Supreme Court: O’Flynns used scheme to avoid tax on £600k

PROPERTY developers Michael and John O’Flynn used a “highly artificial” tax avoidance scheme 20 years ago to avoid paying tax on almost £600,000 in dividends, the Supreme Court has ruled.

In 1997, the Revenue Commissioners found the two directors of O’Flynn Construction used a complicated tax avoidance scheme to avoid paying tax on £298,000 in tax-free export sales relief dividends which each received in January 1992.

“It is possible to admire the ingenuity with which the scheme was devised and efficiency with which it was executed, but lament the fact that such skills are put to use for the sole objective of avoiding tax,” Mr Justice Donal O’Donnell said in the Supreme Court ruling yesterday. He added that the scheme was “highly artificial” and contrived, involving more than 40 steps over a period of 50 days between December 5, 1991, and January 24, 1992.

O’Flynn Construction (OFC) had successfully appealed the Revenue decision to the Revenue Appeals Commissioners in 2002.

That decision was in turn overturned by the High Court four years later and its ruling was rubber-stamped by a three-to-two majority in yesterday’s Supreme Court ruling.

The disputed scheme involved export sales relief reserves in a company in the Dairygold group being transferred to OFC. Michael O’Flynn and John O’Flynn each received £298,000 in January 1992 in tax-free ESR dividends, funded by the write-off of a loan of £650,000 by OFC.

The Supreme Court said the scheme involved profits of OFC, which would attract tax if distributed to shareholders, being paid by a “circuitous route” to those shareholders without attracting tax, all done via “a series of steps devised for the sole purpose of achieving that result”. This was “the antithesis” of the export reliefs scheme, the court said.

This transaction was not the realisation of profits in the ordinary course of business but was arranged primarily to give rise to a tax advantage, Mr Justice O’Donnell said. A scheme which allowed shareholders in a non-exporting company to benefit from export sales reliefs on the profits of the non-exporting company “is surely a misuse” of the export sales relief scheme (ESRS). The ESRS itself made no provision for the sale or trade in export sales relief reserves.