Cussens & Ors -v- Brosnan
HIGH COURT:
REVENUE JURISDICTION
Judgment delivered on June 6th, 2008 by Mr Justice Charleton
JUDGMENT
A lease between the partners in a development and another company established by them to avoid paying VAT was invalid, because of the absence of prior written consent of the mortgagee. In addition, the lease and leaseback had no commercial reality and constituted an abusive practice under EU law, rendering invalid the VAT classification on the transaction.
BACKGROUND
The case came by way of Case Stated from Judge Harvey Kenny in the Circuit Court. It concerned an appeal from the applicants against a VAT assessment of the Revenue Commissioners, which had been upheld by Judge Kenny.
The applicants asked for a case to be stated to the High Court, asking whether he was correct in finding that the lease between the applicants and Shamrock Estates was effective for the purposes of VAT, despite the absence of prior written consent from the mortgagee, ACC; whether he was correct in holding that the lease and leaseback arrangement had no commercial reality and were an abusive practice; whether he was correct that the European Court decision in Halifax and the doctrine of abusive practice had direct effect in the absence of implementing national legislation; and whether there should be no interest on the VAT due by the applicants.
The facts of the case are that Edward Cussens, John Jennings and Vincent Kingston (the applicants) were partners who developed land in Baltimore, Co Cork, by building 15 holiday homes for speculative sale. In order to reduce their VAT liability on such a sale, they entered into a 20 year and one month lease with a connected company, Shamrock Estates Ltd, in March 2002 and immediately leased the houses back. The lease and leaseback were immediately extinguished by mutual surrender, and the partners were free to sell the houses, which they did over the subsequent months. The surrender documents were signed by two of the partners on behalf of Shamrock Estates.
In order to develop the houses, the partners had raised a mortgage with ACC bank. One of the terms of the mortgage was that the property should not be leased in any way. No consent to the lease and leaseback was obtained at the time from the bank, though retrospectively, subsequent to the sale and redemption of the mortgage, a letter was obtained from the bank.
The partners claimed that because they had accounted for VAT on the capitalised value of the 20 year and one month lease, they were entitled to dispose of the freehold interest in the houses without liability for VAT. The Inspector of Taxes disagreed, stating that they were obliged to account for VAT on the freehold sale of the houses.
Commenting on the transactions, Mr Justice Charleton said: "All of this was done expressly for the purpose of tax avoidance. It is improbable, at the least, and I so hold, that the partners of Shamrock Estates ever intended to do what any ordinary party entering a lease intends to do: namely, to exclusively occupy and use the property for a fixed term of years as determined by the lease and perform the covenants therein set out, including the payment of rent."
Judge Kenny found that the leasing transactions between the partners and some of themselves acting as Shamrock Estates Ltd were not void in the light of them not complying with the mortgage conditions set by the bank. However, he found that these transactions were an abusive practice, that it was for the applicants to satisfy the court that they were not, and that they had failed to do so. The applicants claimed that the only part of his decision he was entitled to ask the view of the High Court on was the issue of abusive practice.
DECISION
Mr Justice Charleton first considered whether he had jurisdiction to consider the validity of the leasing transactions. He said: "It seems reasonable to propose that as the normal appeal from a tribunal to a court, or from a court to a court, is by way of a complete rehearing, that this should be the starting point in the construction of the powers of any court exercising an appellate jurisdiction . . . There is nothing in the legislation which limits the hearing of an appeal from the Circuit Court to this court solely to the precise point that generates the appeal through the expression of dissatisfaction by a party appealing."
He then went on to consider the issue of the mortgage, in the light of both common law and the Conveyancing Act 1881. He concluded: "Having conveyed the legal interest in the property to the lending institution, the mortgagor has no legal title to alienate by way of lease. He or she holds the property in equity subject only to the right of redemption of the legal interest. Such a lease is void."
He added that there were other breaches of the 1881 Act as well.
"It therefore follows that the purported leases to which I have referred are void and that I must respectfully differ from the legal conclusion arrived at by Judge Kenny in this regard. In consequence the partnership, as taxpayers, were liable to VAT in precisely the same way as if these purported legal instruments of lease, leaseback and surrender had never been signed."
He then considered whether the transactions had constituted an abusive practice, as found by Judge Kenny. The partnership had argued that the transactions must be found to be valid because of the lack of any legal instrument transferring the principle of abusive practice from European into Irish law.
Mr Justice Charleton examined EU law extensively in relation to taxation and continued: "I am of the view that there is a general principle of European law whereby a transaction may be redefined if it was subjectively entered into for the purpose of avoiding the application of a European legal measure and, objectively, the transaction is not such as might be seen as constituting a legitimate choice or the exercise of ordinary commerce."
He looked in detail at the Halifax case ((Case c-2555/02) ECR 1-1609), concerning a complex series of transactions making up a VAT planning scheme. The European Court of Justice had ruled that an abusive practice existed if the transactions resulted in the accrual of a tax advantage contrary to EU VAT regulations, and that this was the essential purpose of the transactions.
Mr Justice Charleton said that, in light of the relevant jurisprudence, he had no doubt that the transactions were entirely contrary to the correct interpretation of the Sixth Directive (relating to VAT). He agreed with Judge Kenny's findings on this issue.
Referring to the lack of trans-position of abusive practice into domestic legislation, he said that this was one of the general principles applicable to all fields of European law, and therefore was of general application.
The court was also asked to decide on whether interest should be paid on the VAT owed, which had been fixed by statute at 12 per cent. It was argued that this was a penalty provision, contrary to the ruling of the Court of Justice in the Halifax case.
Mr Justice Charleton said that the question of what would be an appropriate rate of interest had not been argued in court, and he was not prepared to deal with it in the absence of evidence.
Therefore, the answers to the questions were:
(i) the lease and leaseback were void, because of the absence of written consent from the mortgagee;
(ii) the lease and leaseback had no commercial reality and constituted an abusive practice within the doctrines identified by the European Court of Justice;
(iii) the European Court decisions as to abusive process are of general application, and implementing national legislation is not required;
(iv) The question of interest payable was not before the court.
The full text of this judgment is on www.courts.ie
Gerard Hogan SC and Siobhán Phelan BL, instructed by Hayes (for the applicant); Anthony Aston SC, instructed by Frances Cooke of the Revenue Commissioners (for the Respondent)