The High Court has ruled that the Revenue’s decision to treat a balance release of a property loan, totalling €6 million, by a development company as a trade receipt was incorrect. Justice Oisín Quinn found Revenue and a tax appeals commissioner to be mistaken in their conclusion that Arlum Ltd’s property value writedown and subsequent carried forward losses did not amount to a permissible debt deduction.
In 2006, Arlum secured a €9.5 million loan from a bank to purchase a 23-acre parcel of land near Tuam, Galway, intending to construct a residential development there. However, due primarily to the 2007/2008 financial crisis, this never materialised. The loan was secured, in part, on the 23-acre plot and an additional property at Palace Fields, which Arlum was finalising as a separate residential scheme.
Arlum paid the bank €5 million in interest and capital using income generated by the Palace Fields project. From 2010, the company began to writedown the value of the land every year in line with the significant drop in property values at the time.
After the failed sale of the land at auction in 2016, the bank agreed to waive a further €6 million of Arlum’s balance and release them from any remaining security measures on a final payment of €250,000.
In October 2016, the losses carried forward due to the land’s decreased value totalled €7.1 million. Arlum attempted to treat the balance of the debt’s release as a credit contribution to the balance sheet below the gross profit line, given that the writeoff amount did not represent a trading gain.
From 2018 to 2021, discussions took place between the company’s tax consultants and the Revenue, culminating in May 2021. The Revenue asserted that it should classify debt write-off as taxable income. If accurate, this could decrease the losses carried forward to approximately €1.1 million, reported by the judge.
Arlum disputed the decision in May 2023, and the tax appeal commissioner concurred that reducing the value of the lands under such circumstances constituted an allowed debt reduction, leading to a financial loss that is allowable for future tax deductions.
In contrast, the company challenged the ruling in the High Court to clarify specific issues. However, the Revenue contested the appeal.
Justice Quinn’s judgement was content with the commissioner misinterpreting section 87(1) of the Taxes Consolidation Act 1997, considering it a legal error. The reduction in land value and the result of carrying forward losses does not reconcile with a debt deduction, he elaborated.
He also determined that both the Revenue and the commissioner made a legal mistake by stipulating that the relief of the €6 million loan balance should be seen as a trade receipt in law. The company, part of the car industry, lost a tax dispute with the Revenue.