Blackwell v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Lord Justice Briggs,Patten LJ,Longmore LJ |
| Judgment Date | 06 April 2017 |
| Neutral Citation | [2017] EWCA Civ 232 |
| Docket Number | Case No: A3/2015/3674 |
| Court | Court of Appeal (Civil Division) |
| Date | 06 April 2017 |
[2017] EWCA Civ 232
Lord Justice Longmore
Lord Justice Patten
and
Lord Justice Briggs
Case No: A3/2015/3674
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
Mr Justice Newey and Judge Charles Hellier
FTC/64/2014
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Kevin Prosser QC and Mr Charles Bradley (instructed by GRM Law) for the Appellant
Mr Michael Jones (instructed by HM Revenue & Customs Solicitors) for the Respondent
Hearing dates: 28 March 2017
Approved Judgment
Introduction
The single question raised by this appeal is whether a taxpayer may, in computing the gain accruing to him on the disposal of shares, bring into account by way of deduction expenditure incurred by him in buying his release from a personal contractual obligation to a third party restrictive of his ability to vote or sell those shares.
The question arises on entirely uncontentious facts, and turns on the interpretation and application to those facts of s.38 of the Taxation of Capital Gains Act 1992, headed "Acquisition and Disposal Costs etc." which provides, so far as is relevant, as follows:
"(1) Except as otherwise expressly provided, the sums allowable as a deduction from the consideration in the computation of the gain accruing to a person on the disposal of an asset shall be restricted to –
(a) The amount or value of the consideration, in money or money's worth, given by him or on his behalf wholly and exclusively for the acquisition of the asset, together with the incidental costs to him of the acquisition or, if the asset was not acquired by him any expenditure wholly and exclusively incurred by him in providing the asset,
(b) The amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the asset, being expenditure reflected in the state or nature of the asset at the time of the disposal, and any expenditure wholly and exclusively incurred by him in establishing, preserving or defending his title to, or to a right over, the asset,
(c) The incidental costs to him of making the disposal.
(2) …"
In 2006 the Appellant Mr Julian Blackwell paid £17.5 million to be released from certain obligations he had undertaken in 2003 in relation to his shares in Blackwell Publishing (Holdings) Limited ("BP Holdings"). Shortly thereafter he disposed of those shares for a little over £100 million. He sought to deduct the £17.5 million under s.38(1)(b) in computing his capital gain on the disposal of the shares. HMRC refused to allow the deduction. Mr Blackwell appealed successfully to the First-tier Tribunal (Judge Richard Barlow and Mr Duncan McBride), but HMRC's appeal was allowed by the Upper Tribunal (Mr Justice Newey and Judge Charles Hellier) by a decision released on 13 August 2015 [2015] UKUT 0418 (TCC).
I can take the material facts from the concise recitation of them by the Upper Tribunal as follows:
"4. Mr Blackwell held class A (and other) shares in BP Holdings such as would enable him to veto a special resolution, including one to approve or facilitate a takeover of the company. In 2003, following an unsuccessful takeover attempt by Taylor & Francis Group plc ("Taylor & Francis"), Mr Blackwell entered into an agreement ("the 2003 agreement") with Taylor & Francis to do and not to do certain things connected with his A shares in return for £1 million.
5. In 2006 John Wiley & Sons Inc ("Wiley") made an offer for BP Holdings for a much higher sum than Taylor & Francis had offered in 2003.
6. Mr Blackwell wished to accept Wiley's offer, but he was advised by his solicitors that the only way to avoid the risk of litigation was not to take any step in respect of the offer.
7. Taylor & Francis offered to release Mr Blackwell from the 2003 agreement if he paid them £25 million.
8. Mr Blackwell decided that it was necessary to make that payment in order to allow the Wiley deal to go through. He believed that the payment would enable the Wiley bid to be accepted.
9. On 17 November 2006 Mr Blackwell entered into a new agreement ("the 2006 agreement") with Taylor & Francis whereby he was released from his undertakings under the 2003 agreement. In return he paid Taylor & Francis £25 million of which Wiley provided £7.5 million and he provided £17.5 million. The deduction was sought for the £17.5 million.
10. The FTT found that Mr Blackwell held a rational and well founded belief that the 2003 agreement amounted to an impediment to his acting freely to vote his shares as he would have wished when the Wiley bid came to his attention: the threat of litigation, whether in the form of an attempt to obtain an injunction or otherwise, could well have had a detrimental effect on the prospect of a successful acceptance of the take over or at least have delayed it. The FTT considered that it was easy to see that the price of the shares could have been affected or even that the deal could have failed altogether."
Two things are worth noting about the 2003 agreement. The first is that it is common ground between the parties to this appeal that it conferred no proprietary rights or interest in the shares upon Taylor & Francis. Specific performance of Mr Blackwell's undertakings was largely (but not entirely) excluded. Those undertakings were therefore purely personal obligations owed by him to Taylor & Francis in contract.
The second point is that, nonetheless, the £1 million which Mr Blackwell received from Taylor & Francis pursuant to the 2003 agreement was treated by HMRC as consideration received by him for a part-disposal of his shares, for the purposes of s.21 and s.22 of the Act. It may therefore add some poignancy to Mr Blackwell's sense of having been hard done by, and some substance to the submissions of Mr Prosser QC who appeared for Mr Blackwell on this appeal, that Mr Blackwell has been taxed in relation to a gain made upon making the 2003 agreement but is, thus far, unable to obtain a deduction for the much larger cost of un-making it, against the even larger gain made on his subsequent disposal of the shares under the scheme of arrangement which gave effect to the takeover by Wiley.
Looking more closely at s.38(1)(b), it is (now at least) common ground that Mr Blackwell paid the £17.5 million for the purpose of enhancing the value of the shares in his hands. But the Upper Tribunal held (and HMRC submit on this appeal) that the £17.5 million was not expenditure incurred "on" the shares, nor expenditure reflected in the "state or nature" of the shares at the time of the disposal pursuant to the takeover bid by Wiley. Nor was it expenditure incurred by Mr Blackwell in "establishing, preserving, or defending his title to, or to a right over", the shares.
The parties recognise that s.38(1)(b) really falls into two limbs, the first requiring both expenditure "on" the asset and expenditure which is reflected in the state or nature of the asset at the time of its disposal, and the second limb being a freestanding alternative, namely expenditure incurred in establishing, preserving or defending title to, or to a right over, the asset. The Upper Tribunal and the parties have treated those limbs separately in their determination and in counsels' submissions, and I shall do the same. But the fact that they constitute alternative means of establishing the condition for deduction imposed by s.38(1)(b) means that a reliable interpretation of s.38 requires both to be kept in mind together, rather than viewed in entirely self-contained compartments.
It needs also to be borne in mind that s.38 applies for the purpose of computing both gains and losses on the disposal of assets, and that "assets" are defined in the widest terms by s.21 as extending to all forms of property, including incorporeal property generally, but also chattels, such as works of art. It is of course common ground that shares are a form of incorporeal or intangible property, properly to be regarded as a bundle of rights, including rights to vote, rights to share in distributions by way of dividend or upon winding up and, because shares are a form of property, carrying with them rights to sell, lend or otherwise deal with them, subject to restrictions (if any) in the Articles of Association of the company concerned. The personal inhibitions which Mr Blackwell undertook in the 2003 agreement affected both his voting rights and his right to sell the shares.
Limb 1
Mr Prosser QC, assisted by Mr Charles Bradley, began his submissions by reminding us that, generally speaking, the capital gains tax legislation, and concepts, phrases and words used in it, are to be given a broad commercial interpretation, and that commercial common sense should prevail if a narrow juristic, mathematical or technical interpretation would conflict with it. This guidance is of course deeply enshrined with what has come to be known as the Ramsay principle, first propounded by Lord Wilberforce in W T Ramsay Limited v Inland Revenue Commissioners [1982] AC 300, page 326:
"The capital gains tax was created to operate in the real world, not that of make-belief. As I said in Aberdeen Construction Group Limited. v Inland Revenue Commissioners [1978] A.C. 885, it is a tax on gains (or I might have added gains less losses), it is not a tax on arithmetical differences. To say that a loss (or gain) which appears to arise at one stage in an indivisible process, and which is intended to be and is cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation, there is not such a loss (or gain) as the legislation is dealing with, is in my opinion well and indeed essentially...
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