Supreme Court allows amendment to appeal regarding VAT liability on holiday home sales under s. 23 VAT Act.

THE SUPREME COURT

[Appeal No 229/2008]

O’Donnell J.

Clarke J.

MacMenamin J.

Laffoy J.

Dunne J.

BETWEEN

EDWARD CUSSENS, JOHN JENNINGS AND VINCENT KINGSTON

APPELLANTS

AND

T. G. BROSNAN (INSPECTOR OF TAXES)

RESPONDENT

Judgment of Ms. Justice Laffoy delivered on 20th day of May, 2015

The factual and procedural background to the application

1. Prior to the year 2002, the appellants, as business partners, were involved in a construction project, namely, the construction of

fifteen holiday homes on a building site of which they were the freehold owners, which was situate at Baltimore, County Cork. In the

course of the disposal of the holiday homes, which were substantially completed by December 2001, the following transactions were

effected:

(a) By a lease dated the 8th day of March, 2002 made between the appellants of the one part and Shamrock Estates

Limited (the Company), a company associated with the appellants, of the other part, the fifteen holiday homes were

demised to the Company for a term of twenty years and one month from the date of the lease. For clarity, that lease will

be referred to as “the Long Lease”.

(b) On the same day, the Company leased the fifteen holiday homes back to the appellants for a term of two years. That

lease will be referred to as “the Short Lease”.

(c) On 3rd April, 2002, the Long Lease and the Short Lease were both extinguished by way of mutual surrender, so that

the appellants again became the owners of the entire freehold interest in the fifteen holiday homes.

(d) Subsequently, from around mid-May 2002, the appellants disposed of each of the fifteen holiday homes by way of sale

of the freehold to each of the purchasers thereof for sums which aggregated approximately €3m.

2. Following the creation of the Long Lease, at the relevant time, the appellants accounted for and paid to the Revenue

Commissioners the Value Added Tax (VAT) exigible in relation to its creation. No VAT was accounted for on any of the subsequent

transactions as, in accordance with the provisions of the Value Added Tax Act 1972 (the VAT Act) as then in force and the

regulations made thereunder, the subsequent disposals, including the final disposal of the fifteen holiday homes to the purchasers,

were not liable to VAT.

3. However, subsequently, in August 2004, the respondent raised on the appellants assessments pursuant to s. 23 of the VAT Act in

respect of VAT on the sales of the fifteen holiday homes to the purchasers for the periods January/February 2002 to

November/December 2002 and for the period May/June 2004, in consequence of which the Revenue Commissioners contended that

the appellants were liable for VAT greater than the amount which had been paid by them.

4. That assessment then became subject to the following appeal and judicial procedures:

(a) an appeal was taken by the appellants to an Appeal Commissioner against the respondent Inspector of Taxes, which

was determined on 21st July, 2005 and on which the appellants were not successful;

(b) a further appeal, pursuant to s. 942(1) of the Taxes Consolidation Act 1997 (the Act of 1997), by way of re-hearing,

was taken by the appellants to the Circuit Court, which appeal was heard in October 2006 by Judge Harvey Kenny, who

decided on 10th October, 2006 that the appeal should be dismissed;

(c) counsel for the appellants having expressed dissatisfaction with the determination of Judge Kenny, on the request of

the appellants to him to state a case for the opinion of the High Court, Judge Kenny stated a case pursuant to s. 943 of

the Act of 1997, which was dated 22nd October, 2007 (the Case Stated); and

(d) the Case Stated was heard in the High Court by Charleton J., who delivered his judgment on 11th June, 2008 ([2008]

IEHC 169) and made the order of the High Court dated 13th June, 2008, wherein the questions of law which had been

raised on the Case Stated were answered, the outcome being that the assessments were upheld.

5. On 11th July, 2008 the appellants filed a notice of appeal against the said judgment and order of the High Court (Charleton J.).

6. This judgment relates to an application filed by the appellants in November 2013 seeking an order granting them leave to amend

the notice of appeal dated 11th July, 2008 in the form exhibited in the affidavit grounding the application. The application having been

resisted by the respondent, by order of the Chief Justice, it was adjourned to be heard with the substantive appeal, which is what

has occurred.

7. This judgment is concerned only with the application to amend the appellants’ notice of appeal.

The context in which the appellants seek to amend their notice of appeal

8. It is appropriate to use the Case Stated as the starting point for identifying why the appellants have considered it necessary to

apply for leave to amend the notice of appeal. In the Case Stated at para. 3 it is stated that it was agreed that the outcome of the

appeal before the Circuit Court involved two issues. One of those issues concerned the validity for the purposes of VAT of the Long

Lease. That issue was not pursued on the appeal to this Court. The other issue was identified as –

“. . . whether the creation of the 20–year 1–month lease [that is to say, the Long Lease] and the associated lease-back

[that is to say, the Short Lease] and subsequent surrender should be disregarded for the purposes of VAT as constituting

an abusive practice in accordance with the decision of the European Court of Justice in the Halifax case”.

The reference there to the decision in the Halifax case is to the judgment delivered by the European Court of Justice on 21st

February, 2006 in Case C – 255/02 Halifax Plc & Ors. v. Customs & Excise Commissioners (the Halifax case).

9. In its judgment in the Halifax case the European Court of Justice found (at para. 70) that the principle of prohibiting abusive

practices applies to the sphere of VAT. Its application in the sphere of VAT was held to involve a two limbed test, which, reiterating

paras. 74 and 75, was summarised as follows in para. 86:

“For it to be found that an abusive practice exists, it is necessary, first, that the transactions concerned,

notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and of

national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the

purpose of those provisions. Second, it must also be apparent from a number of objective factors that the essential aim

of the transactions concerned is to obtain a tax advantage.”

The reference to the Sixth Directive in that passage is to Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of

the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as

amended by EC Council Directive 95/7 of 10 April 1995 (the Sixth Directive).

10. It is recorded in the Case Stated (at para. 8.5), in outlining the submissions made on behalf of counsel for the appellants in the

Circuit Court, that counsel identified the two criteria for determining whether there was abuse or not and that he submitted that it

would be for the respondent to satisfy the Circuit Court that there had been a tax advantage “the grant of which would be contrary

to the purpose of the provisions”, that is to say, the provisions of the Sixth Directive and of the national legislation. It is also

recorded (at para. 8.7) that counsel submitted that the respondent failed on the first issue, because the appellants had simply

availed of the Long Lease, which was “wholly in harmony with the objectives of the legislation”.

11. The determination of the Circuit Court Judge on what he referred to as “the Halifax issue” is recorded in para. 10.2 of the Case

Stated, where he stated:

“. . . I was satisfied that neither the [Long Lease] nor the [Short Lease] had any commercial reality: There was no

evidence of intention to sell the property by way of lease to any third party; in effect the partners were simply leasing to

themselves, and surrendering back to themselves, for the purpose of reducing VAT. In the circumstances, I was of the

view that the lease and lease-back arrangement constitute an abusive practice, contrary to the purpose of the Directive,

and accordingly the respondent is correct in saying that the [Appellants] should be subjected to VAT upon the freehold

sales of the houses to third parties.”

The appellants’ position is that the Circuit Court Judge did not thereby expressly address the appellants’ submission that the first limb

of the Halifax test was not met. It is also recorded in the Case Stated (at para. 10.4) that for the reasons stated in paragraph 10.2

the Circuit Court Judge decided that the appellants’ appeal be dismissed.

12. The Circuit Court Judge then set out four questions of law for the opinion of the High Court. Only question (2) and question (3)

are relevant for present purposes. These were formulated as follows:

“. . . whether, on the foregoing facts I was correct in holding that:

(1) . . .

(2) The [Long Lease] and [Short Lease] arrangements had no commercial reality and constitute an abusive practice

within the doctrine set out in the Halifax case; and should be disregarded for the purposes of VAT.

(3) The European Court decision in Halifax and the doctrine of abusive practice have direct effect in the absence of

implementing national legislation.”

13. In his judgment in the High Court, Charleton J. answered the relevant questions as follows (at para. 51):

(a) As regards question (2):

“The [Long Lease] and [Short Lease] had no commercial reality and constituted an abusive practice

within the doctrines identified by the European Court of Justice. As such, even if such [Long Lease] and

[Short Lease] were apparently valid . . . , they should be redefined for the purpose of VAT in order to

reflect the true reality of the actions of the partnership.”

(b) As regards question (3):

“The European Court decisions as to abusive process are of general application and they require

national courts to redefine abusive measures in accordance with reality. As this is a matter of

interpretation, and given the supremacy of European law, implementing national legislation is not

required in a Member State in respect of this principle of European law and nor has any such

implementing national legislation come to my attention where the doctrine of abusive practice has been

applied at national level, as in the Halifax case.”

Proposed amendment

14. In the appellants’ original notice of appeal, one of the grounds advanced on behalf of the appellants was that the High Court

Judge misdirected himself in law and upon the evidence –

“In holding that the [Long Lease] and [Short Lease] had no commercial reality and constituted an abuse of rights within

the doctrines identified by the European Court of Justice, whereas the true position was that the [Long Lease] and [Short

Lease] were perfectly valid and lawful transactions and that insofar as such transactions should be redefined for VAT

purposes, this could only be done (if at all) by virtue of domestic legislation which transposed the Halifax doctrine into

domestic law.”

15. On the application to amend, the appellant has sought to substitute for the ground quoted in the preceding paragraph that the

High Court Judge misdirected himself in law and upon the evidence –

“In holding that the transactions entered into by the Appellants constituted an abuse of rights as that concept has been

defined by the Court of Justice of the European Union. Without prejudice to the generality of the foregoing, the learned

judge erred in concluding:

(a) that the requirements of the first limb of the test laid down by the European Court in [the Halifax case] were

met in particular in circumstances where the domestic provisions applicable to the Appellants’ transactions

(including those which were retained pursuant to a derogation purportedly obtained by the State in 1979 in

accordance with Article 27(5)) are not in accordance with the provisions of [the Sixth Directive];

(b) in determining that the requirements of the second limb of the test laid down by the European Court in [the

Halifax case] were met in particular in circumstances where the economic purpose of the Appellants’ activity was to

dispose of the properties to third parties in a tax efficient manner; and

(c) in determining that the abuse of rights doctrine could be applied absent legislation which transposed that

doctrine into domestic law.”

16. The reference in paragraph (a) of the proposed amendment to “a derogation purportedly obtained by the State in 1979 in

accordance with Article 27(5)” of the Sixth Directive is a reference to a derogation which had been notified by the State to the

European Commission in the following terms:

“Pursuant to Article 27(5) of the [Sixth] Directive, Ireland intends to continue the following measures which were in

force on 1 January 1977, in order to simplify the procedure for charging VAT (which measures do not affect the

amount of VAT due at the final consumption stage) or in order to prevent evasion or avoidance:

(a) Simplification measures

...

(b) Anti-avoidance measures

(1) . . .

(2) The treatment, as a supply of property, of the granting of a lease for a term of ten years or

more, the taxation at the same time of all interest disposed of in connection with the supply and

the value of the reversion except where the letting is for twenty years or more.”

Factual basis of the appellants’ application to amend

17. In the affidavit grounding the application to amend the notice of appeal sworn by Pascal Brennan, an accountant and a partner in

Deloitte, the appellants’ tax advisers, on 13th November, 2013, the basis of the appellants’ response to the respondent’s invocation in

the Circuit Court and in the High Court of the abuse of rights doctrine was characterised by the deponent as that the appellants

raised issues “as to the compatibility of Irish VAT law with the Sixth Directive”. The purpose of the application to amend was

characterised as “to add . . . an additional ground of such invalidity”. As the analysis conducted later will disclose, the additional

ground is that the derogation quoted at paragraph 16 above relied on by the respondent and referred to at paragraph (a) in the

proposed amended ground is not in accordance with the provisions of the Sixth Directive.

18. In his affidavit Mr. Brennan has addressed the arguments made on behalf of the appellants in the Circuit Court and in the High

Court in some detail. For instance, he has exhibited the written submissions which were before the High Court on the hearing of the

Case Stated and the transcript of the hearing in the High Court. He has averred that in the written submissions and in oral

submissions in the High Court it had been submitted on behalf of the appellants that the respondent could not rely on the abuse of

rights doctrine because the Irish legislation had not properly implemented the Sixth Directive. Two passages from the written

submissions were quoted. In the first it had been submitted that –

“. . . Irish legislation does not correctly reflect the correct purpose of the Sixth Directive with regard to property

transactions so that the appellants cannot be held to have failed to meet any obligations under European law. In these

circumstances Ireland cannot rely directly on the Sixth Directive to inform itself of the purposes of the Sixth Directive and

then claim a breach of those purposes when it has failed to reflect the requirements of the Directive in national law in the

first place . . ..”

In the second passage it had been submitted as follows:

“As Ireland has not properly transposed the Sixth Directive it may not rely on its provisions including its aims against an

individual.”

19. In the replying affidavit on the application to amend sworn on behalf of the respondent by Etáin Croasdell, Assistant Revenue

solicitor, it was averred that the basis on which it was submitted on behalf of the appellants in the High Court that the VAT Act is

defective because it does not properly implement the Sixth Directive is fundamentally different to the argument the appellants now

seek to advance on the appeal, if the application for amendment is acceded to. The argument advanced in the High Court was that

Ireland had failed to implement a specific article of the Sixth Directive, Article 4(3), whereas the arguments which the appellants wish

this Court to have regard to on the appeal are not confined to Article 4(3), but challenge the validity of the treatment of leases under

Irish VAT law having regard to the application of the provisions of the Sixth Directive and any derogation obtained therefrom by

Ireland under Article 27.

20. However, in his affidavit, Mr. Brennan has pointed to a later reference in the appellants’ written submissions in the High Court,

which succeeded the passages quoted earlier to a specific derogation enjoyed by Ireland under Article 27 of the Sixth Directive “as a

simplification measure which allows it to treat the disposal of [interests in excess of twenty years] as a disposal of the entire

property”. He averred that that was a direct reference to the derogation which the appellants’ advisers “understood permitted s. 4(9)

of the VAT Act to exist”, which he averred “is now at the heart of the ‘derogation point’ which the appellants now wish to argue”. Mr.

Brennan averred that at no stage did the respondent correct the appellants’ mistaken understanding that the derogation in question

was a simplification measure rather than an anti-avoidance measure.

21. Further, Mr. Brennan, having noted that the judgment of the High Court did not recite the appellants’ submissions regarding the

first limb of the Halifax test, set out two of the conclusions of the trial judge in finding against the appellants. The trial judge had

expressed the view (in para. 30) 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 . . ..”

The appellants emphasised the words “for the purpose of avoiding the application of a European legal measure” in that passage. The

trial judge also concluded (at para. 42 following the passage from that paragraph quoted at para. 24 below) as follows:

“The transactions were effected solely for the purpose of undermining the application of the national transposition of the

Sixth Directive.”

The appellants emphasised the words “national transposition of the Sixth Directive” in that passage. It does seem to be implicit in it

that the trial judge concluded that the relevant provisions of the Sixth Directive were properly transposed in the VAT Act. However,

as was averred to by Ms. Croasdell, and as Mr. Brennan acknowledged, the argument which the appellants now seek to advance as to

the derogation was not advanced in the High Court, so that no determination could have been made by the trial judge in relation

thereto.

22. In summary, in his affidavit Mr. Brennan emphasised that it has been consistently argued on behalf of the appellants that the

requirements of the first limb of the Halifax test are not met in the circumstances of this case because of the incompatibility of the

provisions of the VAT Act with the provisions of the Sixth Directive. He further emphasised that the response of the respondent to

that argument consistently has been reliance on a derogation from the Sixth Directive obtained by the State in 1979, by virtue of

which, it was contended by the respondent, the relevant provisions of the VAT Act were not inconsistent with the relevant provisions

of the Sixth Directive. The appellants’ position is that they wish to rely on the “myriad ways” in which the national legislation and the

European legislation are incompatible with each other, including the argument that the derogation relied on by the respondent is not in

accordance with the Sixth Directive.

Proposed amendment analysed

23. It is necessary to compare the original ground, as quoted in para. 14 above, with the proposed amended ground, as quoted in

para. 15 above, to determine to what extent, if any, there is a new element in the arguments which may be advanced on behalf of

the appellants, if the amendment is allowed. I am satisfied that, in substance, the first sentence of the amended ground does not

differ from the first assertion in the original ground. Moreover, paragraph (c) of the amended ground, in substance, does not differ

from the remainder of the original ground, because the appellants’ contention in both is that the trial judge erred in not determining

that the abuse of rights doctrine could only be applied if it had been transposed into domestic law. In fact, that ground is reiterated

in paragraph 10 of the original notice of appeal, which stands. That leaves paragraphs (a) and (b) of the proposed amended ground to

be considered.

24. In essence, question (2) posed in the Case Stated raised the issue whether the Circuit Court Judge was correct in the application

to the factual context of the transactions in issue of the principle of prohibiting abusive practice in the sphere of VAT in accordance

with the findings of the ECJ in the Halifax case. In the High Court, the trial judge considered the decision in the Halifax judgment in his

judgment at para. 36 et seq. He quoted paragraph 86 of the judgment of the ECJ, which has been quoted above in para. 9. At

paragraph 40 of his judgment he stated:

“I am bound by the finding of Judge Harvey Kenny as to the purpose of these transactions by the partnership. I have no

doubt that they are entirely contrary to the correct interpretation of the Sixth Directive and operate so as to undermine

the foundational certainty of the exemptions provided for in national law and under the Directive.”

In that passage, the trial judge did not distinguish between the first limb and the second limb of the test set out in paragraph 86 of

the judgment in Halifax. Later, the trial judge stated (at para. 42):

“Overall, the principle of abusive process requires me to agree with the findings of Judge Kenny on this issue. . . . All the

transactions between the partners and their related company were clearly entered into for no economic purpose and were

constructed solely for the purpose of obtaining a tax advantage. There was nothing in the transactions which could

possibly constitute an independent objective justification.”

25. While I did not understand there to be any real controversy between the parties in relation to the inclusion of paragraph (b) of

the proposed amended ground, in any event, I am satisfied that paragraph (b), in essence, elaborates on the original ground. In the

original ground it was asserted that the trial judge erred in holding that the Long Lease and Short Lease had no commercial reality. In

paragraph (b) the appellants merely propose to demonstrate why they contend that is not the case.

26. The principal area of contention between the parties relates to paragraph (a) of the proposed amended ground. The thrust of the

appellants’ argument is that the domestic provisions which at the relevant time governed the appellants’ liability to VAT were not in

accordance with the provisions of the Sixth Directive, because, contrary to the position which has been adopted by the respondent,

the State did not properly obtain a derogation from the Sixth Directive in accordance with Article 27(5) thereof. As recorded earlier, in

the High Court it was submitted on behalf of the appellants that the respondent could not rely on the abuse of rights doctrine

because, it was contended, the Irish legislation had not properly implemented the Sixth Directive. However, as already recorded, it is

acknowledged by appellants that the challenge to the validity of the derogation which the appellants seek to argue in para. (a) of the

proposed amended ground was not argued in the High Court. The reason for that omission, as has been alluded to earlier, was

explained in the affidavit of Mr. Brennan. It was understood by the appellants and their advisers, and it was expressly stated in the

outline written submissions in the High Court, that Ireland enjoyed a specific derogation under the provisions of Article 27 “as a

simplification measure”, which allowed it “to treat the disposal [of interests in excess of twenty years] as a disposal of the entire

property”. As alluded to earlier, Mr. Brennan’s evidence on affidavit as to the understanding of the appellants and their advisers was

that the reference there was to s. 4(9) of the VAT Act, which is at the core of the appellants’ argument that they accounted for the

VAT due by them in 2002 in accordance with Irish law. There was a misunderstanding on the part of the appellants to the extent that

it was assumed that derogation was sought as a “simplification measure”. In fact, as Mr. Brennan subsequently discovered, the

derogation in issue had been notified to the European Commission as an anti-avoidance measure rather than a simplification measure,

but at no time did the respondent apprise the appellants of their obvious misunderstanding. What the appellants wish to do on foot of

the proposed amended ground is to challenge the validity of the derogation.

27. In his affidavit Mr. Brennan, on the basis of his understanding outlined earlier, summarised the grounds for challenging the validity

of the derogation, which dates from 1979, as follows:

(a) it derogates from the basis for charging VAT laid down in the Sixth Directive to a greater extent than that which is

strictly necessary;

(b) it is neither necessary nor appropriate to the realisation of the specific objective which the State has pursued; and

(c) it fails to have the least possible effect on the objectives and principles of the Sixth Directive.

28. The explanation for the appellants not raising that challenge earlier as averred to in Mr. Brennan’s affidavit is that he had made

extensive efforts to obtain a copy of the 1979 derogation and the respondent did not co-operate in attempts to obtain it. He has

outlined at some length the efforts made by Deloitte to obtain it, inter alia, from the Revenue Commissioners, from the Department of

Finance and from the Department of Foreign Affairs under the Freedom of Information Act 1997, from the European Commission under

the European Freedom of Information Rules, and via a complaint to the European Ombudsman, over a period extending from 1999 to

2003, without success.

29. In the context of this appeal, in March 2012 the appellants’ solicitors sought the “full text of all Ireland’s derogations from the

Sixth Directive relating to immovable goods”. The response of the respondent’s solicitor, which was dated 26th March, 2012, was that

there had been no argument before the Appeal Commissioner, the Circuit Court or the High Court relating to Ireland’s derogations from

the Sixth Directive relating to immovable goods and, in the circumstances, the appellants were not entitled to enlarge their

submissions to this Court to encompass such derogations and, in the circumstances, the respondent was not willing to furnish a copy

of the relevant derogation. Notwithstanding adopting that position, it was expressly stated in the respondent’s outline written

submissions filed on 8th May, 2012 that the Article 27(5) derogation “was notified expressly as an anti-avoidance measure not as a

simplification measure as speculated” in the appellants’ outline written submissions, which had been filed on 19th April, 2012. As is

averred to in Mr. Brennan’s affidavit, the appellants took no further steps in connection with these proceedings to obtain a complete

copy of the derogation because, coincidentally, in November 2012, during the course of a hearing before the Circuit Court into the tax

affairs of another client of Deloitte, the 1979 derogation was given to him with no restriction.

30. At the core of the appellants’ argument that the amendment in para. (a) should be allowed is that their position has consistently

been that the burden is on the respondent to establish that the requirement of the abuse of rights doctrine are met, which includes a

requirement to prove that the first limb of the Halifax test is met. In that regard, the respondent relies on the derogation, which the

appellants contend is not valid.

The law

31. Counsel for the appellants referred the Court to two recent judgments of the Court in which the Court had to determine whether

an appellant should be allowed to argue a new ground of appeal on the appeal.

32. The first in time is Lough Swilly Shellfish Growers Co-Operative Society Ltd. & Anor. v. Bradley & Anor. [2013] 1 I.R. 227, in which

judgment was delivered by O’Donnell J. While the appellants’ application in that case was unsuccessful, counsel for the appellants

referred the Court to the following passage (at para. 27):

“There is a spectrum of cases in which a new issue is sought to be argued on appeal. At one extreme lie cases such as

those where argument of the point would necessarily involve new evidence, and with a consequent effect on the

evidence already given . . .; or where a party seeks to make an argument which was actually abandoned in the High

Court . . .; or, for example where a party sought to make an argument which was diametrically opposed to that which had

been advanced in the High Court and on the basis of which the High Court case had been argued, and perhaps evidence

adduced. In such cases leave would not be granted to argue a new point of appeal. At the other end of the continuum lie

cases where a new formulation of argument was made in relation to a point advanced in the High Court, or where new

materials were submitted, or perhaps where a new legal argument was sought to be advanced which was closely related

to arguments already made in the High Court, or a refinement of them, and which was not in any way dependent upon the

evidence adduced. In such cases, while a court might impose terms as to costs, the Court nevertheless retained the

power in appropriate cases to permit the argument to be made.”

33. The later case is Westlink Toll Bridge Ltd. v. Commissioner of Valuation [2013] IESC 42, in which judgment was delivered by

MacMenamin J. In his judgment (at para. 45 et seq.) MacMenamin J. outlined the jurisprudence of the Supreme Court on raising new

arguments on appeal from 1977 onwards, and the principle which emerges from those authorities is to be found in the following

passage of the judgment of Finlay C.J. in K. D. (otherwise C.) v. M.C. [1985] I.R. 697 where he stated:

“It is a fundamental principle, arising from the exclusively appellate jurisdiction of this Court in cases such as this that,

save in the most exceptional circumstances, the Court should not hear and determine an issue which has not been tried

and decided in the High Court. To that fundamental rule or principle there may be exceptions, but they must be clearly

required in the interests of justice.”

MacMenamin J. expressed the view that the passage from the judgment in Lough Swilly Shellfish Growers Co-Operative Society Ltd.

quoted earlier does not radically alter the established jurisprudence.

34. In the Westlink case, MacMenamin J. also placed emphasis on the fact that what had been before the High Court was an appeal

by way of Case Stated from the Valuation Tribunal pursuant to s. 39 of the Valuation Act 2001, the jurisdiction of the High Court

being defined in s. 39(5) as follows:

“The High Court shall hear and determine any question or questions of law arising on the case, and shall reverse, affirm or

amend the determination in respect of which the case has been stated, or shall remit the matter to the Tribunal with the

opinion of the Court thereon, or may make such other order in relation to the matter as the Court thinks fit.”

MacMenamin J. emphasised the words “arising on the case” in that sub-section. He also pointed out that the jurisdiction of the

Supreme Court was delimited by s. 39(7), which provides that an appeal shall lie to the Supreme Court from the decision of the High

Court. He pointed out that the Valuation Tribunal had not been asked to make a decision on the argument sought to be raised by the

appellant. The Case Stated had not addressed the issue. What he characterised as the “new matter” did not arise “on the case”. He

held that this Court had no jurisdiction to entertain the point on the appeal.

Application of law to circumstances of the appeal: submissions

35. It was acknowledged on behalf of the appellants that the issue underlying the application to amend, that is to say, whether the

State properly obtained the derogation from the Sixth Directive on which the appellants understand the respondent to be relying and

which, on their understanding, allowed the having in place of s. 4(9) of the VAT Act, was not argued in the High Court. However, it

was submitted that there is no major factual aspect to that issue. Rather it is a net issue of law, which was identified as whether or

not it had been demonstrated that that statutory provision, s. 4(9), goes no further than the ambit of Article 27 of the Sixth Directive

allows, when deployed as an anti-avoidance measure. The position adopted on behalf of the appellants, accordingly, was that the

derogation argument was not a completely new argument, but in fact is closely connected to the argument which had been made in

the High Court that the State had failed to properly transpose the Sixth Directive and that the relevant provisions of Irish law were

incompatible with the Sixth Directive. Counsel pointed to the very unusual context in which the application to amend arose. First it

had been argued in the High Court that the relevant Irish Law was incompatible with the Sixth Directive. Secondly, the respondent

had not at any time contradicted or corrected the obvious misunderstanding on the part of the appellants that the derogation was a

simplification measure. Thirdly, as the derogation was a legal instrument which ought to be available for inspection so as to enable a

citizen to interrogate its lawfulness, it was wrong for the respondent to withhold it from the appellants.

36. Counsel for the respondent, on the other hand, while submitting that the validity of the derogation was immaterial to the issues to

be decided by the Court, also rejected the argument that the derogation point is so closely linked to the argument made in the High

Court as to justify this Court in acceding to the proposed amendment. It was also emphasised that it was not until 2012 that a copy

of the derogation had been sought in the context of these proceedings and the refusal to furnish it was on the basis that derogation

was not an issue on the appeal. Counsel for the respondent also argued that the Court should not accede to the application to amend

the grounds of appeal because the derogation point was not argued before the Circuit Court and does not arise out of the Case

Stated. That factor should be a bar to allowing the amendment, it was submitted. However, the principal submission on behalf of the

respondent was that it would be fundamentally inappropriate to consider what is, in effect, a new point.

Decision

37. Question (2) on the Case Stated required the opinion of the High Court on the application of the first limb and the second limb of

the Halifax test to the transactions in issue. Although not raised in the High Court as part of the argument that the Sixth Directive

had not been properly transposed into Irish law and, accordingly, that the first limb of the Halifax test was not met, the issue as to

whether the derogation relied on by the respondent was invalid and ineffective to render what the appellants represented as the

relevant statutory provisions (s. 4(9) coupled with s. 4(6) of the VAT Act) compatible with the Sixth Directive, as counsel for the

appellants submitted, is crucial to the proper application of that limb of the test.

38. It should have been obvious to the respondent, on the basis of the appellants’ outline written submissions in the High Court, that

the appellants’ assumption as to the basis of the derogation on which the respondent was relying was incorrect. Further, it is difficult

to understand how a State body could consider that it had the entitlement to withhold the derogation, which, in reality, is a legal

instrument which regulates the charging of VAT and, as was suggested by counsel for the appellants, can be regarded as part of the

law of the land, from a taxpayer’s adviser, for example, from Mr. Brennan and other partners of Deloitte. It should have been furnished

when it was sought in the context of this appeal in March 2012. While the Court was told, in the course of the submissions, that its

withholding was not wilful, in that neither the respondent nor the European Commission was able to find it, there was no evidence to

support that. Further, as counsel for the appellants emphasised, by letter dated 12th August, 2002 from the European Commission,

Mr. Brennan was informed that the “Irish authorities have informed my services that they do not agree to the release of these

documents”.

39. Against that background, and subject to the reservation expressed below, I am satisfied that the derogation issue as raised in

para. (a) of the proposed amendment –

(a) is so closely related to the arguments advanced in the High Court, and

(b) may be properly regarded as arising from the questions posed in the Case Stated,

that the proper conduct of the appeal requires that the appellants be given leave to amend the notice of appeal on the basis set out

above. No prejudice whatsoever to the respondent has been identified as likely to result from that decision. Accordingly, there will be

an order to that effect.

Reservation

40. A peculiar feature of the application to amend is that, leaving aside the application of any anti-avoidance or abuse of rights

doctrines, it was acknowledged by both sides that the provision of Irish law by virtue of which the appellants were not liable for VAT

on the sale of the freehold of the fifteen holidays homes to the ultimate purchasers was s. 4(9) of the VAT Act, which it was

acknowledged was not in place when the derogation in issue was notified to the European Commission in 1979. That section was

enacted by the Finance Act 1998 and it came into effect from 27th March, 1998. It was also acknowledged by both sides that it was

enacted in response to a decision of this Court in Erin Executor and Trustee Co. Ltd. v. Revenue Commissioners [1998] 2 I.R. 287,

although the first occasion throughout the whole administrative and judicial process on which the relevance of that decision was

recognised was on the hearing of the appeal. Counsel for the appellants expressed the view that it is therefore very difficult to see

how a provision introduced directly due to a Supreme Court decision some twenty one years after the derogation was notified could

be said to be a measure enacted consequent on the derogation. He suggested that if it was not, then s. 4(9) is a purely domestic

measure, in which case the so-called derogation point is immaterial. What the correct position is is not for determination on the

application to amend. Therefore, the decision to allow the amendment should not be seen as in any way deciding whether the effect

of Article 27 and the derogation in issue permitted the enactment of s. 4(9). That issue is reserved for determination on the

substantive appeal.