The Supreme Court has upheld Ringmahon Company’s entitlement to deduct £435,764 in interest when calculating its trading profits for tax purposes.
The dispute arose from the financing of Ringmahon, a company involved in retailing food, clothing and household goods under the Dunnes Stores name. In 1987 it acquired a number of former H. Williams supermarkets. That acquisition was initially financed through a loan from Dunnes Stores Ireland Company before the funding was replaced in 1988 by redeemable preference shares.
In 1991 Ringmahon decided to redeem six million of those preference shares. It borrowed £6 million from Allied Irish Banks and used the money for the redemption. The company subsequently incurred interest on the bank loan.
Revenue inspector Seán MacAonghusa argued that because the loan principal had been used for a capital purpose — restructuring the company’s financing by redeeming shares — the interest should carry the same character and should not be deductible from trading profits.
Ringmahon argued that the annual interest was different from the capital repayment. It said the bank borrowing had replaced capital previously supporting its business and the continuing interest expense was therefore incurred in carrying on that trade.
The Circuit Court accepted Ringmahon’s position and the High Court upheld that decision. Revenue then appealed to the Supreme Court.
Mr Justice Geoghegan agreed with Ringmahon. He said the relevant question was how the borrowed capital was being used in the business during the accounting periods in which interest was paid. The fact that the original £6 million was used to redeem preference shares did not permanently prevent the later interest expense from being treated as money laid out wholly and exclusively for the purposes of the trade.
The court found strong support in a Canadian case involving a similar replacement of preference-share capital with borrowing.
The Supreme Court dismissed Revenue’s appeal, leaving intact the finding that Ringmahon was entitled to the £435,764 deduction.