This month’s Chartered Accountants tax case digest considers the High Court decision on the question of whether an individual was a “relevant individual” as defined in section 531AA TCA 1997 for the purposes of the domicile levy. With public attitudes towards legal tax avoidance by wealthy individuals beginning to harden internationally, the domicile levy could be first line of defence in political debate in Ireland.

In brief, the domicile levy applies to a “relevant individual”, who is domiciled in Ireland, whose world-wide income exceeds €1 million, whose Irish properties are greater in value than €5 million, but who pays income tax in the relevant year of less than €200,000. Such individuals are obliged to pay the domicile levy of €200,000. The hotelier, Louis Fitzgerald appealed the determination of the Tax Appeals Commission in 176TACD2020, in dispute of the assessments to the domicile levy for the tax years 2010 and 2011.

Background

Mr Fitzgerald had serval sources of income for the tax years 2010 and 2011, which included Schedule E income, rental income, dividend income and interest income. The extent of his income was such that he had paid over €200,000 in USC in 2011. However, due to the off set of capital allowances and losses arising within his hotel business against other income sources, he received repayments of tax of in excess of €300,000 and €900,000 for the tax years 2010 and 2011, respectively, meaning he paid no income tax alongside his USC liability for those years.

Under section 531AA(1) TCA 1997, “world-wide income” means the individual’s income, “without regard to any amount deductible from or deductible in computing total income, from all sources as estimated in accordance with the Tax Acts…”.

Mr Fitzgerald contended he was not liable to the domicile levy for the years concerned as:

• His “world-wide income” was not in excess of €1 million as under section 381 TCA 1997 deductions for capital allowances/losses were made in estimating income from all sources, and not at the end of the assessment process as a “deduction from total income”; and
• In relation to 2011, on the basis that the phrase “income tax” is not defined in the Tax Acts and the Income Tax Acts, that his payment of USC meant that his ‘liability to income tax’ was more than €200,000.

Decision

The Appeal Commissioner referred six questions to the High Court for consideration. In deciding upon the answer to each of those questions the High Court judgment reflects on the two key issues:

Did Mr Fitzgerald have world-wide income in excess of€1 million?

The High Court considered as reasoned the argument that for the purposes of calculating a liability to tax, the various steps undertaken under section 381 TCA 1997 sees that capital allowances/losses are not a “deduction from total income”, as they’re already accounted for under Scheduled D, Case I or spread across other income before the calculation of total income. However, on a literal reading of section 381(5) TCA 1997 it was considered clear that capital allowances/losses are to be “regarded as a deduction to be made from … total income”. On this basis, it was found that the Commissioner was correct in her determination that a loss under section 381 TCA 1997 does not constitute a deduction in estimating income from all sources but constitutes a deduction in computing total income.

As there is no ambiguity in the legislation, the High Court did not consider it necessary to apply a purposive approach to the legislation. However, it was discussed that in the event of doubt it was clear that the legislation sought to prevent wealthy individuals from using tax shelters and avoidance schemes to pay little or no income tax.

Is paying USC the same as paying income tax?

In analysis of various sections of the Taxes Consolidation Act, 1997, the High Court found USC to be treated “as very different to income tax”. In particular, it was noted in a number of instances that the legislation makes a clear distinction between USC and income tax, making USC very difficult to avoid through tax shelters or avoidance schemes. In giving weight to the judgement in Lord Chetwode v. Inland Revenue Commissioners [1977] 1 All ER 638, the High Court found that USC is not ‘income tax’ for the purposes of the domicile levy as USC was not charged in accordance with the Schedules within the legislation.

In further support of this, it was noted that to otherwise conclude would serve to go against the purpose of the domicile levy.

Conclusion

The Court concluded that Mr Fitzgerald was in fact a relevant individual for the tax years 2010 and 2011, and liable to the domicile levy, as he did have world-wide income in excess of €1 million for the tax years 2010 and 2011, and his USC liability in 2011 did not exclude him from the relevant definition. Accordingly, the Tax Appeal Commissioner was found not to have erred in holding that Mr Fitzgerald was subject to the domicile levy.

The full judgment is available from:- https://www.bailii.org/cgi-bin/format.cgi?doc=/ie/cases/IEHC/2021/2021IEHC487.html