THE way Dunnes Stores paid for the extension to Mr Michael Lowry's house made it possible for him not to pay tax on income from the company, a former senior Dunnes Stores accountant told the tribunal.
Mr Michael Irwin, chief accountant with the company until 1993, said he had been opposed to this method of payment. The money involved, almost £400,000, should either have been paid and accounted for as income to Streamline Enterprises or to Mr Lowry personally for project management services.
When he raised his objections with Mr Ben Dunne, Mr Dunne said "he understood what I was saying but he wanted to do it this way. He intimated that was the way he wanted it to happen. He intimated this was tax efficient from Lowry's perspective".
Explaining how the renovations payment came about, Mr Irwin said the business arrangement with Mr Lowry was working well. Refrigeration maintenance costs had been cut by almost half and the equipment was being charged at cost. "We did extremely well out of it."
Then Mr Lowry approached him and said he had bought a house. He asked Mr Irwin if he could recommend someone to work on it. Mr Irwin recommended Faxhill Homes and the architect, Mr Peter Stevens, who were working on Mr Dunne's private residence. He contacted Mr Stevens on Mr Lowry's behalf. "I said he was a TD and a friend of Mr Dunne and would they look after him."
Mr Denis McCullough SC, counsel for the tribunal, asked if there was any significance in mentioning he was a TD. Mr Irwin said it was just to tell him who he was. Telling him he was a friend of Mr Dunne's was "just to tell him he was a valued client and would they do a good deal".
He had a meeting with Mr Lowry in 1992 at which Mr Lowry sought a reconciliation of the financial matters between them. Up to then he had appeared happy with the informality of the situation, according to which he would be paid bonuses at Mr Dunne's discretion.
Mr Lowry had sought a meeting with Mr Dunne several times during this time. Asked if he had got them, Mr Irwin replied: "Not through me."
"Were matters reconciled between Mr Lowry and Mr Dunne?" Mr McCullough asked.
"No," Mr Irwin said.
Mr Irwin had produced some figures which identified the savings made by Dunnes Stores through the business with Mr Lowry. "It was up to Mr Dunne to decide on the bonus," he said. The savings amounted to more than £1 million over the three years.
Mr Stevens then contacted him and said he was sending Mr Irwin an invoice and architect's certificate for Mr Lowry's house. "Was he indicating he was expecting you to pay it on behalf of Dunnes Stores? Mr McCullough asked.
"Yes," Mr Irwin replied. "Mr Dunne had given instructions to Mr Stevens to charge it to the ILAC stores. The invoice arrived in duly the next day."
Mr Irwin was surprised. He had no idea of this arrangement. "I told him [Mr Dunne] this was not tax efficient from Dunnes Stores' point of view. I was concerned from an accounts perspective. It should have been handled totally differently."
"It should have been accounted for in a different way or not paid at all?" Mr McCullough asked.
"There should have been a more appropriate way for paying for this work from Dunnes Stores point of view." A cheque was duly drawn to pay for the work.
Mr Irwin also discussed the matter with Mr Lowry after the final invoice was submitted in March, 1993. "I intimated this could not be consummated in the way it was," he said. "It had tax implications for him personally. It could have been looked at in different ways. It could be looked at as a gift or as a loan from Dunnes Stores or as an advance.
He explained the different liabilities involved. If it was seen as a gift it could incur gift tax. If it was an interest free loan or an advance the Revenue Commissioners could have imposed preferential tax rates on it as a benefit in kind.
"Or as income?" Mr McCullough asked. "That's the way it should have been treated," Mr Irwin replied.
Asked what the tax implications of that were, Mr Irwin said it was being charged and was not appearing as it should have appeared in the books of Dunnes Stores.
It should have appeared there either as a payment to Streamline Enterprises or to Mr Lowry personally for project management services.
There was no tax benefit for Dunnes Stores if this expenditure was accounted for as an extension to a store, while the company would have had the full tax benefit of 40 per cent if it was accounted as an expense.
Asked if it conferred a tax benefit on Mr Lowry, he said it made it possible for Mr Lowry not to pay tax on it at all.
He had explained all this to Mr Lowry. "I think he understood the position but he said he was not in a position to do anything about it," Mr Irwin said. Mr Dunne had been made a nonexecutive director of Dunnes Stores at this stage and was no longer in a position of control.
Mr Irwin took the matter up with Mr Dunne. "I just felt the sum of £400,000 was totally incorrect and should be regulated. We should retract the paper work and do it properly. Mr Dunne's attitude was to park it and he'd sort it out when he got back to the group."
Asked if he knew anything about the payments into the Isle of Man account to the benefit of Mr Lowry, Mr Irwin said he was not aware of them. "If Mr Dunne wanted to pay someone from his own resources this was his prerogative. It is an individual's responsibility to account for his own tax."
Mr Irwin agreed with counsel for Mr Lowry, Mr Donal O'Donnell SC, that Mr Lowry had given a superb service to Dunnes Stores, and had achieved substantial savings for the company. He agreed that he and his company were treated like part of Dunnes Stores and it was the company's practice to pay bonuses to people if their work resulted in substantial profits or savings.
"When the meeting about [financial] reconciliation took place there was no doubt in your mind that Dunnes Stores owed Streamline a substantial amount of money indeed?"
"Yes," Mr Irwin replied. "Over the three years we made savings well in excess of £1 million." Pressed by Mr O'Donnell, he said the figure was £1.3 or £1.4 million.