smyth ruled that the complex arrangement under which the brothers received income of £298,000 each in January 1992 in the form of tax-free ESR dividends, funded by the write-off of a loan of £650,000 by their company OFC, was a misuse of the relevant reliefs and a tax avoidance transaction.

The issue before the Supreme Court is whether or not the transaction was a tax avoidance transaction under section 86.3 of the Finance Act 1989 (now section 811 of the Taxes Consolidation Act 1997).

The High Court ruled the transaction involved ESR reserves in a company in the Dairygold group being transferred to OFC — a construction company not engaged in an export business — to allow tax relief dividends to be paid to shareholders of that company, the O’Flynn’s.

The Revenue argued the profits of O’Flynn Construction Ltd were used to fund an ESR dividend payment to its shareholders.

In moving the appeal yesterday, Paul Sreenan SC, for the O’Flynn side, argued section 86 provides that a transaction can give rise to a “tax advantage” as long as the transaction was not “primarily” created for the purpose of tax advantage. If a transaction did result in a tax benefit or relief, this could not be a misuse if its primary purpose was not to achieve that benefit, he submitted.

The appeal continues today.