Barker and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 October 2011 |
| Neutral Citation | [2011] UKFTT 645 (TC) |
| Date | 05 October 2011 |
| Court | First Tier Tribunal (Tax Chamber) |
[2011] UKFTT 645 (TC)
Judge Malachy Cornwell-Kelly (Chairman); Ms Sheila Wong Chong FRICS
Mr Kevin Prosser QC and Ms Laura Poots instructed by Baker Tilly for the Appellants
Mr Michael Gibbon QC instructed by the Solicitor and General Counsel of the Respondents
Capital gains tax - share valuation - shares acquired by taxpayers had become of negligible value - taxpayers' appeals allowed - Taxation of Chargeable Gains Act 1992, Taxation of Chargeable Gains Act 1992 section 24 subsec-or-para 2s. 24(2)
The First-tier Tribunal found that the shareholdings of the taxpayers would in all probability have been unsaleable at 5 April 2001 in the open market in a sale by private treaty at arm's length and their value was therefore negligible, within the meaning of that term in the Taxation of Chargeable Gains Act 1992, s. 24(2).
The three taxpayers were shareholders in a company which became a public company (InterX) and raised new capital of some £54m at £34 per share on the stock market, issuing listing particulars describing its new course of development in software and its proposed acquisitions for that purpose. The three appellants received some £10m each for the disposal of part of their shareholdings at £34 per share.
Some £20m of the money raised had been earmarked for an acquisition which did not go ahead because the dotcom bubble burst in March 2000. A new company (Diligenti) was formed in June 2000 to pursue software opportunities, which InterX agreed to fund with £4m of equity and £16m by way of loan. The taxpayers undertook informally to InterX that they would supply further capital to Diligenti, if needed. It was understood that if further funds were invested by the taxpayers InterX would be entitled to the repayment of an equivalent amount of its own debt. The agreement under which InterX provided funding to Diligenti contained such a "pull through" provision in respect of any third party funding. Diligenti made a number of acquisitions but they were overall loss-making. In December 2000, each of the appellants subscribed for 11,000 ordinary shares of £0.01 at par, with a premium of £303.0203 per share, in Diligenti; the total cost to each person was thus £3,333,333 or £10,000,000 between the three of them. The various businesses acquired by Diligenti were never integrated, either financially or technologically, and its financial reporting was unreliable. By the beginning of 2002 it had run out of money and entered a company voluntary arrangement.
The taxpayers claimed that their shares in Diligenti had, by 5 April 2001, become of negligible value under s. 24(2) of the Taxation of Chargeable Gains Act 1992.
Whether the taxpayers' shares in Diligenti had, by 5 April 2001, become of negligible value under s. 24(2) of the Taxation of Chargeable Gains Act 1992.
The First-tier Tribunal (Judge Malachy Cornwell-Kelly and Sheila Wong Chong) allowed the appeals.
Section 24 should in principle be read as a whole, and it was not appropriate to interpret each subsection. Section 24 was intended to deal with a group of very similar though not identical situations in which assets effectively ceased to exist.
It made no sense to speak of an asset which had become of negligible value as having a market value. The very fact that it had no market value was why it was said to be of negligible value; if the asset had a market value, then its value could not be negligible. That it might nonetheless have a subjective value to its owner was beside the point.
The test of eligibility for a claim under s. 24(2) was therefore whether the asset had a market value. The draftsman had no need to specify whether the word "value" in the phrase "negligible value" meant "market value" - or some other type of value - because the reference was to a situation in which there was no objective value. It was accepted that "negligible value" meant "worth next to nothing".
It followed that the criteria in s. 272 and 273 were applicable for the purpose of ascertaining whether a claim fell within s. 24(2) or whether it failed in limine.
Bearing in mind the possibility admitted by subs. (2)(b) of making negligible value claims two years in arrear, it was apparent that information relevant to the earlier time which was discovered after that date could be taken into account, but only if it was in fact available at the relevant time and the prospective purchaser would reasonably have requested it. Accounts not in existence at the relevant time were not to be treated as having been created at that time, even if they came into existence subsequently and contained information available at the time (Marks v R & C Commrs [2011] UKFTT 221 (TC); [2011] TC 01086 considered).
Since the issue was whether the asset in question had a market value or not, the likely costs of disposal had to be taken into account in the usual way in order to determine whether there was a market value. The fact that s. 38(4) required no account to be taken of expenditure incidental to the deemed sale and re-acquisition was irrelevant, since that notional transaction took place after determination of the prior question of whether the asset was of negligible value or not.
A valuable summary of the characteristics of the market to be hypothesised was given in the inheritance tax case of IR Commrs v Gray[1994] BTC 8034.
The range of potential purchasers of shares in Diligenti in April 2001 consisted of two groups of persons: group one being high net worth individuals interested in a relatively speculative investment in the technology sector; and group two being the three taxpayers, Diligenti's senior executives and InterX. They were the only persons likely to be willing to consider purchasing with a low level of due diligence.
The clear probability was that the blocking effect on new funding of InterX's repayment rights under the "pull through"provision would have reduced the population of willing and interested buyers in group one as at 5 April 2001 to nil.
It was also clear that InterX had no desire to invest more in Diligenti. On the balance of probabilities the company's senior executives and the taxpayers would not have been purchasers either.
The taxpayers' shareholdings would have been unsaleable at 5 April 2001 in the open market. Their value therefore was, within the sense of that term as used in the statute, negligible.
1.These are three joined appeals against closure notices dated 26, 28 & 29 May 2009 refusing claims that shares acquired by the taxpayers in a company called Diligenti Limited on 19 December 2000 had, by 5 April 2001, become of negligible value. The claims were made under Taxation of Chargeable Gains Act 1992 section 24 subsec-or-para 2section 24(2) of the Taxation of Chargeable Gains Act 1992. The issue of fact in the appeal is whether the shares had indeed become of negligible value by that date, and the issue of law is what is meant by the expression "negligible value" in section 24(2) - a matter on which there is only one direct authority, and only at first instance.
2.Each holding was of 11,000 ordinary shares of one penny, which were subscribed at par with a premium of £303.0203 per share, so that each taxpayer paid a total of £3,333,333 for his shares. The appeals are joined because the issues in each of the three cases are the same, but the claims and the appeals are distinct.
3.Taxation of Chargeable Gains Act 1992 section 24Section 24 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) is headed "Disposals where assets lost or destroyed, or become of negligible value". At the material time, the section provided:
(1)Subject to the provisions of this Act and, in particular to section 144, the occasion of the entire loss, destruction, dissipation or extinction of an asset shall, for the purposes of this Act, constitute a disposal of the asset whether or not any capital sum by way of compensation or otherwise is received in respect of the destruction, dissipation or extinction of the asset.
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(2)Where the owner of an asset which has become of negligible value makes a claim to that effect-
(a) this Act shall apply as if the claimant had sold, and immediately reaquired, the asset at the time of the claim or (subject to paragraphs (b) and (c) below) at any earlier time specified in the claim, for a consideration of an amount equal to the value specified in the claim.
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(b) an earlier time may be specified in the claim if-
(i) the claimant owned the asset at the earlier time; and
(ii) the asset had become of negligible value at the earlier time; and either
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(iii) for capital gains tax purposes the earlier time is not more than two years before the beginning of the year of assessment in which the claim is made; or
(vi) for corporation tax purposes the earlier time is on or after the first day of the earliest accounting period ending not more than two years before the time of the claim.
(c) Finance Act 1994 section 93section 93 of and Finance Act 1994 schedule 12Schedule 12 to the Finance Act 1994 (indexation losses and transitional relief) shall have effect in relation to an asset to which this section applies as if the sale and reacquisition occurred at the time of the claim and not at any earlier time.
(3)For the purposes of subsections (1) and (2) above, a building and any permanent or semi-permanent structure in the nature of a building may be regarded as an asset separate from the land on which it is situated, but where either of those subsections applies in accordance with this subsection, the person deemed to make the disposal of the building or structure shall be treated as if he had also sold, and immediately reaquired, the site of the building or structure (including in the site any land occupied for purposes ancillary to the use of the building or structure) for a consideration equal to its market value at that time.
4.Section 272 provided:
(1)In this...
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