Killian Flood BL

About this case:

• Citation:
  [2021] IEHC 487
• Judgment:
  External link
• Court:
  High Court
• Judge:
  Mr Justice Michael Twomey

In so ruling, the court held that the appellant could not deduct capital allowances and losses from his hotel business in order to reduce his overall income below €1 million for tax purposes.

The court also determined that the appellant’s payment of USC for the relevant period could not exempt him from the domicile levy.

Background

The case came before the High Court by way of case stated. The appellant, Mr Louis Fitzgerald, was the owner of a hotel in Dublin. During the years 2010 and 2011, he paid no income tax because he offset his capital/trading losses in his hotel business against other sources of income. His hotel had capital allowances of €25 million in 2010 and €14 million in 2011. As such, he received repayments of tax in the sums of €361,000 and €919,000 during the period.

In the circumstances, the Revenue argued that Mr Fitzgerald was subject to the domicile levy, which applied to individuals domiciled in Ireland with a worldwide income of more than €1 million but who paid less than €200,000 in income tax.

The definition of “worldwide income” under section 531AA(1) of the Taxes Consolidation Act, 1997 (as amended) stated that an income would be calculated “without regard to any amount deductible in computing total income.” As such, it was argued by Revenue that Mr Fitzgerald could not apply his capital allowances/losses to his income in order to reduce it below €1 million and avoid the domicile levy.

Conversely, it was submitted by Mr Fitzgerald that Revenue was not entitled to disregard his deductions in capital allowances because those deductions were made to estimate his income from all sources. As such, the deductions were not being made at the end of the income assessment process and did not constitute a “deduction from total income.”

Accordingly, it was argued that the capital allowances/losses were not deductibles within the meaning of the 1997 Act and acted to reduce his income below €1 million.

Further, section 381 of the 1997 Act dealt with hotel trading losses. It was argued by Mr Fitzgerald that the calculation of income under the Schedules in section 381 excluded the capital allowances/losses. On the other hand, Revenue argued that the legislation contained a sheltering mechanism for income and allowed for a recalculation of income tax liability for a given year. As such, Revenue said that section 381 did not impact upon the level of Mr Fitzgerald’s income.

Mr Fitzgerald also raised a second point relating to the payment of the Universal Social Charge. In 2011, Mr Fitzgerald paid €200,000 in USC and he argued that this should contribute to his overall tax liability for that year. Revenue argued that USC was not related to his income tax and therefore could not be used to avoid the domicile levy.

High Court

Delivering judgment in the case, Mr Justice Michael Twomey rejected both of the points raised by Mr Fitzgerald. First, on the issue of deducting capital allowances, the court held that it could not overlook the wording of section 381 of the 1996 Act.

On a literal interpretation, the section made it clear that capital allowances/losses were to be regarded as a deduction to be made from total income. As such, these deductions were to be disregarded from calculating the worldwide income, because the definition of worldwide income specifically excluded “deductions from or in computing total income.”

There was no ambiguity in the wording of the relevant legislation, so there was no need for a purposive approach to the legislation (Bookfinders Limited v. Revenue Commissioners [2020] IESC 60). Even if there was a doubt, the purpose of the legislation was to avoid wealthy individuals to use tax shelters or avoidance schemes to pay very little income tax relative to their income. As such, an interpretation of the legislation which disregarded tax shelter mechanisms for determining worldwide income seemed appropriate to the court.

The court then considered the second issue of the USC. The court stated that an analysis of the various sections of the 1997 Act showed that USC was “very different to income tax.” Considering section 531AS(1) of the 1997 Act, the court noted that USC was payable “as if it were” an amount of income tax, which indicated a prima facie distinction between the USC and income tax.

Moreover, USC was not charged in accordance with the Schedules to the 1997 Act, which supported a finding that it was not income tax (see Lord Chetwode v. Inland Revenue Commissioners [1977] 1 All ER 638). Under section 531AX(1), USC was paid “in addition to, and does not reduce, any liability which an individual may have in respect of income tax.”

As such, there was a clear distinction between USC and income tax. This was emphasised by the difference in rates for USC and income tax for the relevant period. The court observed that it was difficult to avoid the USC and it would go against the purpose of the legislation if an individual could avoid the domicile levy on the basis of USC.

Conclusion

Accordingly, the court did not accept that the capital allowances/losses could be applied to reduce Mr Fitzgerald’s income tax to less than €1 million. Further, the USC could not be applied by Mr Fitzgerald as income tax payments.

As such, the court held that the Tax Appeal Commissioner had not erred by holding that Mr Fitzgerald was subject to the domicile levy.