Court of Appeal: Annual charge for second homes is not tax-deductible against rental income

About this case:

• Judgment:
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Delivering the judgment of the Court, Mr Justice Gerard Hogan held that the annual non-principal private residence charge (NPPR) was a charge imposed by the Oireachtas, and was therefore not a deductible expense against rental income for income tax purposes.

Background

Mr Thomas Collins owns six rental properties to which the NPPR charge was applicable. In 2009 he had paid the NPPR charge, being €200 per each property, and then sought to deduct the sum of €1,200 against rental income received under s. 97(2)(b) of the Taxes Consolidation Act 1997

The question for the Court was: “Whether the Non-Principal Private Residents charge is chargeable pursuant to the Local Government (Charges) Act 2009 is deductible against rental profits under s. 97(2) of the Taxes Consolidation Act 1997 as being “any rate levied by a local authority”.

Determination of the Appeal Commissioner

The Appeal Commissioner found for the taxpayer, concluding that the NPPR charge was a rate levied by a local authority. “The charge amount is set out in the Local Government (Charges) Act 2009 and in this it results from a different process from that employed by a local authority in setting the annual rates as part of the annual budgeting process”.

However, it was found that this difference should not deny the NPPR charge to be regarded as an open “rate”. The phrase used in TCA 1997 is “any rate levied by a local authority” and the ordinary meaning of that phrase includes the charge.

High Court

Justice Reynolds noted that there was no definition of what constituted a “rate” for the purposes of s. 97(2)(b) of the TCA 1997. She concluded that as this funding mechanism was designed exclusively for the benefit of local authorities it would be artificial and contrived not to hold that the charge amounted to a rate levied by a local authority for this purpose.

Considering Inspector of Taxes v. Kiernan I.R. 117, Justice Reynolds stated that the ordinary or colloquial meaning included the NPPR charge.

Court of Appeal

Acknowledging that there were several other cases awaiting the outcome of this appeal, Justice Hogan noted that the NPPR was introduced for the purpose of assisting local authorities to fund local services, and that the charge was collected by each local authority and retained by the local authority for its use. However, Justice Hogan stated that the single question before the court was whether the NPPR charge was a rate levied by a local authority:

“The current rating system has its origins in pre-Famine and post-Famine Victorian legislation, namely, the Poor Law (Ireland) Act 1838 and the Valuation (Ireland) Act 1852 prior to the enactment of modern legislation such as the Valuation Act 1988 and the Valuation Act 2001. It is true that, historically, the rating system amounted to a form of annual ad valorem charge on immoveable property and, in the context of commercial rates, industrial plant and machinery. The amount of this ad valorem charge was left to the local authority itself whose task it was to fix or strike the rate for coming financial year”.

Justice Hogan was satisfied that the Local Government (Charges) Act 2009 did not fall into the category of local taxation raised by a local authority for local purposes, and instead represented a form of charge imposed by statute by the Oireachtas.

Local authorities were given no role in determining whether to raise such charge or to determine or even to vary the amount that would be levied on each taxpayer – as such, the NPPR charge was not one which was “levied” by a local authority.

Since this latter requirement is a pre-condition for satisfying the deductibility provisions of s. 97(2)(b) of the 1997 Act, it is plain that the taxpayer’s claim for a deduction on this ground must accordingly fail.

Allowing the appeal, Justice Hogan was satisfied that the taxpayer could not bring himself within the scope of the deductibility provisions of s. 97(2)(b) of the TCA 1997.