THE SUPREME Court has rejected arguments by two construction firm directors that Revenue should pay the costs of lengthy court proceedings that culminated in the disallowing of a “highly artificial” tax avoidance scheme under which the two received £600,000 in tax-free dividends.

The court ruled yesterday that Cork-based O’Flynn Construction Ltd and its directors, Michael and John O’Flynn, Kilcrea, Ovens, Co Cork, must pay the Revenue’s costs in the High Court, while each side pays their own costs in the Supreme Court.

By a three-two majority in December, the court had dismissed the O’Flynn appeal against a High Court ruling disallowing the scheme after finding it was a tax-avoidance transaction involving a misuse of export sales tax reliefs.

Giving the majority judgment, Mr Justice Donal O’Donnell said the scheme was “highly artificial” and contrived, involving more than 40 steps over 50 days between December 5th, 1991, and January 24th, 1992. It involved profits of O’Flynn Construction, which would attract tax if distributed to shareholders, being paid by a “circuitous route” to those shareholders without attracting tax, he said. A scheme that allowed shareholders in a non-exporting company to benefit from export sales reliefs on the profits of the non-exporting company was “surely a misuse” of the scheme.

The case involved important findings on the meaning of section 86 of the Finance Act, 1989 – the only anti-avoidance measure in Irish law and described by the court as “of mind-numbing complexity”.

Paul Sreenan SC, for the O’Flynns, yesterday asked the Supreme Court to award them their costs in the High and Supreme courts. Mr Sreenan argued the legal issues were of special and general public importance, the legislation involved was dense and the judgment was for the benefit of the Revenue and all taxpayers. It was also not entirely clear from the High Court decision why his clients lost in that court, he added.

Anthony Aston SC, for the Revenue, opposed that application and sought the Revenue’s costs in both courts. While the judgment was clearly helpful to the Revenue and it was important that section 86 was clearly construed, that provision was directed against a small minority of taxpayers who had the means to engage in such schemes, he said.

When Ms Justice Fidelma Macken put it to Mr Aston that he could not say section 86 applied to a small minority, Mr Aston said most people paid PAYE. These applicants were essentially pursuing “a private interest in very privileged circumstances” and the scheme was “ingenious”, involving investment of a lot of time and money by people with resources for “very efficient accounting”.

Giving the five-judge court’s ruling, Mr Justice Nial Fennelly refused Mr Sreenan’s application for costs in both courts. The High Court costs order must stand (requiring the O’Flynns to pay costs in that court), he said. There would be no order for the costs of the Supreme Court appeal (meaning each side paid their own).