Hardy v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 July 2016 |
| Neutral Citation | [2016] UKUT 332 (TCC) |
| Date | 19 July 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
The Hon Mr Justice Arnold and Judge Greg Sinfield
Rory Mullan, instructed by direct access, appeared for the appellant
Kate Balmer, instructed by the Solicitor to HM Revenue and Customs, appeared for the respondents
Capital gains tax – Forfeited deposit on rescinded contract for purchase of land – Whether contractual rights a chargeable asset – Whether disposal – Whether an allowable loss.
The Upper Tribunal found that the amount of the forfeited deposit on a rescinded contract for purchase of land was not an allowable loss.
The appellant (Mr Hardy) and his wife entered into a (non-assignable) contract for the off-plan purchase of a leasehold property (the Contract). A deposit of 10% was paid and the balance was payable within 10 days of the vendor's service of notice that the property had been substantially completed. Notice was served on 22 May 2009 but Mr Hardy was unable to complete because he had failed to sell two other properties intended to part-fund the purchase in time. The seller rescinded the Contract in accordance with its terms and retained the deposit. Mr Hardy then sold the other two properties later in the tax year and sought to offset the loss suffered on the Contract through forfeiture of the deposit against the gains arising.
The First-tier Tribunal (FTT) had rejected Mr Hardy's argument that he had acquired the property on entering into the Contract and (involuntarily) disposed of it when the contract was rescinded. Mr Hardy (who had represented himself before the FTT) instructed counsel and was then given permission to appeal on new grounds, the new argument being that he had acquired valuable contractual rights on entering into the Contract that constituted an asset and that when the vendor rescinded the contract, those rights were extinguished resulting in a loss equal to the amount of the forfeited deposit.
Although the Contract was entered into and the other properties sold by Mr Hardy and his wife, all amounts had been returned on Mr Hardy's self-assessment return. As he accepted accountability for all tax arising (although resulting in a higher amount), the Upper Tribunal proceeded on this basis.
The Upper Tribunal considered three arguments put forward by HMRC. They agreed with HMRC's contention that no asset had been acquired by Mr Hardy because the contractual right he acquired was primarily the right to obtain specific performance of the contract (the conveyance of legal title by the vendor) which was contingent upon his performance of his own obligations (payment of the balance of the purchase price) and his failure to perform meant that there was no acquisition. On this basis, it was not necessary to consider the remaining two arguments, but nevertheless the Upper Tribunal considered them briefly, and found that Mr Hardy's loss of the right to enforce performance of the Contract was not a disposal of an asset (an option) within the meaning of TCGA 1992, s. 144 and that, even if it were, there would be no allowable loss because the payment of the deposit was not expenditure wholly and exclusively incurred (TCGA 1992, s. 38(1)) in acquiring the contractual rights, as it was primarily a part-payment of the purchase price of the property.
The Upper Tribunal considered that, although it is well-established that contractual rights are capable of being an asset for capital gains tax purposes even if not assignable, on the authority of Zim Properties Ltd v Proctor TAX[1985] BTC 42, not every right to a payment is an asset and therefore the nature of the contractual rights had to be carefully analysed.
[1] This is an appeal from a decision of the First-tier Tribunal (Tax) (Tribunal Judge Malachy Cornwell-Kelly and Duncan McBride) dated 3 June 2015 [2015] TC 04444 dismissing an appeal by Anthony Hardy against a closure notice issued by the Commissioners of Her Majesty's Revenue and Customs (HMRC) under section 28A of the Taxes Management Act 1970 disallowing a claim to losses for capital gains tax purposes in respect of the deposits on the purchase of two properties which Mr Hardy forfeited when he was unable to complete the contracts. The appeal is confined to only one of the deposits considered by the First-tier Tribunal.
[2] The facts are not in dispute and were clearly and succinctly summarised by the First-tier Tribunal in its decision at [3]–[6]. Given the way in which counsel for Mr Hardy put his case on this appeal, however, we shall give a slightly fuller account.
[3] On 7 May 2008 Mr Hardy and his wife Grazyna Chont-Rudzka (collectively the Buyers) entered into a contract (the Contract) with St James Group Ltd (the Seller) for the off-plan purchase of a leasehold property situated at Plot No 187 in a development at the former Queen Mary Hospital, Roehampton Lane, Roehampton, London SW15 (the Property). The Buyers' intention was to let the Property for rental.
[4] The Contract incorporated the Standard Conditions of Sale (Fourth Edition) with some minor exclusions (clause 1). The Contract provided for the Vendor to erect the Property as soon as reasonably practicable (clause 2.1). Completion was to take place not less than 10 working days after service of notice in writing by the Seller's solicitors on the Buyers or their solicitors that the Property had been, or would be on the day the notice was due to take effect, substantially completed (clause 3.1).
[5] The purchase price was £720,000 (Particulars paragraph 9). A deposit of 10% of the purchase price (i.e. £72,000) was required to be paid on the date of the Contract (Particulars paragraph 6 and clause 6). The Buyers duly paid the deposit. On completion, the deposit was to be credited against the purchase price (Particulars paragraph 9 and Standard Conditions 6.4).
[6] The benefit of the Contract was not assignable by the Buyers (clause 7.4 and Standard Condition 1.5).
[7] Completion was initially scheduled to take place on 22 May 2009. The Buyers were able to raise 75% of the purchase price (£540,000) by way of mortgage. This left a shortfall of 15% (£108,000), plus stamp duty and legal fees. The Buyers intended to raise the necessary shortfall by selling two other properties which they had let for rental situated at Flat 4, Phillimore Place and 34 Darling House, Twickenham (the Existing Properties), but they were unable to do so in time to meet the completion date and sought extra time to raise the money.
[8] Standard Condition 6.8 provides, so far as relevant:
6.8.1 At any time on or after completion date, a party who is ready, able and willing to complete may give the other a notice to complete.
6.8.2 The parties are to complete the contract within ten working days of giving a notice to complete, excluding the day on which the notice is given. For this purpose, time is of the essence of the contract.
…
[9] Standard Condition 7.2 provides, so far as relevant:
If either party rescinds the contract:
a) Unless the rescission is a result of the buyer's breach of contract the deposit is to be repaid to the buyer with accrued interest,
…
[10] Standard Condition 7.5 provides, so far as relevant:
7.5.1 If the buyer fails to complete in accordance with a notice to complete, the following terms apply.
7.5.2 The seller may rescind the contract, and if he does so:
a) he may:
i) forfeit and keep any deposit and accrued interest,
ii) resell the property and any chattels included in the contract,
iii) claim damages,
iii) …
7.5.3 The seller retains his other rights and remedies.
[11] The Vendor served a notice to complete on the Buyers on 27 May 2009. The Buyers were unable to complete. Accordingly, on 12 June 2009 the Vendor exercised its right to rescind the Contract and keep the deposit.
[12] Completion of the sales of...
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