The Supreme Court allowed an appeal by O’Flynn Construction Company Limited, John O’Flynn and Michael O’Flynn over a tax arrangement that channelled export sales relief dividends to the two shareholders. It held that the arrangement did not misuse or abuse the relief provisions, so the statutory benefit exemption applied.
The judgment, delivered by Mr Justice McKechnie on 14 December 2011, followed a case stated from the Appeal Commissioners. They had found that the arrangement gave rise to a tax advantage and was primarily tax-driven, but concluded it was not a tax avoidance transaction because it did not misuse or abuse the export relief provisions. The High Court reversed that decision. The Supreme Court appeal concerned the legal correctness of the High Court’s determination.
Mitchelstown Export Company Limited, part of the Dairygold Group, had accumulated IR£1.2 million in export sales relief reserves. Through a series of steps between December 1991 and January 1992, it sold the reserves, indirectly, to O’Flynn Construction and another company for IR£117,668 in total, shared equally. John and Michael O’Flynn, the construction company’s only shareholders, each ultimately received a tax-free dividend of IR£298,000.
Revenue had argued that the arrangement extracted company funds for the shareholders without tax being paid, despite O’Flynn Construction having no export-manufacturing business. It said the steps had little or no commercial value and were contrary to the purpose of export sales relief. The appellants disputed that the arrangement was abusive and argued, among other things, that the legislation imposed no restrictions on who could receive dividends sourced from qualifying export profits.
The court agreed that the arrangement was a “transaction” under section 86 of the Finance Act 1989, produced a tax advantage and was not undertaken primarily for purposes other than obtaining that advantage. It also held that the arrangement was made to obtain the benefit of export sales relief. Those conclusions did not resolve the appeal: the court had to decide whether the arrangement directly or indirectly misused or abused the relief, having regard to its statutory purpose.
The court examined the history and terms of the relief. It found that the legislation had not restricted the ultimate recipients of tax-free dividends by their business, connection to the exporting company, investment, or timing of shareholding. On that basis, the transaction did not violate or undermine the purpose of the relief as it applied to dividends. The Supreme Court therefore concluded that the benefit exemption applied and the arrangement was not a tax avoidance transaction under section 86.
The judgment rejected the High Court’s conclusion on that central issue. It did not hold that the arrangement lacked a tax advantage or a primary tax purpose; those points were resolved against the appellants. The appeal succeeded because the arrangement did not fail the benefit exemption’s misuse-or-abuse test.