Tribunal concludes that capital gains tax legislation is compliant with Human Rights and EU law
In William Reeves v HMRC [2017] UKFTT 192 (TC), the First-tier Tribunal (FTT) has held that section 167 Taxation of Chargeable Gains Act 1992 (TCGA) is compliant with the European Convention on Human Rights (ECHR) and EU law.
BackgroundWilliam Reeves (the Appellant) a non-UK resident taxpayer, appealed against HMRC's disallowance of his claim for holdover relief from capital gains tax under section 165, TCGA.
The Appellant had disposed of his interest in a UK-based business by transferring it by way of gift to a newly-formed UK incorporated company (NewCo) of which he was the sole shareholder and director. HMRC disallowed the Appellant's claim for holdover relief on the basis that it was precluded by section 167, TCGA (which covered gifts to foreign-controlled companies) because the Appellant's wife was a non-UK resident and, as an "associate" of his, could be deemed to "control" NewCo.
It was agreed that HMRC's decision was correct on a literal interpretation of section 167(2) because although NewCo was controlled by the Appellant, section 416(6), Income and Corporation Taxes Act 1988 (ICTA)1, attributed control of NewCo to his non-resident wife and children.
The Appellant argued that:
(1) The purpose of section 167 was to deny holdover relief for a gift that would take a business asset indirectly outside the charge to capital gains tax because, although the company to which the gift was made was resident in the UK, it was controlled by a non-UK resident person who could dispose of the asset free from capital gains tax. Section 288, TCGA, provided that "control" was to be construed in accordance with section 416, ICTA "unless the context otherwise require[d]", and the context of the case did "otherwise require". Therefore, section 416 should be construed omitting subsection (6), which concerned fictional "control" of a company, and was in contrast to section 167, which concerned "real" control.
(2) The effect of section 416(6) on section 167(2) had been overlooked by Parliament, so that, even if the context did not otherwise require "control" in section 167(2) to be construed omitting section 416(6), its inclusion was a clear drafting error that should be corrected.
(3) By precluding holdover relief, section 167(2) breached the Appellant's rights under ECHR, Protocol 1, Article 1 and Article 14. However wide the margin of appreciation, it would be just as irrational to deny him holdover relief by treating his wife as having control of NewCo as it would be to deny relief by treating his children as having control. He had been denied holdover relief because he had non-UK resident relatives, whereas, if he did not have a wife or children, or did not have a non-UK resident wife or children, he would be entitled to relief. Such discrimination could not be justified.
(4) Section 167(2) restricted the free movement of capital, contrary to the Treaty on the Functioning of the European Union (TFEU), Article 63, because it discriminated against non-UK resident transferors, who were more likely to have non-UK resident relatives.
FTT's decision
The FTT, in dismissing the appeal, held that:
(1) Given that anti-avoidance provisions sometimes have a greater scope than is strictly required, with possible unforeseen and unwelcome consequences, it was not possible to conclude that Parliament necessarily intended control for the purposes of section 167(2) to refer to "real" as opposed to "fictional" control. Accordingly, section 416(6) could not be disapplied, with the result that holdover relief was precluded by section 167(2).
(2) Before a court could correct a statutory drafting error, it had to be sure of:
(a) the intended purpose of the provision in question;
(b) the fact that, by inadvertence, Parliament had failed to give effect to that purpose; and
(c) the substance of the provision that Parliament would have made.
Although it was likely that Parliament had not considered the effect of importing the definition of "control" in section 416(6) into section 167, the FTT was not sure that that was the case. Accordingly, it was not possible to correct the legislation in the way the Appellant sought.
(3) The FTT had some sympathy with the Appellant's argument that it was irrational to deny him relief because his wife and children were treated under section 167, by virtue of section 416(6), as having control of NewCo. However, given the high hurdle for those alleging infringement of Article 1, and the wide margin of appreciation accorded to the state, as the Appellant had had an effective means of challenging it, the FTT was unable to conclude that section 167 was devoid of reasonable foundation amounting to a breach of his rights. The FTT was of the view that the Appellant had not been treated differently to any other person with a non-UK resident wife and children and therefore had not been subject to any discrimination. The Appellant had not suffered any difference in treatment and had been taxed in the same way as a UK resident with a non-resident wife and children.
Comment
This was an unusual case in that it was HMRC who, on this occasion, relied on a literal interpretation of the legislation under consideration. It would appear that when such an interpretation leads to the result desired by HMRC it is happy to urge the FTT to adopt such an interpretation but when a literal interpretation does not lead to the desired result, often in the context of perceived tax planning arrangements which HMRC does not approve of, it will urge the FTT and courts to adopt a purposive interpretation of the relevant statutory provisions. Some consistency from HMRC in this regard would be welcome.
A copy of the decision can be found here.
________________________________________1. Rewritten to Corporation Tax Act 2010, sections 451(1), (4)-(6) and 1069(3).