Inspector Humpty

Inspector Humpty

Not all Revenue interpretations are rational, warns DAVID TEALE.

As Humpty Dumpty said in a rather scornful tone, 'When I use a word, it means just what I choose it to mean - neither more nor less.'

'The question is,' said Alice, 'whether you can make words mean different things.'

'The question is,' said Humpty Dumpty, 'which is to be master that's all.'

This well-known quotation demonstrates its timelessness in the wonderful world of statements of practice, Revenue concessions and Revenue manuals. Many commentators have expressed despair at the way the tax system is now operated through these measures, leaving the taxpayer with no statutory redress and little other practical redress from a perverse application.

One of the down sides of the publication of the Revenue's manuals is the extent to which they are acquiring an authority of their own. This is demonstrated by Extra-statutory Concession C9. This concession amends the associated companies rule, which can affect a company's effective rate of corporation tax, apparently to the benefit of taxpayers by excluding adult children from the definition of an associate when establishing the concept of control.

The proviso is, not unreasonably, that the two companies must not have any substantial commercial inter-dependence. Problems arise when one looks at the Revenue's Company Taxation Manual at paragraph 3077 which tells Inspectors to 'take a broad view of the phrase “commercial inter-dependence”'. In fact, the thinking in that paragraph is shoddy throughout. Take for example: 'The … text makes it clear the word substantial is not being used in a comparative sense but rather as meaning not insubstantial.' The context of Extra-statutory Concession C9 does nothing of the sort. One can read through the whole of that concession without finding anything which puts the word in that context. The word 'substantial' clearly invites comparison and if the Revenue had wanted to use the phrase 'not insubstantial', it could have used it.

The paragraph also deals with the interpretation of the word 'inter-dependence'. It says that dependence means reliance but not in the narrow sense of being unable to do without. Inspectors are therefore told that essentially they are concerned with whether or not the companies rely on each other 'in any way'. But this is clearly not the meaning of the word inter-dependence.

Dependence is a strong word when one considers what alternatives might have been used. Being dependent may not quite mean that one cannot do without somebody or something but it is getting close to it, and it is stronger than the concept of relying on somebody or something in any way. In this context, reliance is a much weaker word than the word dependence.

When information for Inspectors is as badly put together as paragraph 3077, which effectively gives most Inspectors carte blanche not to apply the concession on very thin grounds, then those who work in or with the tax system must have cause for concern.

By way of example, I recently came across a case where an Inspector denied the concession because the company in question was the sole supplier of one particular product to the other company. His argument was that company A was reliant on company B in that respect and, therefore, was inter-dependent. This was despite the fact that company B tendered for, and obtained the work on commercial terms and could, if necessary, have been replaced. The Inspector was quite immovable on this point and, given the quality of the advice he was receiving from his manual, it was hardly surprising.

Ultimately that Inspector understood, as Humpty Dumpty did, that the interpretation of language is all about power.

David Teale is a partner with DTE Business Services Group, an accountancy and advisory firm.

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