93TCAD2021 |
Income tax – tax avoidance |
Section 248 TCA 1997
Section 250 TCA 1997
Section 817A TCA 1997 |
Yes, but subsequently withdrawn |
The appeal primarily concerns interest relief claimed by the Appellant in the tax years ended 31 December 2006 to 31 December 2011, under section 248 TCA 1997 as extended by section 250 TCA 1997, on loans taken out in December 2005 to invest in two private unlimited companies, P and L. The interest relief claims amount to in excess of €2 million.
Revenue denied the relief, contending that the Appellant had obtained a disproportion tax saving through a construed arrangement involving forward currency contracts with a bank and financial spread betting arrangements.
Six issues were identified for consideration at appeal, for which the findings of the Appeal Commissioners are set out below:
Issue 1: Is section 248(3) applicable to section 250 TCA?
Issue 2: If the Appellant satisfies the conditions for interest relief pursuant to section 250(2), is he also subject to the conditions in section 248(3)?
Section 250 was found to be complete on a standalone basis, with no mandate for importing other language or conditions. As such, the anti-avoidance subsection, section 248(3) only applies to that section, with section 250 having its own anti-avoidance and recovery of capital provisions. Accordingly, the Appellant’s relief was determined to fully conform with section 250 and was not restricted or extinguished by section 248(3). In the event that the Appeal Commissioner was incorrect in this interpretation, the Appellant was considered to have engaged in a “scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax”.
Issue 3: Was the interest on the loans ‘paid’ within the meaning of section 248?
Revenue submitted that given that the interest due on the loans concerned has been discharged by means of an overdraft facility advanced by the same bank, the Appellant must show the interest was in fact ‘paid’ and not simply re-packaged as a different kind of debt. The Appellant distinguished their case from the English cases of Patron, Minsham Properties and Leeds Design, on which Revenue sought to rely, on the basis that there were no interest payments in these cases as interest was rolled up and added to the principal sum. In considering the ordinary language and common commercial sense the Appeal Commissioner determined that interest on the loans was paid having been discharged with funds borrowed from a separate overdraft account.
Issue 4: Whether there were ‘loan extensions’ in 2007 or actually new loans, with the result that interest relief is not due for the years 2008–2011?
The Appeal Commissioner was satisfied that a loan extension agreement providing for the same principal sum with the same specific security guarantee requirements, and a forward contract and financial spread bet extension agreements in respect of the same principal sum did not fall outside the scope of the relief by reason of section 248(1A). The extension of the loan term, a new increase in interest rates and payment dates were considered merely incidental to the loan extension.
Issue 5: In the year ended 31 December 2011, was L a company of the kind referred to in section 248(1)(a)(i) or (ii)?
It was argued that owing to dividend income earned in 2011, L was not “a company whose income consists wholly or mainly of profits or gains chargeable under Case V of schedule D”. Owing to the intention of the Oireachtas, the Appeal Commissioner considered for the relief to be permitted for a non-qualifying purpose, such as a fundamental change in the company’s primary source of income from Case V to a Case III or Case IV source to be absurd, despite the use of the present tense of the verb “consists” and the lack of statutory obligation to continue to derive a Case V source as its main source of income. In relation to the argument that section 129 TCA excludes dividends or distributions from other Irish companies being taken into account in computing income for corporation tax purposes the Appeal Commissioner sided with Revenue, in that the principle of statutory construction requires consideration of the intention of the legislature in enacting section 248(1)(a), such that no interest relief could be allowed for interest paid in 2011 when L’s income consisted of dividend income.
Issue 6: If the Appellant is entitled to relief under section 248 as extended by section 250, is the relief disallowed under section 817A?
Section 817A was considered to involve a dual process of initially determining the transaction under which the interest is paid and thereafter establishing the benefits of interest relief against all other benefits. In relation to the consideration of the transaction under which the interest is paid, the Appeal Commissioner determined that analysis was not practical as section 817A can never apply unless the tax rates are above 100 percent, which could not be the case here, as interest will reduce the liability and this benefit will always exceed the benefit of any tax relief on interest. The Appeal Commissioner considered the tax benefit of the interest paid on the loan with the value of the assets acquired under the loans accordingly. As the immediate and expected benefit of the assets acquired far outweighed the benefit of the tax deduction, it was determined that section 817A could not be applied to the Appellant.
Accordingly, the interest relief on the monies borrowed to acquire shares in P and L were determined to be allowed for the years 2006 to 2010 inclusive. For the year 2011, the relief for interest paid on the monies borrowed to acquire shares in P only was determined to be allowed. |
