SPC00428
Income tax loss relief TA 1988 s 574 whether allowable loss for capital gains tax purposes
Capital gains tax whether shares becoming of negligible value whether claim made form of claim whether date specified
Capital gains tax whether share issue a bargain other than at arm's length whether a reorganisation
Jurisdiction estoppel whether available against Crown conditions for claim based on "legitimate expectation" method of seeking remedies
THE SPECIAL COMMISSIONERS
ROSS MARKS Appellant
- and -
JOHN MCNALLY
(HM INSPECTOR OF TAXES) Respondent
Special Commissioner: JOHN CLARK
Sitting in public in London on 29 July 2004
Carol Fraser, representing Goldberg Linde Solicitors, for the Appellant
John Cormack, HM Inspector of Taxes, Inland Revenue Northern England Regional Appeals Unit, for the Respondents
© CROWN COPYRIGHT 2004
DECISION
- Mr Ross Marks (the Appellant) appeals against the refusal of a claim for loss relief under section 574 of the Income and Corporation Taxes Act 1988 (the 1988 Act) in respect of shares in a trading company.
The law
- The principal legislation relevant to the claim is Section 574 of the 1988 Act and Section 24(2) of the Taxation of Chargeable Gains Act 1992 (the 1992 Act). Section 574, in the form that applied for 1994-95, the relevant year, provided:
"(1) Where an individual who has subscribed for shares in a qualifying trading company incurs an allowable loss (for capital gains tax purposes) on the disposal of the shares in any year of assessment, he may, by notice given within two years after that year, make a claim for relief from income tax on
(a) so much of his income for that year as is equal to the amount of the loss or, where it is less than that amount, the whole of that income; or
(b) so much of his income for the last preceding year as is equal to that amount or, where it is less than that amount, the whole of that income;
but relief shall not be given for the loss or the same part of the loss both under paragraph (a) and under paragraph (b) above.
Where such relief is given in respect of the loss or any part of it, no deduction shall be made in respect of the loss or (as the case may be) that part under the 1992 Act."
Before it was amended for claims made after 5 April 1996, Section 24(2) of the 1992 Act provided:
" (2) If, on a claim by the owner of an asset, the inspector is satisfied that the value of an asset has become negligible, he may allow the claim and thereupon this Act shall have effect as if the claimant had sold, and immediately reacquired, the asset for a consideration of an amount equal to the value specified in the claim."
Before 6 April 1996, section 24(2) was subject to the application of Extra-Statutory Concession D28. As this is not set out in current reference materials, I set out the appropriate paragraphs of this Concession as it applied in 1994-95:
"In strictness [section 24(2)] requires the deemed sale and reacquisition to be treated as taking place when the claim is made. In practice the Revenue are prepared to accept that a claim by the owner to be treated as having sold and reacquired the asset at a particular date may be made not later than 24 months after the end of the tax year (or accounting period in the case of a company) in which that date fell, provided that the asset is of negligible value both when the claim is made and at that earlier date (whether or not it had first become of negligible value before that earlier date).
In the case of unquoted shares, where this Concession applies, relief under ICTA 1988 sections 573-576 will be available if the conditions for relief are satisfied both at the date the claim to negligible value is made and the date at which the owner is treated as having sold and reacquired the shares."
The facts
- The evidence consisted of an Agreed Statement of Facts, and the documents in the Revenue's bundle. In addition, certain documents were provided at the hearing on behalf of the Appellant. There was no oral evidence. I find the following facts; where matters of fact were subject to dispute, I deal with these later in this decision.
- On 16 June 1994, a limited company, Gemforce Ltd (Gemforce) was incorporated. On 23 June 1994, the Appellant acquired two shares in Gemforce. These two shares represented the entire issued share capital of Gemforce at that time. The Appellant was appointed sole director of Gemforce on 23 June 2004. On the same date, a resolution was passed increasing the nominal share capital of Gemforce from £100 to £250,000 in ordinary shares of £1 each. On 27 June 1994 Gemforce entered into an agreement to purchase all of the 10,000 issued shares in a company called In-Flight Supply Services (International) Ltd from Ross Group PLC for a consideration of £225,000. Clause 15.5 of that agreement [which was not included in the evidence] stated that "Mr Marks' liability under this clause 15 shall not exceed £225,000." (Details of the transaction were set out in a circular dated 30 June 1994 to shareholders of Ross Group PLC. This indicated that Ross Group PLC proposed to sell this wholly-owned subsidiary to Gemforce, a company controlled by the Appellant, and that on completion of this disposal, the Appellant would cease to be an executive Director of Ross Group PLC. £225,000 was to be paid in cash following completion, and the circular explained the terms of a proposed licensing agreement.) The 10,000 shares in In-Flight Supply Services (International) Ltd were transferred to Gemforce on 27 July 1994; as a result, Gemforce was the owner of the entire issued share capital in that company. These shares were Gemforce's only asset. Subsequently, on 8 November 1994, £225,000 was transferred into a bank account in the name of Gemforce from Morgan Bruce Binks. On the same date, £225,000 was transferred from a bank account in the name of Gemforce to Ross Group PLC. Again on the same date, 224,998 shares in Gemforce were allotted to the Appellant. The consideration payable by the Appellant for the shares issued on that date was £224,998. Following that subscription for shares, the Appellant's holding of shares in Gemforce was 225,000, i.e. all of the issued share capital of Gemforce.
- On 1 December 1994, In-Flight Supply Services (International) Ltd, which had changed its name to IFSSI Ltd, went into liquidation. On 2 December 1994, the liquidators of IFSSI Ltd sold the stock and goodwill of that company to a newly incorporated company named In Flight Supply Services (International) Ltd. The Appellant was a director of this new company.
- The Appellant's Tax Return for 1994-95 had attached to it a schedule relating to capital gains. On page 3 of this schedule, under the heading "Chargeable Assets Disposed of", an entry showed the disposal of 224,998 shares in Gemforce for nil proceeds on 1 December 1994 following their acquisition on 8 November 1994 for £224,998. [There is no reference in the information submitted to the Revenue to the other two shares.] On the signature page of the return form, the Appellant did not enter the date on which he signed the form. The only date contained in the return is the date on the first page of the schedules to the return form; under the statement "This schedule to the Tax Return of Mr R Marks was completed by Fox Associates [address]", the date is shown as 1 September 1995.
- On 27 September 1996 Fox Associates submitted a claim on behalf of the Appellant under section 574 of the 1988 Act to have the loss incurred in respect of the shares in Gemforce set off against the Appellant's total income for 1994-95, with any balance to be set off against total income for the following year. [I comment below on the latter aspect of the claim.] The claim under section 574 was made within the statutory time limit relevant to a capital loss for the year 1994-95. Following correspondence relating to the claim, on 19 August 1998 the Revenue issued a formal Notice of Decision that the claim to relief under section 574 was refused. On the following day, the Appellant appealed against that decision, leading to the present hearing. Meanwhile, Gemforce had been dissolved on 31 March 1998.
Preliminary matters
- Mrs Fraser raised two preliminary points. One was that the Appellant did not agree with a statement in the Revenue's skeleton argument, recording the absence of any dispute that the Appellant retained ownership of the Gemforce shares throughout the tax year 1994-95, despite the submission of a schedule to the Appellant's tax return for that year showing a disposal of the Gemforce shares for nil consideration. The second was the question of the scope of the hearing. On 10 February 2004, the Presiding Special Commissioner had directed that the matters to be considered at the present hearing were all matters other than the "reserved issue". The latter was the valuation of the shares in Gemforce. Mrs Fraser contended that the reserved issue included the legal arguments on the basis for the valuation of the shares in Gemforce. However, the Revenue's skeleton argument referred to a number of legal arguments concerning the basis for that valuation. In reply, Mr Cormack indicated that only two amounts could be relevant, either the price paid or the market value. Mrs Fraser pointed out that if it was not established that there was an allowable loss, the question of valuation became otiose. Mr Cormack maintained that the point of the Presiding Special Commissioner's direction had been to avoid engaging expert valuation evidence for the purposes of the present hearing. If, however, the question of valuation were to arise as a result of the decision following the present hearing, it would be necessary for the experts to know the appropriate basis for considering their valuations. There was room for differences of view on the appropriate basis.
- My conclusion on the preliminary point concerning valuations was that it would be appropriate for me to consider the legal arguments relating to the basis for valuations, but that in the light of the comments of Gloster J in the case of IRC v Arkwright and another [2004] EWHC 1720 (Ch), I should avoid making comments on matters relating to the value of the shares as opposed to the basis on which any such valuation should be arrived at.
Arguments for the Appellant
- Mrs Fraser stated that the sole issue for determination was whether the Appellant was lawfully entitled to his claim for loss relief under section 574 of the 1988 Act. If the Appellant succeeded on this point, then the amount of loss relief (if any) to which he was entitled would depend on the outcome of the Gemforce shares valuation issue, to be determined at a separate subsequent hearing. Mrs Fraser referred also to section 24(2) of the 1992 Act. She referred to the Revenue's arguments that a section 24(2) claim was a condition precedent to a claim under section 574 of the 1988 Act, and that the Appellant did not in fact make a section 24(2) claim, so that the section 574 claim must necessarily fail from the outset. This was the heart of the dispute.
- She submitted that on the proper construction of section 574, there was no express or implied requirement to import a condition precedent that any claim under the section must necessarily fail if no successful claim had first been made by the claimant under section 24 of the 1992 Act. Section 574 merely referred to "an allowable [capital gains tax] loss" arising from the disposal of shares, and a claim for relief under the section being made by notice to the Revenue. Nowhere in section 574 was there a reference to section 24(2) of the 1992 Act. Mrs Fraser maintained that the Appellant had made a claim in his 1994-95 return. She referred to the schedule to the return [see paragraph 6 above]. She maintained that a claim for a loss had certainly been made.
- If the Appellant failed on the argument as to the construction of section 574, and the Revenue's contention were accepted that a section 24(2) claim must first have been made by the Appellant in this instance as a condition precedent to the section 574 claim, she submitted that on the facts that Appellant had in any event made the section 24(2) claim required. It was clear that the Appellant had on the face of the relevant page of the schedule to his return made a negligible value claim as regards his Gemforce shares, as they were treated as being disposed of for nil value on 1 December 1994. This was the day that Gemforce's only asset, the subsidiary company IFSSI Ltd, had gone into liquidation. Section 24(2) did not specify any form for the purposes of the claim.
- Mrs Fraser maintained that the Appellant had proved as a matter of fact that not only was a section 24(2) claim made by the Appellant, but that there was also an earlier effective date for the purposes of section 24(2)(b) for the deemed disposal of the asset (the Gemforce shares) specified within the claim made. This earlier effective date specified for the date of the deemed disposal was clearly identified on the relevant page of the schedule to the return as "01/12/94", being a date within the year of assessment 1994-95.
- If it were to be accepted that the Appellant had made a section 24(2) claim in his tax return for 1994-95, but that an earlier date for the deemed disposal of the shares had not been specified, than Mrs Fraser submitted that the date for the deemed disposal must be the date of the section 24(2) claim, namely the date of the Appellant's 1994-95 Tax Return and schedule, 1 September 1995. This date for the deemed disposal of the shares was therefore the date when the allowable loss for capital gains tax purposes arose under the section 24(2) claim, and this date, falling within 1995-96, in relation to the Appellant's section 574 claim (27 September 1996, as shown in the Agreed Statement of Facts) was well within the statutory time limit for the latter claim, as set out in section 574(1). Mrs Fraser submitted that in this event, the section 574 claim, validly made within the statutory time limits, was to be treated as a claim in respect of a loss arising within the year of assessment 1995-96.
- In the final version of her skeleton argument, being the version provided both to me and to Mr Cormack about fifteen minutes before the start of the hearing, Mrs Fraser raised a new point concerning estoppel. (I comment below on the procedural questions raised by this late submission of a new argument, and on other questions relating to this issue, so at this point I merely record the arguments raised by Mrs Fraser at the hearing). It was clear that the Revenue had, before 2003, when the appeal had been re-activated by the Appellant, consistently accepted that a section 24(2) negligible value claim for an allowable loss for capital gains tax purposes had been made by the Appellant, but had taken the view that no allowable loss for those purposes could arise under the claim since (according to the Revenue) the Appellant's Gemforce shares were already "worthless" when they were acquired by subscription on 8 November 1994. Mrs Fraser referred to a number of passages in letters from the Revenue to the Appellant's accountants dated 1998 and 1999, and maintained that in these the Revenue had expressly or impliedly acknowledged to the Appellant that a section 24(2) claim had been made by the Appellant, but that in the Revenue's view it could not succeed, or no allowable loss could arise from it on which a subsequent section 574 claim could attach so as to transmute the capital gains tax loss into an income tax loss.
- Mrs Fraser submitted that in the interests of fairness, natural justice and equity, because of the Revenue's previous and consistent acknowledgement (over many years) of the Appellant's section 24(2) claim, the Revenue were estopped from denying that a section 24(2) claim was ever made by the Appellant for the year of assessment 1994-95 or at all. She cited the summary of conditions for making out a successful ground of estoppel as set out by the Court of Appeal in Derby v Scottish Equitable plc [2001] EWCA Civ 369 at [27]. These were that there must have been a representation made to a person (the representee), upon which the representee then relied to his detriment (namely, his changed position).
- She argued that in the Appellant's case the two required conditions for estoppel were manifestly present. The Revenue had expressly or impliedly represented to the Appellant that they acknowledged that a section 24(2) claim had been made, but that it could not succeed in any case because the shares on which the negligible value claim had been made had been of negligible value at the time of the acquisition. The Appellant had relied on this representation/acknowledgement to his detriment, because he then believed and understood that the section 24(2) claim had indeed been made to the Revenue. She contended that it would be wholly unfair and inequitable for the Revenue to retract and now assert that the section 24(2) claim for the relevant year was never made. This was because any section 24(2) claim would now be totally out of time in itself and in relation to the section 574 claim. The important point to note was that if the Revenue had from the outset refused the Appellant's claim for relief under section 574 on the basis that there was no allowable loss because no claim had been received by the Revenue under section 24(2) in respect of the Gemforce shares, the Appellant could then have made his section 24(2) claim then, and in time.
- On the question of the valuation of the Gemforce shares, the Appellant contended, and would if necessary prove at a subsequent hearing reserved for the share valuation issue, that the Gemforce shares at their time of issue on the date of acquisition on 8 November 1994 were not of nil or negligible value, as alleged by the Revenue.
- In summary, if the Appellant's submissions were successfully made out, the Appellant was lawfully entitled to succeed on his section 574 claim, although as regards the amount of the loss relief to which the Appellant was entitled under that claim, this would have to be determined at a separate subsequent hearing to ascertain the value for capital gains tax purposes of the Appellant's Gemforce shares at their date of issue on 8 November 1994. On the question of the Revenue's arguments relating to the legal basis for the valuation, Mrs Fraser proposed to deal with these in her reply.
Arguments for the Revenue
- Mr Cormack raised certain questions relating to the Appellant's skeleton argument. I did not comment on these at the hearing, but consider them below. In relation to the question of the powers of the Special Commissioners to consider the question of estoppel, Mr Cormack was not in a position to present arguments. He was prepared to leave to the Tribunal the question of the jurisdiction of the Special Commissioners to consider the question of estoppel. It was agreed that I would consider the question, and that if I concluded that it was within the jurisdiction of the Tribunal to consider questions relating to estoppel, I would arrange for the appeal to be adjourned for a further hearing to consider this, and would give appropriate directions. I comment below on the question of estoppel, and on certain matters raised after the hearing had taken place. Mr Cormack therefore made no comment on the estoppel argument, other than to produce copies of letters dated 27 November 2000 and 4 May 2001, in the first of which the question of the apparent absence of a section 24(2) claim had been raised.
- Mr Cormack restated the subject matter of the appeal; it was against the refusal of a claim for loss relief under section 574. He apologised for the delay in providing a copy of the Appellant's Tax Return for 1994-95. He pointed out that the hearing was the first point at which the basis of the Appellant's section 24(2) claim had been explained. At one stage the argument had been that there were no preconditions. He considered the terms of section 574(1). There was no dispute that the Appellant had subscribed for shares in a qualifying trading company, Gemforce, as required by section 574(1). The opening words of that sub-section made it clear that any relief was given in respect of an allowable loss (for capital gains tax purposes) on the disposal of shares in a qualifying trading company which an individual had subscribed for. There was no dispute that the Appellant had made a claim for relief under section 574 for 1994-95 within the time limit of two years from the end of that year of assessment. The words in section 574(1) required that there should be an allowable loss for capital gains tax purposes. It followed therefore that there must be both a loss and a disposal. The Revenue's case was that without a loss falling within the year of assessment in question, 1994-95, the claim for relief must fail.
- The first question was whether there was a disposal. There was no contention that the Appellant did not own the Gemforce shares at 5 April 1995. The only possible indication to the contrary was the entry in the schedule to the Appellant's Tax Return showing a disposal on 1 December 1994 for disposal proceeds of nil. Mr Cormack argued that this date was significant; it was the date on which IFSSI Ltd had gone into liquidation, and as far as he was aware, this had been Gemforce's only asset. If there had been no actual disposal of the Gemforce shares by way of sale or gift during the year to 5 April 1995, the only way there could have been a disposal would have been that a deemed disposal had occurred. This could only have arisen as a result of a section 24(2) claim. There was no dispute that the shares in Gemforce were of negligible value on 1 December 1994, although this was a matter for submission at another hearing to consider valuation matters. If shares became of negligible value, there could be no deemed disposal without a claim. He referred to the wording of section 24(2). This required the owner of an asset to make a claim to the effect that the value of that asset had become negligible. In other words, it was a claim which created the deemed disposal.
- The Appellant had now identified page 3 of the schedule to the 1994-95 Tax Return as the claim. Mr Cormack acknowledged that there was no form specified for the purposes of a section 24(2) claim, and that such a claim could be accepted so long as it was clear what the claim was. He considered the wording of the relevant page of the schedule. He asked what any reasonable Inspector of Taxes would make of that schedule. He considered that there was nothing to point the Inspector towards a negligible value claim. It would equally have been possible to assume that the shares had been disposed of by way of some form of gift, or that Gemforce had ceased to exist during the year. It would have required a leap of imagination to assume that the Appellant was making a section 24(2) claim.
- If it were to be found that page 3 of the schedule to the Appellant's Tax Return for 1994-95 did not amount to a section 24(2) claim, in Mr Cormack's submission it followed that there had been no valid claim under section 24(2) that the Gemforce shares had become of negligible value during 1994-95, and thus no deemed disposal of the Gemforce shares in the year to 5 April 1995.
- That page of the schedule showed a disposal date of 1 December 1994. If (which the Revenue denied) it were to be accepted as being a section 24(2) claim, it would be necessary to consider whether there was a date specified in the claim. (Mr Cormack referred to the wording of section 24(2) relating to the timing. As the version of the section applying for claims made before 6 April 1996 contained no reference to timing, this being dealt with by way of Revenue practice rather than on a statutory basis, I have considered his argument on the basis of that practice as set out in Extra-Statutory Concession D28.) He argued that no earlier time was specified in the document that the Appellant was contending to amount to a section 24(2) claim, so that the date of the deemed disposal would be the date of the claim, falling after 5 April 1995. If it were found that there was no valid claim under section 24(2) specifying a date within the tax year 1994-95, it followed that there was no disposal of the Gemforce shares during that year and that the Appellant's claim under section 574 must fail, and the Revenue submitted that the appeal must be dismissed without any need for consideration of the valuation of the Gemforce shares.
- It had to be established whether the entry on the relevant page of the schedule could be construed as a section 24(2) claim. To succeed, it would have to point unambiguously to what it was claiming. If it was a claim, how could the Revenue identify it as such, or investigate or refuse it? If there was no opportunity to enquire into it or refuse it, Mr Cormack argued that it was not a claim. He considered that the Revenue could not be expected to interpret it as a section 24(2) claim.
- If the entry did amount to a claim, the question was what happened then. Mr Cormack was not sure whether the Appellant accepted that the shares had to be valued at the date of the Appellant's acquisition. This would be a valuation issue. If there were something amounting to a section 24(2) claim, it would be necessary not only to show that the shares were of negligible value at the date of the claim; the shares must have become of negligible value. He cited Director v Inspector of Taxes SpC 161, reported at [1998] STC (SCD) 172. This showed that where shares had a market value of nil when they were acquired, they were not capable of "becoming" of negligible value pursuant to section 24(2). Thus on the assumption that there had been a claim, it would be necessary at a further hearing to decide whether the shares had become of negligible value or whether they had previously been of negligible value. If at that further hearing it were found that the latter had been the case, the section 24(2) claim would fail, and the section 574 claim must also fail. In advance of any such hearing, he asked for a finding as a matter of law that on the plain language of section 24(2), for a claim to succeed it was necessary for the shares to have had a value in excess of negligible value at some point in their ownership by the Appellant prior to the time of claim.
- If it were to be found that there had been a claim under section 24(2) creating a deemed disposal of the Gemforce shares in 1994-95, the Revenue's case was that any loss for capital gains tax purposes arising on such a deemed disposal should be computed by reference to the market value of the Appellant's shareholding under section 128(2) of the 1992 Act. This was on the basis that the issue of the shares to the Appellant by Gemforce amounted to a reorganisation of Gemforce's share capital within section 126(2)(a) of the 1992 Act, and that the consideration paid for the shares issued on 8 November 1994 was other than by way of a bargain made at arm's length. Mr Cormack considered the question whether that issue of the Gemforce shares had been one within section 126 of the 1992 Act. Previously the Appellant had held 2 out of 2 shares, then 250,000 out of 250,000. He submitted that shares had been allotted to the Appellant in proportion to his existing holding of shares in Gemforce. If this argument were accepted, he submitted that section 128(2) of the 1992 Act applied. This required any consideration otherwise than by way of a bargain made at arm's length to be disregarded to the extent that it exceeded the relevant increase in value. This was the amount by which the market value of the new holding immediately after the reorganisation exceeded the market value of the shares immediately before the reorganisation. He suggested that the valuation of the shares might be considered relevant also to the question of whether the issue of the shares was a bargain made at arm's length; if so, it would have to be reserved for the valuation hearing.
- Assuming findings that there had been a claim under section 24(2) and also that the shares had not been of negligible value on acquisition, the Revenue argument was that the shares were acquired by the Appellant other than by way of a bargain made at arm's length. Mr Cormack submitted that any allowable loss for capital gains tax purposes should be computed using the market value rule under section 17 of the 1992 Act, so that the Appellant's acquisition of the Gemforce shares should be deemed to be for a consideration equal to the open market value of those shares. He argued that section 17(2) did not apply, as the shares had not been acquired for a consideration lower than the market value of the shares. (If the contrary were to be argued on behalf of the Appellant, this would be a matter for the future valuation hearing.) He contended that following Harrison v Nairn Williamson Ltd [1978] STC 67, section 17 could still apply where there was an acquisition with no corresponding disposal. He asked for a finding that the shares had been acquired by the Appellant other than by way of a bargain at arm's length. The Appellant and Gemforce were connected persons as defined in section 286(2) of the 1992 Act. At all relevant times Gemforce was controlled by the Appellant. Under section 288 of the 1992 Act, "control" is to be construed in accordance with section 416 of the 1988 Act. A person is to be taken to have control of a company if he possesses the greater part of the share capital or the issued share capital of the company. The Appellant had controlled Gemforce, and had been its sole director and sole shareholder. All the shares issued on 8 November 1994 had been issued to the Appellant. The circumstances surrounding the issue of shares could be drawn from the Agreed Statement of Facts. The Appellant had been required to give a guarantee. Gemforce had had no money other than that paid to it for the share issue on 8 November 1994. Mr Cormack suggested that all these circumstances did not have the flavour of a bargain at arm's length. The Revenue submission was that the bargain struck between Gemforce and the Appellant was not struck at arm's length, if indeed it could be described as a bargain in any real sense. He questioned whether the expression could have any meaning in the context of a close company with one person being the sole director and shareholder, and the agreement being between the company and that person. He asked for a finding that the issue of shares was not a bargain made at arm's length, that therefore section 17 of the 1992 Act should apply, and that the market value should be ascertained to see whether there was any loss. Mr Cormack acknowledged that the valuation of the shares, or the value attributed to the shares by section 128(2) of the 1992 Act at the time of issue, were valuation matters.
- In summary, Mr Cormack asked for various findings. The first was that the Appellant had not made a claim under section 24(2), and in particular that the schedule attached to the Appellant's Tax Return for 1994-95 was not such a claim; if it did not amount to such a claim, the Appellant had not pointed to any other document which would be. Secondly, if it were to be found that there had been a claim, Mr Cormack asked for findings that it had specified no earlier date, and that the deemed disposal had occurred on the date of the claim, which had been accepted by the Appellant to be outwith 1994-95. On the basis of either of these findings in favour of the Revenue, the appeal failed. Thirdly, he asked for a finding (on the basis that there had been a claim) that the shares must have become of negligible value prior to the claim. He referred to the short period of time for which the shares had been held. For the purposes of this third finding, he asked for a finding that the question should be determined by ascertaining the market value of the shares on the date of issue. The next finding required was whether the issue of shares was a bargain made otherwise than at arm's length; if there were such a finding, the question of the valuation of the shares would have to be reserved to the further valuation hearing. In addition he asked for findings that the share issue amounted to a reorganisation and that this was a bargain made otherwise than at arm's length; such findings would in the same way require valuation matters to be considered at a separate hearing. In conclusion, the refusal of the section 574 claim should be upheld on the basis that there had been no disposal and no claim under section 24(2); in the alternative, there would have to be separate consideration of negligible value and open market value (if this were not negligible).
Reply for Appellant
- Mrs Fraser asked that what the Appellant had been said by the Revenue to have accepted should be disregarded. The Appellant's claim was to an amount of loss relief under section 574. The Appellant accepted that it was necessary to show that an allowable loss for capital gains purposes had been suffered. She submitted that on the facts the Appellant had made such a claim. There was clear notation on the relevant page of the schedule to the Appellant's Tax Return; it was clear that there had been a deemed or real disposal.
- If it were accepted that a claim had been made, the question was the amount of the loss. She submitted that the amount of loss asserted as value was the price paid; there was no question of the Appellant asserting any other value. On the question whether the bargain was at arm's length or not, the Appellant's contention was that the acquisition cost should be the price paid.
- On the argument relating to sections 126 and 128 of the 1992 Act, Mrs Fraser argued that this was not a case of the Appellant being allotted the shares "in respect of and in proportion to" his holding of shares in the company. Instead, the 224,998 shares had been issued to the Appellant to facilitate an injection of capital into Gemforce, so that it could pay for the commercial purchase of shares in IFSSI. Further, she submitted that the consideration of £224,998 paid for the shares was a fair commercial price, a bargain made at arm's length; this amount was paid to inject the capital into the company which was required to pay for IFSSI, the only asset owned by Gemforce. The sale of IFSSI by Ross Group PLC had clearly been on arm's length terms, having had to be approved by the latter's ordinary shareholders, as indicated in the circular dated 30 June 1994.
- On the Revenue's argument under section 17(1) of the 1992 Act, the Revenue assertion was that the Appellant had clearly on the facts acquired his Gemforce shares on 8 November 1994 in a bargain that was "otherwise than by way of a bargain at arm's length". The only evidence produced by the Revenue to support this proposition had been that Gemforce was a company solely owned and controlled by the Appellant, and therefore (as the Revenue argued) by virtue of this very fact, wholly incapable of striking any arm's length bargain with its own shareholder. Mrs Fraser submitted that this proposition was wholly misconceived and not supported by authority. On the contrary, it was patently the case in much of the tax legislation (and indeed in the Revenue leaflets) that the Revenue itself recognised that transactions between connected persons could be (and had to be) struck at arm's length prices, in order for anti-avoidance provisions not to be invoked. She cited as an example the transfer pricing legislation in sections 770-773 of the 1988 Act and the commentary in the Revenue's International Tax Handbook at paragraph 1501. This recognised the possibility of connected parties being able to achieve arm's length bargains, despite their status as connected parties. In any event, the issue of whether section 17(1) applied so as to deem the Appellant's acquisition cost of the Gemforce shares to be at market value, rather than at the price paid, could not be determined at the present hearing. This was because, even if the Revenue proved that the issue of the Gemforce shares to the Appellant on 8 November 1994 was "otherwise than by way of a bargain at arm's length", so that section 17(1) became relevant, the proviso in section 17(2) then had to be considered to ascertain whether section 17(1) could be disapplied. This could only be ascertained at the second, subsequent hearing to determine the value of the Appellant's Gemforce shares on 8 November 1994, because the second limb (b) of the proviso in section 17(2) referred to and relied on the "market value of the asset". Mrs Fraser submitted that for these reasons the Revenue had failed to establish that the provisions of sections 17 or 126-128 of the 1992 Act applied in the present case, and therefore the market value basis of valuation did not apply in computing the value (acquisition cost) of the Appellant's Gemforce shares at 8 November 1994.
- On the question of jurisdiction relating to estoppel, Mrs Fraser mentioned a Canadian case, and asked for permission to submit a copy of that decision subsequently to the hearing.
Application after the hearing
- On 30 July 2004 Mrs Fraser applied on behalf of the Appellant for directions under regulation 4(2) of the Special Commissioners' Regulations that a separate hearing should be held as soon as possible so as to hear full submissions in order to determine the issue as to whether the Tribunal had jurisdiction to hear the defence of estoppel against the Revenue raised by the Appellant, and the merits of the Appellant's defence on the ground of estoppel, if that issue on jurisdiction were first decided in the affirmative. She requested that the Notice of Application be referred to the Presiding Special Commissioner, if appropriate. I considered the terms of Mrs Fraser's application, and recorded my own views on the issue. I then arranged for the application and the note of my views to be submitted to the Presiding Special Commissioner for him to consider and express his own view. The result of this process was that we agreed that the application would not be entertained, and that the reasons for this would be set out in this decision. (No representations relating to this issue were received from the Revenue.) Following notification of this reaction to the application, Mrs Fraser submitted two decisions made by other (non-tax) tribunals relating to the question of estoppel; I refer to these below. Although Mrs Fraser had previously mentioned her wish to submit a Canadian case concerning the same subject, she did not do so, and I have assumed that she relies on these two decisions made in the United Kingdom rather than seeking to bring in an authority relating to a legal system that may be different in material respects from that applying to tribunals in the United Kingdom.
Discussion and conclusions
- I consider first the issues raised by the parties in relation to the legislation, including the findings that Mr Cormack asked me to make, and deal with the question of estoppel afterwards.
- The first issue, given the acceptance that there was a proper and timely claim under section 574, is whether on the proper construction of that section, it was necessary as a condition precedent to any claim under the section that a claim had first been made by the claimant under section 24(2) of the 1992 Act. The section refers to "an allowable loss (for capital gains tax purposes)". In order to establish an allowable loss, I agree with Mr Cormack that there must either be a disposal or a deemed disposal. In the absence of anything amounting to an actual disposal during 1994-95, the Appellant needs to show a deemed disposal in order to crystallise the loss incurred. In the circumstances, the only way of doing so is by virtue of a section 24(2) claim. I therefore do not accept Mrs Fraser's initial argument that a section 24(2) claim was not required as a condition precedent to the section 574 claim.
- The second issue is whether on the facts the Appellant did make the necessary claim under section 24(2). Page 3 of the schedule to the Appellant's Tax Return for 1994-95 showed the disposal of 24,998 shares in Gemforce for disposal proceeds of [£]0. (It also showed the loss as enhanced by indexation allowance of £1,125 for the period from 8 November 1994 to 1 December 1994; this appears to have been ignored in the correspondence. Although the use of indexation allowance to enhance a loss was precluded with effect for disposals after 29 November 1993, transitional relief for indexation losses remained available for the rest of 1993-94 and the whole of 1994-95, with a £10,000 limit. However, there is a question whether the necessary conditions for a claim to transitional relief for this indexation loss were met.) Nowhere on page 3 of the schedule is there any indication that this disposal is a deemed rather than an actual disposal, or that this is a claim that the value of the Gemforce shares had become negligible. As 1994-95 preceded the self-assessment system, it was necessary for the inspector to be satisfied that the value of the asset had become negligible. I agree with Mr Cormack's submission that in order for the inspector to consider this question, it would have been necessary to direct his attention to it, and for the entry on page 3 of the schedule to point unambiguously to what the Appellant was claiming. It gave the inspector no opportunity to investigate or refuse what the Appellant was arguing amounted to a claim. I do not consider that what is shown on that page amounted to a claim under section 24(2), and there is nothing else in that Tax Return that can be construed as such a claim by the Appellant. In the absence of a valid section 24(2) claim, there is no allowable loss for the purposes of the section 574 claim, which therefore fails.
- My decision on the second issue is enough to determine the appeal. However, I consider the other issues in case my view as to the absence of a section 24(2) claim proves incorrect. The third issue is whether, if the entry on page 3 of the schedule did amount to a section 24(2) claim, the Appellant specified a date on which the Gemforce shares became of negligible value. The entry shows a disposal on 1 December 1994, without specifying the details of that disposal, and in particular without specifying the reason for the disposal taking place at nil value. If, despite the view that I have already expressed, the entry could be construed as a negligible value claim, it would be reasonable to assume that the disposal date would be the date specified for the purposes of such a claim. On that basis, the Appellant would have met the relevant timing condition as set out in Extra-Statutory Concession D18, the date falling within 1994-95.
- In case my conclusion on the timing in relation to this alternative hypothesis is incorrect, it is necessary to decide on the Appellant's further contention that the negligible value claim should instead be regarded as made within 1995-96 and was therefore made in time so as to be treated as a loss made within 1995-96. The difficulty for the Appellant is that the section 574 claim, although worded somewhat imprecisely, was a claim that the loss incurred in respect of the Gemforce shares be offset against total income for the year ended 5 April 1995, with the balance to be offset against income for the following year. This was therefore a claim to offset a loss incurred in 1994-95. If the effect of the section 24(2) claim being treated as made in 1995-96 was that the loss was incurred in that year rather than in 1994-95, there was no allowable loss in 1994-95 to found a section 574 claim in respect of that year. Nor does the wording of the section 574 claim letter written by the Appellant's accountants read as if it is intended to amount to a section 574 claim in respect of 1995-96; the reference to the balance being offset against total income for the latter year is inconsistent with the full claim being for that year. I therefore accept Mr Cormack's contention that without a loss falling within the year of assessment in question, 1994-95, the claim for section 574 relief must fail.
- The fourth issue is whether as a matter of law the shares in Gemforce must have become of negligible value before the date of the claim. I accept that this is so, in the light of the comments made by the Special Commissioner in the case of Director v Inspector of Taxes, at the penultimate paragraph. This follows the logic of section 24(2). For this purpose, I find as requested by Mr Cormack that the question should be determined by ascertaining the market value of the shares on the date of issue.
- The fifth issue is whether the issue of shares to the Appellant was a bargain otherwise than at arm's length. The normal rules contained in section 18 of the 1992 Act relating to acquisitions and disposals between connected persons cannot apply in the absence of a disposal; Gemforce made no disposal when issuing the shares. Under section 17(1) of the 1992 Act, the Appellant's acquisition of the Gemforce shares is to be deemed to have been at market value if such acquisition was otherwise than by way of a bargain made at arm's length. Mr Cormack argued that Section 17(2) did not displace this, as although there was no corresponding disposal of the shares, the consideration given for the shares was not lower than the market value of the shares. This begs a valuation question, on which I am not in a position to comment, other than to record the absence of any argument from either party that the consideration given for the Gemforce shares was of an amount or value lower than the value of those shares. Given the absence of any such argument, I shall assume that section 17(1) does apply; as contended by Mrs Fraser, in the event of any subsequent valuation hearing, it would be necessary to value the Gemforce shares at the time of issue to confirm whether this assumption is correct. The test to determine whether or not the bargain was at arm's length has to consider the close association between the Appellant and Gemforce as part of the commercial context, but as section 18 cannot apply, it is not appropriate simply to assume by reference to such close association that the bargain could not have been at arm's length. Mr Cormack went so far in his supplementary argument as to question whether there could be a "bargain" between a sole director/shareholder and his close company. This overstates the position. Generally, there is no need to consider this question, given the statutory assumption contained in section 18 of the 1992 Act. In the limited context of a share issue, the identity of the person acquiring the shares and that person's relationship with the issuing company are not automatic indicators of the absence of arm's length terms. At most, they are additional factors to be taken into account in looking at the general commercial context of the issue. The other factors in the present case relate to the nature of the transaction presented to the shareholders in Ross Group PLC in the circular dated 30 June 1994, the commitment to sell In-Flight Supply Services (International) Ltd to Gemforce at the price of £225,000 having been made under the agreement dated 27 June 1994. This transaction was completed on 27 July 1994. There is nothing in the evidence to explain why the amount of £225,000 was not paid by Gemforce to Ross Group PLC until 8 November 1994. It would be reasonable to assume that the bargain between Ross Group PLC and Gemforce, requiring the approval of the ordinary shareholders in Ross, was at arm's length at the time of the circular. This was also likely to have been the case both on 27 June 1994 and on 27 July 1994. There is thus a general background of some commerciality to the transactions leading to the issue of the Gemforce shares. Bearing in mind that background, in order to ascertain whether that issue to the Appellant on 8 November 1994 was a bargain made at arm's length, it would be necessary to consider the actual market value of the shares in Gemforce immediately before the share issue on 8 November 1994, and to consider the effect on the value of the Gemforce shares of the additional subscription of £224,998. In other words, whether the bargain was one made at arm's length can only be determined by comparing the market value of the new shares in Gemforce with the subscription price paid. This means that the question of arm's length becomes to a large extent a valuation issue, which would have to be reserved to a separate hearing if this were appropriate. The valuation of the Gemforce shares as at the time of the share issue would presumably have to take into account the valuation of the shares in its subsidiary, both at the time of that share issue and at the (earlier) time of Gemforce's acquisition of that subsidiary, but again, this is ultimately a question to be reserved for the valuation hearing.
- The sixth issue is whether the issue of shares to the Appellant amounted to a reorganisation. The (non-exclusive) definition is contained in section 126(2) of the 1992 Act. Sub-section 2(a) refers to persons being
" . . . allotted shares in . . . the company in respect of and in proportion to . . . their holdings of shares in the company . . . "
I find that the issue of shares in Gemforce to the Appellant did not fall within this description. Although it has not specifically been proved in the evidence put before me that the Appellant actually expended the £224,998 in acquiring the shares, the totality of the evidence is such as to suggest that he did so. The commercial terms of the transaction as set out in the circular to Ross Group PLC shareholders required Gemforce to be funded to the extent necessary to pay for the purchase of the shares in In-Flight Supply Services (International) Ltd. The shares in Gemforce were issued to the Appellant as the person willing to provide the funding to Gemforce, rather than being offered to the Appellant pro rata to his existing shareholding. This is clear from the sheer number of additional shares issued. It would be unusual for a rights issue to involve such a large number of new shares in proportion to the existing holding; this suggests that if there is some alternative explanation for the transaction, it is unlikely to constitute a reorganisation within section 126(2). I consider that the share issue is explained by the commercial circumstances as put to the Ross Group PLC ordinary shareholders.
- The seventh issue is the question of estoppel. The two decisions submitted by Mrs Fraser after the hearing were a decision of the Social Security Commissioner, number CIS 15655/96, and a decision of the Registered Homes Tribunal, Dr Ezzat Abu Moustafa & Dr Leila Abouzekry v London Borough of Ealing (decision number 153). I comment on these decisions after considering authorities relating more specifically to the position of this tribunal.
- Assuming for the present that the Appellant would be in a position to rely on the arguments put by Mrs Fraser concerning estoppel, the question arises on what basis relief could be sought from this tribunal. I have reviewed both the primary and secondary legislation relating to the Special Commissioners, and can see nothing in that legislation giving authority for such matters to be considered. (It was for this reason that I referred at the hearing to the question of judicial review.) This tribunal being a creature of statute, it cannot of its own volition extend its jurisdiction to matters falling outside its own competence and within that of the courts.
- There is long-standing authority for the proposition in relation to direct tax matters that there is no estoppel against the Crown; see Rowlatt J in Liberty & Co, Ltd v CIR (1924) 12 TC 630 at 639, and Finlay J in Williams v Trustees of WW Grundy (dec'd) (1933) 18 TC 271 at 278-279:
" . . . nothing is better settled than the principle that there is no estoppel as against the Crown."
(Finlay J made comments to similar effect in Brodie's Trustees v CIR (1933) 17 TC 432 at 441.)
This statement needs some qualification; in Halsbury's Laws, Constitutional Law and Human Rights, 5, The Executive at para 385, footnote 1 states:
"The doctrine of legitimate expectation has mitigated the severity of the rule that estoppel cannot bind the Crown: see generally Wade and Bradley Constitutional and Administrative Law (11th Edn, 1993) pp 700-703: de Smith and Brazier Constitutional and Administrative Law (7th Edn, 1994) pp 438-440."
However, even if the doctrine of legitimate expectation could be raised, I do not think that the tribunal has jurisdiction to consider it, for the reasons given above. In IRC v Preston [1985] STC 282 at 294, Lord Templeman referred to the possibility of the Revenue being guilty of "unfairness" amounting to an abuse of power if by taking action under the relevant legislation their conduct would, in the case of an authority other than Crown authority, entitle the taxpayer to an injunction or damages based on breach of contract or estoppel by representation. He said:
"In principle I see no reason why the taxpayer should not be entitled to judicial review of a decision taken by the commissioners if that decision is unfair to the taxpayer because the conduct of the commissioners is equivalent to a breach of contract or a breach of representation. Such a decision fell within the ambit of an abuse of power for which in the present case judicial review is the sole remedy and an appropriate remedy . . . In the present case, however, I consider that the appellant is entitled to relief by way of judicial review for 'unfairness' amounting to abuse of power if the commissioners have been guilty of conduct equivalent to a breach of contract or breach of representations on their part."
Thus any attempt to rely on estoppel as against the Crown is clearly prevented by established authorities, and if it were appropriate for the Appellant to raise the question of legitimate expectation, this could only be done through the courts, rather than through this tribunal. Given the clear authority for these propositions, I do not consider it appropriate to deal in any detail with the two additional decisions submitted by Mrs Fraser, other than to question whether they amounted to claims of estoppel as against the Crown; the references to estoppel appear to be in different contexts.
- For the sake of completeness, I do not consider on the facts of the present case that the Revenue made any representations on which the Appellant and/or his advisers could be said to have relied; as a result, the necessary conditions for what would amount to estoppel in a case not involving the Crown, or a claim based on legitimate expectation as against a Crown authority, are not met.
- On the basis of the decision that I have reached on the estoppel point, the need for a separate hearing to consider this issue does not arise.
- Certain matters arise for comment. The first relates to the use of wrong versions of the legislation. In relation to the hearing, the problem was the use by the Revenue of the wrong version of section 24(2) of the 1992 Act. This led Mr Cormack to base his argument on the later version of the section, rather than on Extra-Statutory Concession D28. It is essential for the purposes of a hearing relating to a particular year of assessment that the version of the legislation cited is that applicable for that year. If extracts from the legislation are to be included in the authorities placed before the tribunal, the parties must take care to ensure that only the appropriate versions, omitting details of later amendments applying for later years, are included. Perhaps a similar difficulty may have arisen with the Appellant's accountants. In claiming on the Appellant's behalf to carry the balance of section 574 relief forward into following year, they were not acting consistently with the wording of the section as it applied for 1994-95; as should be apparent from the section as cited above, in respect of 1994-95 any balance of relief had to be set against income for the year preceding that in which the allowable loss arose. It is not clear on what basis they made the claim to carry the balance forward to the following year; it would not have been possible to use the relief against income for 1995-96. They did not claim any offset against the Appellant's income for 1993-94, as would have been possible on the basis of section 574 as it applied for 1994-95.
- The second comment relates to matters of procedure. Mr Cormack's criticism of Mrs Fraser's skeleton argument was that it did not, or did not sufficiently, set out the substantive arguments being raised on the Appellant's behalf, being very largely a commentary on the Revenue's arguments as raised in their skeleton argument. I consider that Mr Cormack's criticism was justified. The other difficulty was caused by the late submission of the final version of the Appellant's skeleton argument. Among other changes from the earlier version submitted to the tribunal and the Revenue, this contained the estoppel argument. It is necessary to consider the purpose of the tribunal making a direction for the exchange of skeleton arguments in advance of the hearing, as had been directed in the present case. This is to ensure that each party has the opportunity to consider the arguments to be raised by the other, so that as far as possible "surprise" arguments are avoided. The risk arising from such unexpected arguments being raised is that proceedings before the tribunal may be prolonged or even delayed as a result of requests for adjournments. To prepare properly for a hearing, the parties must ensure that where there is a direction to exchange skeleton arguments in advance, the versions so exchanged contain all the arguments to be raised by each party at the hearing. If a party then wishes to introduce a new argument at the hearing, this should be a matter of seeking leave from the tribunal, which can consider whether this may necessitate an adjournment.
- On the basis of the decision that I have reached on the second issue, the appeal fails and is therefore dismissed. There is accordingly no need for the question of the valuation of the Gemforce shares to be considered at a separate hearing.
JOHN CLARK
SPECIAL COMMISSIONER
Release Date: 8 September 2004
SC/3073/2003
