Drummond v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Norris |
| Judgment Date | 23 July 2008 |
| Neutral Citation | [2008] EWHC 1758 (Ch) |
| Docket Number | Case No: CH/2007/APP/0461 |
| Court | Chancery Division |
| Date | 23 July 2008 |
[2008] EWHC 1758 (Ch).
Chancery Division.
Norris J.
Patrick Way and Hui Ling McCarthy (instructed by Penningtons Solicitors LLP) for the appellant.
Timothy Brennan QC and Nicola Shaw (instructed by the Solictor for HM Revenue and Customs) for the respondent.
The following cases were referred to in the judgment:
Barclays Mercantile Business Finance v Mawson (HMIT)TAXTAX [2004] BTC 414; (2004) 72 TC 446
Harding v R & C CommrsTAX [2008] BTC 109
Hirsch v Crowthers Cloth LtdTAXTAX [1990] BTC 64; (1989) 62 TC 759
MacNiven v Westmoreland Investments LtdTAXELR [2001] BTC 44; [2003] 1 AC 311
R & C Commrs v D'ArcyUNKTAX [2007] EWHC 163 (Ch); [2007] BTC 257
Capital gains tax - Acquisitions - Capital loss - Consideration for disposal of assets - Consideration to be taken into account in computation of gain - Consideration chargeable to tax on income - Acquisition and disposal costs - tax avoidance scheme - Second-hand life assurance policies - Whether surrender proceeds to be excluded from consideration for disposal - Sums allowable as deduction from consideration restricted to money given wholly and exclusively for acquisition of asset - Taxation of Chargeable Gains Act 1992, Taxation of Chargeable Gains Act 1992 section 22 section 37 subsec-or-para 1 section 38 subsec-or-para 1 section 210ss. 22, 37(1), 38(1), 210 - Income and Corporation Taxes Act 1988, Income and Corporation Taxes Act 1988 section 539 section 547ss. 539-541, 547.
This was an appeal by the taxpayer against a decision of the special commissioners ((2007) Sp C 617) that the taxpayer was not entitled to exclude the proceeds of the surrender of five second-hand life assurance policies from the consideration for the disposal of the policies pursuant to the Taxation of Chargeable Gains Act 1992, s. 37(1) so as to create a loss as part of a tax avoidance scheme.
In April 2001 the taxpayer contracted to buy from a corporate finance company (L plc) for £1,962,233 five second-hand "non-qualifying" life assurance policies which had been recently created for the purpose. The five policies had a surrender value of £1,751,376, which was equivalent to the premiums paid. The difference between the cost to the taxpayer of the five policies (£1.962 million) and the surrender value (£1.751 million) represented the scheme costs (consisting of L plc's profit, an introductory commission, fees for independent financial advice, a contribution to a fighting fund, and a contingency fund of about £98,000). The next day the taxpayer surrendered the policies. The object of the process had been to create an allowable capital gains tax loss of £1.962 million to off set against a capital gain of £4.875 million which the taxpayer had made on a sale of shares.
For income tax purposes, the surrender of the policies gave rise to a "chargeable event gain" of £1,351 for the purposes of Ch. II of Pt. XIII of the Income and Corporation Taxes Act 1988, consisting for the most part of the excess of the surrender proceeds over the premiums paid. When the taxpayer did his computation of the capital gain arising on the disposal by surrender of the policies he did not deduct from the policy proceeds the sum of £1,351 as "money … charged to income tax as income of … the person making the disposal" under s. 541(1)(b) and 547(1) of ICTA 1998. Instead he deducted the entirety of the surrender proceeds (£1,751,376) thereby reducing the consideration for the disposal by way of surrender to nil, on the basis that the £1.751 million was "money … taken into account as a receipt in computing income or profits or gains or losses … for the purposes of the Income Tax Acts" within s. 37(1) of the 1992 Act.
The Revenue considered that the taxpayer's view of the effect s. 37 was erroneous. The £1,751,376 paid by the insurance company on surrender was not so taken into account in computing the taxpayer's income or profits or gains. It was brought into the earlier calculation of the gain treated as arising in connection with each of the five policies for the purpose of determining the amount deemed by s. 547(1) to form part of the taxpayer's total income for the year to 5 April 2001.
The special commissioner dismissed the taxpayer's appeal against that decision and agreed with the Revenue's interpretation of s. 37. He drew a distinction between amounts taken into account for the purposes of prior calculations affecting a taxpayer and amounts taken into account as receipts in computing the taxpayer's income, by reference to the decision of Vinelott J in Hirsch v Crowthers Cloth Ltd [1990] BTC 64; (1989) 62 TC 759. He held that the surrender proceeds were not moneys taken into account as receipts in computing the taxpayer's income or profits or gains or losses for income tax purposes, in terms of s. 37(1). The only amount so taken into account was the actual chargeable event gain of £1,351.35. That was a discrete amount produced from the calculation of gain "treated as arising in connection with" the policy; and that amount, as a stand-alone figure of income, was deemed by s. 547(1)(a) to form part of his total income. The Revenue also contended and the special commissioner accepted that in the computation of the taxpayer's capital gain none of the £1.962 million paid to L plc for the policies was to be allowed as a deduction since none of it was paid "wholly and exclusively" for the acquisition of the asset.
The taxpayer appealed on the construction of s. 37 and on the issue of what could be deducted from the consideration under s. 38.
Held, allowing the appeal on the s. 38 issue:
1. The purpose of s. 37 was to avoid a taxpayer suffering double taxation in relation to a single event which occasioned both a charge to income tax and a charge to capital gains tax by adjusting for capital gains tax purposes the consideration that was taken into account on the disposal of the asset by excluding amounts that had already been charged to income tax. The principle embodied in and governing the construction of s. 37 was clear. If a sum had been allowed as a deduction from the income chargeable to tax it should not be allowed as a deduction from the gain chargeable to tax. If a sum of money had been directly treated as part of an individual's total income or been treated as a receipt and thereby inflated the income charged to tax (or reduced the loss otherwise available), it should not also be charged to capital gains tax.
2. The chargeable event gain of £1,351 was money charged to income tax as income of the taxpayer and as such was to be excluded from the consideration received on the surrender of the policies. Since there was money which had been charged to income tax as income of the taxpayer and on which s. 37 could bite, there was no need to look for (and no warrant in s. 37 for seeking) some other money which might additionally be used to create a second deduction from the consideration received for the policies for purposes of the computation of the gain on their disposal. The section contemplated that in relation to any given transaction there would only be one sum of money to be deducted from the consideration received on disposal in the calculation of the capital gain.
3. If there had been no money charged to income tax as income of the taxpayer, it would have been necessary to see whether there was any money which had been taken into account as a receipt in computing income. In the present case the proceeds of the policies were not "taken into account as a receipt" for the purpose of computing income or profits or gains or losses within the meaning of s. 37. The taxpayer was not taxed as if he had received the policy proceeds as part of his income. He paid income tax assessed on the basis that he had received the chargeable event gain, a gain calculated and certified by the insurance company. Since the chargeable event gain itself represented part of the policy proceeds they inevitably constituted an element in the equation or an ingredient in the insurance company's calculation. However, they were not taken into account as a receipt for the purpose of computing income because they were not brought directly into the computation of the taxpayer's total income. They simply provided the starting point (the raw data) for a statutory process undertaken by the insurance company which involved the deduction of sums not expended by the taxpayer and of which he had no knowledge, the result of which was a certificate specifying the deemed gain arising in connection with the policies that was then added to his total income. The words "taken into account as a receipt" were not the equivalent of "featuring in some prior calculation which results in a figure to be added to income". The money had to have been taken into account "as a receipt" and to have had a direct effect on the sum charged to income tax. (Hirsch v Crowthers Cloth Ltd [1990] BTC 64 considered.)
4. Section 38 of the 1992 Act permitted deductions to be made from the consideration received on the surrender of the policies for the purpose of calculating the gain to be subjected to tax. The transaction in question was the purchase and disposal of second-hand policies. There was no doubt that such a purchase really occurred and that the taxpayer acquired an equitable title to the five policies. He was allowed to deduct from what he received that which he expended upon acquisition. He had paid a total of £1.962 million and in return he acquired the five policies and some services and benefits. The total of £1.962 million could be broken down into a number of discrete sums and matched to the benefits or services. L plc's fee, the introductory commissions, the fees for independent financial advice, the contribution to the fighting fund, and the contingency payment of £98,000 into the escrow account were plainly not payments made wholly and exclusively for the acquisition of the five...
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