Reeves

JurisdictionUK Non-devolved
Judgment Date28 February 2017
Neutral Citation[2017] UKFTT 192 (TC)
Date28 February 2017
CourtFirst Tier Tribunal (Tax Chamber)

[2017] UKFTT 0192 (TC)

Judge John Brooks

Reeves

Kevin Prosser QC and David Yates, instructed by Slaughter and May, appeared for the appellant

David Goy QC and Sarah Abram, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents

Capital gains tax – Gift of business asset to UK-resident company by transferor with non-UK resident relatives – Hold-over relief claim disallowed by HMRC – Whether claim precluded by Taxation of Chargeable Gains Act 1992 (TCGA 1992), s. 167 – Yes – Whether construction of s. 167 conforming with European Convention on Human Rights (ECHR) and the European Union (EU) law – Yes – Appeal dismissed.

The First-tier Tribunal (FTT) dismissed an appeal against the disallowance of a holdover claim under TCGA 1992, s. 167, declining to adopt a non-literal construction of the provision.

Summary

Mr Reeves was a US citizen who co-founded a UK hedge fund business (Bluecrest) in 2000 whilst UK resident and ordinarily resident. He moved back to the US in 2007. Bluecrest began planning to move its business out of the UK (which would have triggered a tax charge in respect of Mr Reeves' share in Bluecrest's assets under TCGA 1992, s. 25). However, prior to the move (at a time when he was non-resident and non-ordinarily resident), Mr Reeve established a new UK resident company (WHR) to which he gifted his interest in Bluecrest and claimed holdover relief under TCGA 1992, s. 165. In view of his non-residence status, a subsequent disposal of his shares in WHR would not give rise to a chargeable gain. HMRC did not accept the gift relief claim, on the basis that it was precluded by TCGA 1992, s. 167. Mr Reeve appealed on the grounds that:

  • a literal construction of s. 167 would produce an unjust and absurd result, therefore a purposive interpretation should be applied;
  • alternatively, a literal construction should not be applied as s. 167 does not conform to the First Protocol (A1P1), art. 1 or ECHR, art. 14, nor does it conform to EU law as it restricts the free movement of capital.

The parties agreed that on a literal interpretation relief would be denied by s. 167 (which applies to deny holdover relief where the transferee is a company controlled by non-resident person(s) connected with the transferor), because Mr Reeve's wife, as an “associate” of his, controlled the company by virtue of the Corporation Tax Act 2010 (CTA 2010), s. 451(4) and she was non-resident. It was argued on behalf of Mr Reeves that a literal approach could lead to an absurd result – for example a gift by a UK resident individual to a company owned by another UK resident individual who happened to have a son or daughter (an associate) who was non-resident would be caught. However, the Tribunal (applying Inco Europe Ltd v First Choice Distribution (a firm) [2000] 1 WLR 586) considered that, before interpreting statute in a different way, a court had to be “abundantly sure” of three matters, being the intended purpose of the statute, the fact that parliament had inadvertently failed to give effect to that purpose, and the substance of the provision that had been intended. As the Tribunal could not be sure of the second of these matters, given that anti-avoidance provisions may cover a wider area than that strictly necessary to achieve their object, they were unable to substitute a non-literal interpretation.

Turning to the issues arising under ECHR, the Tribunal first considered A1P1, entitling an individual to the right to peaceful enjoyment of his property. As the legislation being challenged (s. 167(2)) was a provision enabling HMRC to claim tax, A1P1 was engaged because there was a possibility of Mr Reeve being deprived of a possession. However, the right to peaceful enjoyment is subject to a member state's right (inter alia) to secure the payment of taxes, and, following National & Provincial Building Society v United Kingdom [1997] BTC 624, a member state's right to secure the payment of taxes by framing and implementing tax policies is to be respected “unless it is devoid of reasonable foundation”. Although the Tribunal had some sympathy with the argument that it was irrational to deny relief to Mr Reeves because his wife (and children) were, as his associates, treated as controlling WHR, nevertheless they were unable to conclude that s. 167 was “devoid of reasonable foundation” amounting to a breach of rights under A1P1.

The Tribunal next considered the argument under art. 14 (prohibition of discrimination), namely that Mr Reeves had suffered discrimination by being denied holdover relief under s. 165 on the grounds that he had non-UK resident relatives. However, they concluded that there was no discrimination as, even if Mr Reeves had been UK resident with a non-resident wife, he would have been treated in the same way.

Concerning the possible breach of EU law in relation to the right to free movement of capital (art. 63 of the Treaty on the Functioning of the European Union), the Tribunal did not accept the argument on behalf of HMRC that s. 167 fell within the exception from art. 63 provided for by art. 64 (exception for restrictions already existing at 31 December 1993 that involve direct investments). Although the legislation already existed at that date, the transfer of the interest in Bluecrest to WHR did not fall within the definition of direct investment, therefore the exception did not apply. Thus they had to consider whether s. 167 contravenes art. 63 (prohibiting all restrictions on the movement of capital between member states and between member states and third countries). On behalf of Mr Reeves it was argued that s. 167 restricts the free movement of capital by discriminating against non-UK residents, who are more likely to have non-resident relatives. The Tribunal considered the correct question to be whether the denial of holdover relief was discriminatory based on the particular facts of the case and concluded that it was not because Mr Reeves was treated in exactly the same way as a UK-resident with non-resident relatives.

Comment

This case highlights a potential pitfall when claiming holdover relief: namely that although TCGA 1992, s. 167 does not preclude relief for a transfer by a non-resident transferor to a company that he controls (as it only applies where control passes to someone other than the transferor but who is both non-resident and connected to him), the rule in CTA 2010, s. 451(4) that attributes rights and powers to an associate could bring s. 167 into play where the transferor has non-resident relatives.

DECISION

[1] On 1 April 2010 Mr William Reeves, a US citizen who was neither resident or ordinarily resident in the UK, disposed of his interest in a business carried on by BlueCrest Capital Management LLP (“BlueCrest”) transferring it by way of a gift to WHR Investments Limited (“WHR”), a new UK incorporated and resident company of which he was the sole shareholder and director. In his amended 2009–10 self-assessment tax return, Mr Reeves claimed hold-over relief from capital gains tax (“CGT”) under s 165 of the Taxation of Chargeable Gains Act 1992 (“TCGA”) in relation to the gift to WHR. HM Revenue and Customs (“HMRC”) subsequently opened an enquiry into that return and by a closure notice, dated 1 September 2014, disallowed the hold-over relief claim on the basis that it was precluded by s 167 TCGA.

[2] Mr Kevin Prosser QC and Mr David Yates, who appear for Mr Reeves, contend that as a literal construction of the s 167 TCGA would produce an irrational, arbitrary, unjust and absurd result a purposive interpretation should be adopted allowing the claim to hold-over relief. Alternatively they argue that, if the statutory language does not admit such a purposive interpretation, a literal construction should not be applied as s 167 TCGA does not conform to article 1 of the First Protocol (“A1P1”) or article 14 of the European Convention on Human Rights (“ECHR”). Neither, they say, does it conform to European Union (“EU”) law (in that it restricts the free movement of capital).

[3] For HMRC, Mr David Goy QC and Ms Sarah Abram contend that the hold-over relief claim is precluded by s 167 TCGA and that this does not give rise to any absurdity or illogicality. Additionally, they submit that because there is no “possession” of which Mr Reeves would be deprived or have interfered with the ECHR is not engaged. They also contend that the EU law arguments advanced on behalf of Mr Reeves are misconceived as it is the freedom of establishment not the free movement of capital that is engaged but even if this were not the case the free movement of capital it is not restricted by s 167(2) TCGA and, even it was, it is a justified and proportionate measure.

[4] It is therefore necessary to consider the construction of the domestic legislation and whether it is compliant with the ECHR and EU law. In doing so, although carefully considered, in reaching my conclusions it has not been necessary to mention every argument advanced on behalf of the parties.

Facts

[5] The facts are not disputed. The following “Statement of Agreed Facts and Issues” was produced by the parties:

  • This appeal concerns the treatment for CGT purposes of a gift made on 1 April 2010 by Mr William Reeves (the Disposal) of an interest, including a share of the goodwill, in a business carried on by BlueCrest.
  • BlueCrest carried on business as a private hedge fund in the UK. However, in late 2009 BlueCrest began planning for a change in its operations aimed at moving its business out of the UK.
  • Mr Reeves, a US citizen, was one of two founders of the hedge fund business in 2000. At the time, he was a UK resident and ordinarily resident. Mr Reeves ceased to be UK resident and ordinarily resident in 2007 when he moved back to the US.
  • On the date of the Disposal Mr Reeves held a 7.4% interest in BlueCrest, represented by allocations of income points and capital points each of which came to a...

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1 cases
  • Reeves v Revenue and Customs Commissioners
    • United Kingdom
    • Upper Tribunal (Tax and Chancery Chamber)
    • 26 Septiembre 2018
    ...read down pursuant to s. 3 Human Rights Act 1998 – Appeal allowed. The Upper Tribunal (overturning the decision of the FTT in Reeves [2017] TC 05680) has held that gift relief under TCGA 1992, s. 165 should not be denied where the gift was made to a company that could only be regarded as co......

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