Film firm partner not liable for tax bill because time limit expired

A partner in a film distribution company could not be made liable for a €30,000 income tax bill 10 years after he filed a €63,000 loss in his self-assessed returns because of a four-year time limit preventing re-opening of a compliant taxpayer's affairs, the Supreme Court has ruled.

The court dismissed an appeal by Revenue against a High Court decision in favour of Hans Droog who had claimed tax relief for 1996/97 on his IR£50,046 (€63,558) share of losses in Taupe Partners which was involved in the acquisition, distribution and licensing of films.

In 1998, he received an assessment for 1996/97 which was in accordance with his return and which allowed relief for his loss.

Ten years later however, in 2007, Revenue notified him that the loss transaction was a tax avoidance measure designed to give rise to a tax advantage. Revenue said he had therefore paid IR£24,022(€30,507) less tax than he should have.

Mr Droog appealed Revenue’s notice and an Appeals Commissioner found the initiation of the process (to decide it was tax avoidance) was out of time. Revenue appealed to the High Court, which agreed with the Appeals Commissioner.

Revenue then appealed to the Supreme Court which noted income tax legislation provides a general four-year time limit in respect of some, though not all, taxes and commencing from the end of the relevant tax year

Taxes Acts

Mr Justice Clarke, on behalf of the three-judge court, said the issue at the heart of the case was whether, on a proper construction of Taxes Acts as a whole, an opinion of a Revenue inspector in relation to tax avoidance, is caught by general time limits contained in the 1997 Taxes Consolidation Act (TCA).

He noted the 2008 Finance Act had amended the 1997 provisions to deal with this issue.

In this case, while section 811 of the 1997 Act provided Revenue could form an opinion as to a tax avoidance transaction “at any time”, sections 955 and 956 expressly state a four-year time limit after which “no additional tax shall be payable”.

The judge said the reason for this provision was, where a taxpayer had made a "full and true" disclosure of all relevant facts, the Oireachtas must have considered it significantly unfair to allow Revenue re-open the amount of tax due after a four year period elapsed.

The time limit does not apply if Revenue has reasonable grounds for believing returns have been completed in a fraudulent or negligent manner.

‘Fishing’ exploration

Revenue is however not entitled to engage in a “fishing” exploration as to whether old returns were inaccurate, the judge said.

It was the court’s view that the use of the phrase “at any time” in the legislation did not amount to a sufficiently clear and express exclusion of the four-year time limit so as to disapply that time limit, he said.

As the only purpose of raising an opinion (as to tax avoidance in 2007) would be to require Mr Droog to pay additional tax which would necessarily arise outside the four year limit, the raising of that opinion “can have no lawful objective” and must be regarded as legally impermissible, the court said.