Article on Special Commissioners and VAT Tribunals by Mike Thexton,a partner of Thexton Training, which was published in the October 2002 issue of Tax Adviser.
I have an idea for a new business venture. Called TaxAppealsBetting.com; it will offer punters the facility to gamble on a wide variety of outcomes after a decision of the Special Commissioners or VAT Tribunal – whether an appeal will be successful, how far it will go, what the score will be in the House of Lords and so on.
Of course the educated clientele will be able to review the arguments, but will also study the form of the runners and riders – how frequently the decisions of particular Commissioners are upheld or overturned, who is representing the Crown and the taxpayer. It will perhaps be a little more protracted than horse-racing, but contains fascinating possibilities. The major problem is that those who are likely to be interested are either too cautious to gamble, or too clever to lose, and a bookie won’t make money out of either sort.
Nevertheless, I might have made a profit on Jerome v Kelly (HMIT) Ch D  BTC 290. The form of the Special Commissioner was good – the distinguished and experienced Dr Brice – and the provision of the law seemed clear and well-known – the rule relating to disposals under contract in what is now Taxes and Chargeable Gains Act 1992 (TCGA 1992), s. 28. What is more, if the decision was wrong the taxpayer seemed to get away without a tax liability in surprising circumstances.
So I do not think I was alone in my surprise that the taxpayer won his appeal before Mr Justice Park. There was clearly more to this than had met the eye. Fortunately, the High Court judgment sets out the arguments and the reasons for the decision with exceptional clarity, including dealing with a number of objections, and now seems to me to be the obvious result. This means that I may lose my shirt on the findings of the Appeal Court ...
In outlining the problem the facts need simplifying considerably, because they were complicated. The full judgment also simplifies the problem in order to deal with the fundamental principle of the case, but it builds back all the complexities to show that none of them affect that fundamental principle. I will stick to the basic point by (for example) treating joint owners as a ‘single taxpayer’, and a disposal completed in several tranches as completed at one go. These simplifications will save many words, but do not change the concepts involved.
In this simpler version, a taxpayer owned some land. During the tax year 1987/88, he signed a contract to sell this land, for completion in a later year. The contract was accepted by both taxpayer and the Inland Revenue as being unconditional. In 1988/89, the taxpayer created a foreign resident trust, and in 1989/90, assigned the land (subject to the uncompleted sale contract) to the trust. In 1990/91 the contract was completed, the land sold, and the proceeds paid into the foreign trust.
The Revenue assessed the taxpayer on the final disposal, charging it to capital gains tax (CGT) in the tax year 1987/88. This was based on what is now Taxes and Chargeable Gains Act 1992, s. 28, which provides that:
‘... where an asset is disposed of and acquired under a contract the time at which the disposal and acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed or transferred)’.
This must be one of the most familiar and well-understood provisions in the whole of CGT: if you sign an unconditional contract, you have a disposal immediately, and what happens afterwards makes little difference.
The taxpayer argued that he had not made the disposal – the trust had done so. He should therefore not be assessed. The Special Commissioner rejected this argument, holding that the clear effect of s. 28 was that the person who signed the disposal contract made the disposal at that time.
This seemed a very reasonable conclusion. After all, if it was wrong, the disposal of the land was made by a foreign trust, and that would not be charged to CGT at all (as the arrangements predated the tightening of the foreign trust rules in 1991). It would appear to be possible to make planning arrangements between contract and completion to reallocate gains. If the trust was the person who made the disposal, the law would say that it had done so in a year before it existed. None of these things could be right.
The High Court judgment
Mr Justice Park’s decision is unusual in that after setting out the facts and the law, he deals with the problem by considering a number of hypothetical situations, applying the law to each of them according to the Revenue’s interpretation and the taxpayer’s. He makes it clear from the outset that he thinks that the Revenue’s interpretation creates too many anomalies and absurdities, and that the taxpayer’s interpretation should be favoured. But, by dealing with a succession of ‘what if” situations, he makes the reasoning very clear and the extent of the consequences easy to see. Often, judges restrict themselves very tightly to the precise point at issue, and it is then much harder to say what would happen if the facts were slightly different.
The main thrust of the taxpayer’s argument is that s. 28 only prescribes the time at which a disposal is made once there is a disposal which is to be charged to tax. The disposal is actually made, in law, on completion of the contract. Until that point, the vendor still owns and has the use of the property, subject to the rights of the purchaser under the contract. It is only years of CGT experience that make it easy to believe that the signing of the contract ‘is the disposal’. Furthermore, until the contract is completed, there is no disposal – if one party defaults and the contract is never completed, there should not be an assessment to CGT just because a piece of paper was signed.
So, on completion, there is a disposal; the law then says that it must be charged to tax at a particular time. That time is the date of the contract for sale, provided the contract is unconditional. The Revenue’s argument adds to this the idea that: 'the person who owned the property at the time of the contract is the person who has made the disposal’; Mr Park rejects this as unnecessary and likely to create more difficulties. He agrees with the taxpayer that the person who makes the disposal is the person who completes it.
Aside: an analogy
At about this point it occurred to me that there is a very similar rule and problem with value added tax (VAT). The ‘tax point rules’ for VAT are quite similar to s. 28, in that they deem a supply to have been made at various particular times, which may differ from the actual making of the supply. In particular, if a payment is made for the supply or a tax invoice is raised before the supply is made, these events fix the tax point. But it is settled and accepted law that they do not mean anything at all if the supply never takes place. Once the supply has taken place the timing rules are important; but if you pay in advance for goods, and hold a tax invoice showing input tax, you are not entitled to input tax only on the strength of payment and invoice if the goods never arrive. The tax invoice is not the supply for VAT, and the contract is not the disposal for CGT.
This raises the various difficulties that were outlined earlier. Mr Park deals with each of them. The main problem seems to be the ability to make the gain disappear by interposing a foreign trust between contract and completion. But there is a disposal to the foreign trust, effectively contracted and completed in 1989/90, of ‘the property subject to the disposal contract’. Mr Park states that he has not been asked to consider an assessment based on that disposal, and he is unaware whether the Revenue raised such an assessment or not. The taxpayer’s counsel: ‘commented that he imagined that the Revenue would have protected their position by making precautionary assessments’ – this may have been mischievous, knowing that the Revenue should have done so, but had not. In keeping with the unusual nature of this decision, Mr Park states that he believes that the taxpayer did make a taxable disposal in 1989/90 (so giving a decision on something that was not before the court, perhaps to save time by avoiding a further dispute).
The hypothetical situations explain the point well. The ‘facts’ of the hypothesis are set out below.
The taxpayer (A) owns an asset with base cost 100.
In year 1, A signs a contract to sell the asset to B for 1,000, for completion in year 3.
In year 2, A assigns the asset to C for consideration of 800, subject to the sale contract to B.
In year 3, C completes the sale contract made by A, delivers the asset and receives payment of 1,000.
Mr Park believes that his, and the taxpayer’s, analysis results in A being assessed on a gain of 700 in year 2 – the disposal actually made by A, and the consideration actually received by A, being charged to tax on A. C would then be assessed on a gain of 200, in year 1. This is the gain actually made by C on the disposal actually made by C, and C is then troubled by the legal fiction inherent in any deeming provision, in that C is charged to tax for a year before C owned the asset.
The Revenue’s argument would tax A on a gain of 900 in year 1 and it is not clear what the consequence would be for C. It is not clear what C has acquired or disposed of under the Revenue’s analysis; it would certainly seem unfair to charge C on a further gain given that the whole gain has already been assessed on A.
The conclusion does not differ if the disposal from A to C is a gift of the asset subject to the contract (as in the present case). There is a further argument to be had about the market value of the asset at that time so that the split of the total gain between A and C can be properly calculated – but the timing and nature of the disposals, and the identity of the parties, should not be affected.
The most potent problem with the taxpayer’s analysis is dealt with briefly by Mr Park in para. 28 of his judgment. It is only partly relevant to the case in point, so it is not so crucial for him to deal with it in detail. It is that C might not exist in year 1, and could therefore not be assessed for that year. The judgment refers to the possibility that C could be a company that is not incorporated until later, but it could also be an unborn child, or – as in the present case – a trust which has not yet been established. It is not crucial to this case because the trust is foreign, and therefore not assessable on the gain at all.
Mr Park suggests that it might be appropriate to charge the company (or, in my alternative situations, the child or the trust) in the first year in which it does exist – the disposal is ‘taken back’ by the deeming provision of s. 28, and cannot be taken further back than incorporation (or birth, or creation of the settlement). But this is not part of the main decision, and it cannot be relied on in future. Mr Park simply says that he does not think that this creates as many difficulties as the Revenue’s argument contains.
This case is a useful reminder that looking at a rule too often can make you forget what it actually means. The contract will fix the time of disposal, but it is not the disposal itself and it does not determine the person who makes it. On the other hand, it does not ‘open the floodgates’ for similar avoidance schemes (if the avoidance worked in this case) – there ought to be a CGT charge on the disposal of the asset subject to the sale contract, and this should prevent much loss of tax.
A final question: suppose you sign a contract to sell an asset for £1m, and accept a deposit of £50,000? The purchaser defaults, so you end up keeping the asset and the £50,000. What is the result for CGT? On the Revenue’s analysis, presumably there ought to be a chargeable gain on signing the contract with some relief under TCGA 1992, s. 48 for consideration not received. But this is wholly unrealistic – there is no disposal at all. The status of the £50,000 is probably covered by the case of Zim Properties Ltd v Proctor,  BTC 42 and Extra Statutory Concession D33, Capital Gains Tax on Compensation and Damages - Compensation and Damages, but it is certainly not consideration for a disposal of the asset itself.
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October 2002 by