EU curtails Revenue tax clampdown

Comment/Terry O'Neill: The pursuit of recognising the elephant is back in the news this week following a judgment from the European Court of Justice dealing with tax planning.

The distinction between "acceptable" and "unacceptable" tax planning has been the subject of much debate over the last number of years. The Revenue Commissioners have expanded their specialist anti-avoidance units and have been very vocal in highlighting their crackdown on tax avoidance.

However, coming up with a clear description of the difference between "acceptable" and "unacceptable" tax avoidance to which taxpayers would subscribe has proved difficult. This is hardly surprising given that the Revenue's job is to collect as much tax as possible and the taxpayer has a legitimate right, subject to complying with the tax law, to minimise the amount of tax payable.

The Revenue view is that, like an elephant, they find it difficult to describe but will know "unacceptable" tax planning when they see it. However, the elephant which Revenue sees is not always visible to the taxpayer.

Consequently, the decision of the European Court was eagerly awaited by Revenue and taxpayers alike in the hope that it would support their respective views of the type of looking glass to be used in seeking out the elephant.

The European Court decision related to three UK-connected cases - they being Halifax, which is a bank, Bupa, a healthcare insurance group and the University of Huddersfield. The question for decision by the court was whether VAT refunds were permissible where they would not have arisen in the absence of tax planning.

The court ruled that a VAT advantage cannot be obtained if a transaction is entered into purely to obtain an artificial VAT advantage that was not envisaged by European VAT law as this would constitute an abuse of the law. However, it also ruled that, even if considered abusive, a Revenue authority cannot withdraw a VAT advantage where the tax planning transaction has a commercial rationale.

The Revenue will now have a much higher threshold to meet in proving that "unacceptable" VAT planning has taken place and, even if it succeeds, the court held that no penalty should apply.

Although the court judgment dealt solely with VAT, which is a tax based on EU law, it will also have implications in the Republic for the manner in which the courts rule on avoidance transactions in other taxes such as income tax and corporation tax.

So, after this decision, are the Revenue and the taxpayer any closer to identifying the same elephant when they peer through their respective looking glasses? Well, it depends on what you want to see.

Businesses regard taxes as a cost, similar to any other cost incurred by them. The Revenue Commissioners don't see it this way and have enunciated the view that tax is not a dead cost because the tax collected goes to pay for essential services, and, consequently, businesses should pay their "fair share" of tax.

But who decides what is "fair"? A taxpayer must comply with tax law but there is no reference in the tax code to what is fair and what is not fair.

The court judgment tells us that where a person chooses one of two transactions, VAT law does not require him to choose the one which involves paying the highest amount of VAT. The judgment also confirms that taxpayers may choose to structure their business so as to limit their tax liability. Does this constitute a fair share in Revenue's eyes?

Revenue will now need to frame their view of what is "unacceptable" VAT avoidance by reference to whether there is an abuse of the law based on the principles as set out by the European judgment.

Notwithstanding the guidance arising from the court, we can be sure that, given the complexity of tax law, tax disputes will arise. Consequently, what is required going forward is a system which will ensure that disagreements between taxpayers and the Revenue can be resolved in a speedy and efficient manner.

This will require a radical overhaul of the existing appeal system for dealing with tax disputes.

At present, where there is an unresolved dispute between a taxpayer and the Revenue, no progress can be made until the Revenue raises a tax assessment on the taxpayer.

The Revenue has a four-year time period within which to raise such an assessment and there is no sanction for any delay in the raising of the assessment.

The taxpayer then has the right to appeal such an assessment to the Independent Appeals Commissioners. However, the formal procedure for making such an appeal to the Appeal Commissioners is that the taxpayer must give written notice to the Inspector of Taxes who then liaises with the appeal commissioners.

At present, there can be significant delays in Revenue seeking to have the disputed case listed before the appeals commissioners.

The system needs to be changed so that where the Revenue disputes the taxpayer's position, the taxpayer can lodge an appeal directly with the appeal commissioner to have an early hearing of the dispute.

Businesses require certainty and a speedier and more efficient appeals process would assist in obtaining this certainty.

A speedier appeal process would assist in determining whether there is an elephant out there and whether the taxpayer has paid a fair share of tax!

Terry O'Neill is a tax partner with KPMG