Three men who claimed a tax planning scheme meant they did not have to pay VAT on the €3 million sale of 15 holiday homes in west Cork have lost their Supreme Court appeal against decisions the scheme had "no commercial reality" and constituted an "abusive practice" as defined by the Court of Justice of the EU (ECJ).

The proceedings by Edward Cussens, John Jennings and Vincent Kingston arose after the Revenue Commissioners said the complex scheme concerning the development at Baltimore did not permit them to sell their freehold interests without paying VAT.

The case involved analysis of the effect and application of Irish tax law, ECJ decisions and a European directive – the sixth directive – relating to harmonisation of the laws of EU member states on common systems of VAT.

Giving the five-judge court's unanimous judgment on Friday, Chief Justice Frank Clarke said he was satisfied it was appropriate to treat the relevant transactions in the manner contended for by the Revenue. While Irish VAT legislation does not provide for disregarding certain transactions found to be abusive, it was clear from an ECJ judgment in this case that national implementation measures were not necessary for the abuse doctrine, which derived from a fundamental principle of EU law, to be applied in appropriate cases, he said.

He upheld High Court and Circuit Court findings concerning legal issues in the case, apart from a Circuit Court finding that no interest was payable on VAT due.

He said the interest issue was not properly before the Circuit Court but the taxpayers remained entitled to argue, in any appropriate proceedings, that interest was not payable.

Leases extinguished

The three partners, on advice of Deloitte & Touche, had put in place transactions involving their entering on March 8th, 2002, into a 20-year and one-month lease with a connected company, Shamrock Estates Ltd, which then immediately leased back the property to the partners for two years. On March 20th, 2002, the lease and leasehold were extinguished by mutual surrender.

Because the partners had paid some €40,000 VAT on the capitalised value of the 20-year and one-month lease, they claimed they could then legally sell their freehold interest in the holiday homes without paying VAT on that disposal.

An inspector of taxes held that the VAT exemptions arose from a series of “artificial” transactions and VAT assessments were raised against them for periods in 2002 and 2004.

They appealed to the Circuit Court, which found the leases were not void but also found the partners were simply leasing to themselves and surrendering back to themselves and this amounted to an abusive practice contrary to the purpose of the sixth directive.

Legal issues were referred to the High Court, with the focus on whether the principle of abusive process could be applied. In 2008 Mr Justice Peter Charleton said the transactions were entirely contrary to the correct interpretation of the sixth directive and were constructed solely to obtain a tax advantage.

Abuse doctrine

The three appealed to the Supreme Court. It referred certain issues to the European court, and the appeal resumed after the ECJ gave judgment in 2017.

In the Supreme Court judgment, the chief justice said the abuse doctrine has had application in the field of tax, where that tax was governed by EU law, since a 2006 Halifax judgment of the ECJ. He rejected arguments that because these transactions were carried out before the Halifax judgment, the abuse doctrine did not apply to them or that further issues had to be addressed by the ECJ before this appeal could be decided.

On the basis of the findings of fact by the Circuit Court judge, by which both the High and Supreme Courts were bound, there could be "no doubt" the transactions were an "abusive practice" for the purpose of the Halifax doctrine, he held. The ECJ has determined the abuse doctrine applied to transactions predating Halifax and that the application of that doctrine, in practical terms, did not require specific national law measures or even EU legislation as it derived from a fundamental principle of EU law.