Top builders’ scheme a misuse of tax reliefs

A SCHEME under which two directors of one of the country’s largest construction companies received Ir£600,000 (€760,000) in tax-free dividends was a tax avoidance scheme involving a misuse of export sales tax reliefs, the High Court ruled yesterday.

Mr Justice Thomas Smyth found that an arrangement under which Michael O’Flynn and John O’Flynn each received Ir£298,000 (€378,000) in January 1992 in the form of tax-free Export Sales Relief (ESR) dividends, funded by the write-off of a loan of Ir£650,000 (€850,000) by their company, O’Flynn Construction Company Ltd, was a misuse of the reliefs.

Justice Smyth disagreed with a decision of the Appeals Commissioners of the Revenue Commissioners that the transaction was not a tax avoidance transaction. He was delivering his reserved decision on a challenge by the Revenue Commissioners to that Appeals Commissioners decision of April 2000.

The question to be decided was whether the Appeals Commissioners were correct in holding the transaction was not a tax avoidance transaction, on the ground it did not result in a misuse of ESR provisions.

The judge said the commissioners were incorrect. This transaction, he said, involved ESR reserves in a company in the Dairygold group being transferred to a construction firm not in an export business, in order to allow tax relief dividends to be paid to shareholders of that company.

This scheme was completely at odds with the purpose for which ESR was provided and Revenue was required to have regard to the substance of the transaction, the judge found.

The case arose after O’Flynn Construction and Michael and John O’Flynn, with addresses at Kilcrea, Ovens, Co Cork, appealed to the Appeals Commissioners against an opinion of a Revenue officer in relation to the scheme.

Revenue had claimed the scheme had three phases.

The first related to the isolation within the Dairygold group of ESR reserves of Ir£1.2 million (€1.5m).

The second related to the utilisation of £600,000 (€760,000) of the reserves by unconnected persons and the third related to the utilisation of the balance by Michael and John O’Flynn.

Revenue had claimed the transaction was undertaken primarily to give rise to a tax advantage and involved an abuse or misuse of the ESR provisions.