You know the duck test: "When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck". This reasoning was used by the Irish High Court recently when allowing a tax deduction for the Non-Principal Private Residence (NPPR) charge in calculating a property owner's rental income. That decision is now being appealed by Revenue so tax refunds are on hold.
In effect the High Court said that the NPPR looked, swam and quacked like any rate levied by a local authority. Therefore in accordance with the law which provides that such rates can be deducted from rental income before tax is calculated, the court held that the taxpayer could indeed deduct the charge and reduce his tax bill.
We all thought that was the end of the matter. Not so. The Minister for Finance Michael Noonan recently told the Dail that the Revenue Commissioners have appealed that decision to the Court of Appeal. In addition, he noted in response to a Dail question that "Revenue advises that there is a general right to repayment of tax provided for in … the Taxes Consolidation Act 1997, where a person has paid an amount of tax which is not due. However that right is subject to a statutory limit of four years from the end of the chargeable period to which the claim relates".
This four-year rule applies to tax refund claims generally, not just NPPR deductions. The NPPR charge comprised €200 for each property that was not a person's main residence. It applied up until 2013 so the final year in which it was levied was just within this four-year limit. That means that if landlords want to claim an NPPR deduction to reduce rental income then they have to make sure the claim is made in time such that if the Court of Appeal rules in favour of the taxpayer then a valid and timely claim has been made. Otherwise they risk being told that they were too late.
This all seems like administration for administration's sake but it's not. It's administration to protect a refund possibility. The minister noted that "any repayment claims made in relation to this matter that are received within the statutory time limits, as they apply to each year of assessment, will be retained and processed when the outcome of the Appeal case is known". So timely claims matter.
The thinking behind the four-year time limit is understandable. The Exchequer has to protect its resources and cannot entertain refund claims going all the way back to Adam and Eve.
Certainty, to the extent that it can be achieved, is a necessity in running any business, let alone a country. However, Revenue can go back further than four years in seeking tax where they suspect fraud or neglect has been committed in paying tax so surely a quid pro quo in cases of taxpayer hardship and extenuating circumstances is appropriate? In these circumstances, it certainly seems fair.
Granted, that would make for subjective law but from a taxpayer's perspective isn't that better than an objective 'no' where hardship and extenuating factors prevail? Isn't it better from a policy perspective to show that Ireland does not go beyond what's necessary to protect the Exchequer to the detriment of others?
But let's be clear. If you have a claim to make, make it on time.
For example, three separate taxpayers came before the Tax Appeal Commissioners recently seeking various tax repayments. All of them lost. It was accepted that all had overpaid tax. It's just they were too late in asking for their tax back. One case dealt with a taxpayer who had not availed of a particular tax credit in previous years. The taxpayer submitted a repayment claim and received a tax repayment from Revenue in respect of the tax years 2011-2014 because of the taxpayer's entitlement to the tax credit. The taxpayer argued that the repayment claim for the tax years 2008-2010 should not be refused given he/she was unaware of his/her entitlements in relation to them. It was refused.
The Appeal Commissioner clearly had some sympathy for the taxpayer in that instance noting: "The wording of the provision does not provide for extenuating circumstances in which the four-year rule might be mitigated. In short, I do not have authority or jurisdiction to direct that a repayment be made to the Appellant where the claim in respect of the repayment is outside the four-year time period …."
Put another way, the Commissioner adopted the 'Lt Daniel Kaffee' approach in the movie A Few Good Men where Tom Cruise playing that lawyer exclaims "… it doesn't matter what I believe. It only matters what I can prove. So please don't tell me what I know and don't know. I know the law". In my view this is one instance where the law's purpose should be reviewed and amended to deal with hardship and extenuating circumstances that may be faced by taxpayers.
But back to the duck test. In trying to understand the law, the High Court quoted a Supreme Court decision from the early 1980s which dealt with the issue of whether or not a pig could be regarded as cattle for certain tax purposes based on the ordinary meaning of the words. Gasp! It held they weren't the same.
The High Court in the NPPR case said "… this is a legislative provision directed at the public at large and therefore the phrase "any rate levied by a local authority" must be given its "ordinary or colloquial meaning" … I am satisfied that ordinary or colloquial meaning includes the NPPR charge". The judge applied the duck test and said the NPPR was what it looked like - a rate levied by a local authority.
The Court of Appeal will now have to do the same. It's not beyond doubt that they will hold similarly to the High Court before them. But if the Supreme Court can say that cattle and pigs are different then surely the Court of Appeal could get to the position that NPPR and local authority rates are the same. Time will tell.
In the meantime, from a taxpayer perspective, if you have a valid claim then it's time to make that claim.
From a policy perspective it's time to consider amending our law for tax refunds in hardship and extenuating circumstances. From an Ireland Inc perspective it's time to send the policy message that Ireland does not go beyond what's necessary to protect the Exchequer.
Tom Maguire is a Tax Partner in Deloitte
Sunday Indo Business