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Redress for Taxpayers (Special Report)

Chapter 3 - Compensation for loss in value of delayed refunds of tax

Chapter 3

Compensation for loss in value of delayed refunds of tax

Legislation

The Revenue claims that, apart from those cases where a statutory provision exists for the payment of compensation in the form of interest, it is unable to compensate for loss in value of tax refunds made.

Provision is made in legislation for the payment of interest on tax overpaid in certain instances, including:

(i) Under Section 941(9) of TCA 1997, which provides, in relation to income tax or corporation tax:

"if the amount of the assessment is altered by the order or judgement of the Supreme Court or the High Court, then�
(a) if too much tax has been paid, the amount overpaid shall be refunded with such interest, if any, as the Court may allow "

(ii) Under Section 942(6)(b) of TCA 1997, which provides in relation to the Circuit Court:

"where the amount of tax is altered by the determination of the judge or by giving effect to an agreement under subsection (8), then, if too much tax has been paid, the amount or amounts overpaid shall be repaid and (except where the interest amounts to less than �10) in so far as the amount to be repaid represents tax paid in accordance with this subsection it shall be repaid with interest at the rate of 0.6 per cent, or such other rate (if any) prescribed by the Minister for Finance by regulations, for each month or part of a month from the date or dates of payment of the amount or amounts giving rise to the overpayment to the date on which the repayment is made."

(iii) Under Section 30 of the Finance Act, 1976 (FA 1976) which provides, where an assessment has been raised and where there has been an appeal against the assessment:

"Where an overpayment of tax is to be repaid under subsection (3), the overpayment shall carry interest at the rate or rates in force by virtue of section 550 (1) of the Income Tax Act, 1967, for the period from the date or dates of the payment of the amount or amounts giving rise to the overpayment, as the case may require, to the date on which the repayment is made"

(iv) Under Section 953(9) of TCA 1997 in relation to an overpayment of preliminary tax which provides:

"Where the amount of preliminary tax paid by a chargeable person for any chargeable period exceeds that person's tax liability for that period, the excess shall be repaid and the amount repaid shall carry interest at the rate of 0.6 per cent, or such other rate (if any) prescribed by the Minister for Finance by regulations, for each month or part of a month for the period from the date or dates of the payment of the amount or amounts giving rise to the overpayment, as the case may require, to the date on which the repayment is made"

Case law

The issue as to whether interest was payable on a tax repayment was considered in a number of court cases:

(i) Mooney v Ó Coindealbháin [1988] ITR Vol 4
Mr Mooney was a branch manager in an employment exchange. For income tax purposes his employment was treated as coming within Schedule E of ITA, 1967 and tax was deducted under the PAYE system. Mr Mooney claimed that he should be regarded as self-employed and assessed under Schedule D. The Circuit Court agreed but the Inspector of Taxes appealed the decision to the High Court. The High Court held that the working relationship between the then Minister for Social Welfare and Mr Mooney was a contract for services and not a contract of service and that he should have been assessed under Schedule D. As a consequence the PAYE tax overpaid by Mr Mooney in the sum of �58,853 was refunded to him and, in a subsequent decision, the High Court also held that he was entitled to be paid interest on his overpayments in accordance with Section 30 FA 1976.

(ii) Lawrence O'Rourke v The Revenue Commissioners [1996] ITR p81
Mr O'Rourke was also a branch manager in an employment exchange. Following the High Court decision in Mooney v Ó Coindealbháin, the same tax consultant who had acted for Mr Mooney, and who was now acting for Mr O'Rourke, met with the Inspector of Taxes. As a result of this meeting it was agreed that Mr O'Rourke and some 80/90 other branch managers were entitled to be treated as coming within Schedule D. It was also agreed that the formalities of raising assessments for the relevant years could be dispensed with, if abridged income and expenditure accounts were submitted on behalf of Mr O'Rourke for the relevant tax years. On the basis of these accounts, the Inspector certified a repayment of �23,139 to Mr O'Rourke. No interest was paid on this sum. Mr O'Rourke commenced High Court proceedings and contended that he was also entitled to interest under Section 30 FA 1976.

In the High Court, Counsel for Mr O'Rourke accepted that there was no express agreement between his client and the Inspector that interest on the tax repayment would be paid in accordance with Section 30. He claimed, however, that it was implicit in the agreement on dispensing with the formalities of raising assessments in order to avoid over-burdening the revenue system, that Mr O'Rourke would be treated as entitled to interest pursuant to Section 30 as if these formalities had taken place.

Counsel for the Revenue Commissioners submitted that Section 30 only took effect when an assessment had been raised and where there had been an appeal against the assessment. These necessary pre-conditions had not been met in this case.

The High Court judge agreed to state a case for the opinion of the Supreme Court as follows:

"Whether having regard to the facts found or admitted before me the Plaintiff is entitled to a payment of interest on foot of the overpayment of tax for the periods in question pursuant to Section 30 of the Finance Act, 1976".

The Supreme Court answered the question in the negative and ordered the matter to be referred back to the High Court for determination. In the course of the Supreme Court judgement, Murphy J. said there was no doubt about the necessity for compliance with the pre-conditions required by Section 30, i.e., that there had been an assessment raised and an appeal against the assessment had been made. There was, therefore, considerable difficulty in asserting a claim for interest under Section 30 in respect of PAYE tax collected otherwise than by assessment on the taxpayer. O'Flaherty J., however, made the point that simple justice would seem to require that the Revenue Commissioners, having mistakenly come into possession of the taxpayer's money, should pay interest at a rate to be decided upon by the trial judge rather than the de luxe rate specified in Section 30.

The decision of the High Court was that interest should be paid on the tax refunded based on the doctrine of unjust enrichment. The unjust enrichment occurred as a result of the retention by the Revenue of the excess tax. The measure of the taxpayer's loss was the amount of excess tax plus the interest which the money might have earned had it not been withheld. In calculating the rate of interest applicable the court rejected the argument that the punitive interest rate provided for under Section 30 FA 1976, was appropriate. The court also rejected a contention that the overdraft rate applicable in respect of current accounts at the relevant times would be appropriate and concluded that the appropriate rate of interest was that applicable under Section 21(1) of the Courts Act, 1981.

The application of the O'Rourke ruling

In O'Rourke, there was no statutory authority under the Taxes Acts for the payment of interest, but interest was paid to him and to his fellow branch managers by order of the High Court based on the doctrine of unjust enrichment. Following the decision to pay interest in O'Rourke, Revenue decided to apply the rationale for the payment of interest used in that case, notwithstanding the fact that there was no statutory provision for such payment, in another case. In this instance, a number of former bank officials had been refunded income tax following a High Court decision that marriage gratuities paid to them should be regarded as termination payments. This decision entitled the former bank officials to the statutory relief available on such termination payments and the overpaid tax was refunded. Interest was paid on the refunds on the same basis as in O'Rourke.

In his judgement in O'Rourke, Keane J. referred to the House of Lords decision in Woolwich Building Society v Inland Revenue Commissioners [1993] AC 70. The facts of this case were that the Woolwich Building Society had paid �57m. in tax pursuant to demands under certain tax regulations. Payment was made under protest on the grounds that the regulations were ultra vires and void. Proceedings for judicial review to challenge the validity of the regulations were immediately commenced and were successful. The Inland Revenue Commissioners repaid the capital sum with interest from the date of the Court order finding the regulations ultra vires but refused to pay interest from any earlier date. A majority of the House of Lords held that Woolwich was entitled to interest for the earlier period. A majority also expressed the view that the time was appropriate to develop the law of restitution to an extent that permitted the recovery of interest in circumstances such as arose in that case.

In O'Rourke, Keane J. quoted a paragraph from Lord Goff's judgement in Woolwich:

"I would therefore hold that money paid by a citizen to a public authority in the form of taxes paid pursuant to an ultra vires demand by the authority is prima facie recoverable by the citizen as of right. As at present advised, I incline to the opinion that this principle should extend to embrace cases in which the tax or other levy has been wrongly exacted by the public authority not because the demand was ultra vires but for other reasons, for example, because the authority has misconstrued a relevant statute or regulation ..."

and Keane J. himself continued:

"... if the law as laid down in those passages is also the law applicable in Ireland, the tax overpaid by the plaintiff was recoverable as a matter of right. It would follow automatically from that conclusion that the plaintiff was entitled to interest so as to compensate him for the unjust enrichment effected at his expense by the defendants."

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