Reeves v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 26 September 2018 |
| Neutral Citation | [2018] UKUT 293 (TCC) |
| Date | 26 September 2018 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2018] UKUT 0293 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mrs Justice Rose, Judge Sinfield
Kevin Prosser QC and David Yates (instructed by Slaughter & May) appeared for the appellant
David Ewart 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 TCGA 1992, s. 167 – No – Whether literal construction of s. 167 conforming with art. 14 ECHR in conjunction with art. 1 Protocol 1 – No – Legislation 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 controlled by non-resident shareholders by attributing control to non-resident associates who did not themselves hold any shares.
In April 2010, when he was non-UK resident, Mr Reeves gifted an interest in Bluecrest, a limited liability partnership (LLP) that was trading in the UK, to a UK resident company (WHR Ltd) of which he was the sole shareholder and claimed gift relief under TCGA 1992, s. 165. The gift was made in preparation for the emigration of Bluecrest to Guernsey which, if Mr Reeves had still owned Bluecrest, would have triggered a tax charge under TCGA 1992, s. 25. No charge arose once Bluecrest was owned by WHR Ltd because s. 25 can only apply if any chargeable gain on the disposal of an asset accruing to a non-resident would have been chargeable under s. 10 and s. 10 could not apply to WHR Ltd because it was UK-resident. Subsequently Mr Reeves sold his shares in WHR Ltd (whilst still non-resident therefore outside the scope of CGT by virtue of s. 2(1)) and paid US tax on the gain. HMRC refused his gift relief claim on the basis that WHR Ltd was controlled by non-residents who were connected with the person making the disposal (s. 167(2)). Since TCGA 1992, s. 288(1) applied the definition of control found in what is now CTA 2010, s. 450, 451, and s. 451(4) attributes to a person all the rights and powers of his associates, this would attribute control to Mr Reeves' wife and family (associates within s. 448), who were resident in the US and “connected” with him, using the s. 286 definition that applies for CGT purposes.
Both parties agreed that, on a literal interpretation of the relevant provisions, HMRC were correct. However, both parties also regarded the drafting of TCGA 1992, s. 167(2) as unsatisfactory.
HMRC argued that s. 167(2) contains a drafting error because it applies only to companies controlled by persons connected with the transferor, not the transferor himself. Thus, if Mr Reeves had not had non-resident associates, gift relief would have been available even though he was himself non-resident and could sell the WHR Ltd shares without a liability to CGT. This could not have been intended and was a mistake that could be remedied by an insertion in s. 167(2) to also include the transferor.
The Tribunal rejected this purposive interpretation as they could not be “abundantly sure” of Parliament's intentions, in particular because s. 10 itself is drafted so that shares in a company (not a business asset) do not trigger a charge, hence the intention must be only to catch non-residents who directly owned assets not those who owned or controlled them via a company. Moreover, the relevant provisions had all been drafted prior to the existence of LLPs (created by the Limited Liability Partnerships Act 2000) so Parliament's intentions with regard to LLPs could not be determined. They were also persuaded by the argument on behalf of Mr Reeves that the purpose of s. 167 was to prevent a device (known as the “envelope trick”) whereby UK-resident taxpayers transferred their UK assets to non-resident connected persons so that subsequent shareholdings would not be caught and that, since that result was clearly achieved by s. 167, it could not be said that the section did not achieve its intended result. They also found it hard to believe that the draftsman would not have been aware that s. 167(2), which is a very short and simply worded provision, did not include the transferor.
The argument on behalf of Mr Reeves was that because the combined effect of s. 167(2) and s. 451 was to attribute his rights and powers in WHR Ltd to his non-resident wife and children who themselves had nothing to do with the company, this led to an absurd result.
The Tribunal were not convinced by Mr Reeves' first contention that the words in s. 167(3) which restrict the meaning of a person who controls a company to a person who controls it “by virtue of holding assets relating to that or any other company” should be read into s. 167(2) because it could not have been intended that s. 167(3) should be narrower than s. 167(2). In support of this, O'Rourke v Binks [1992] BTC 460 was cited as authority for the transposition of words expressly included in one subsection into another subsection from which they had been omitted. The Tribunal did not reach a conclusion on this point because they were instead able to accept his second contention.
The second argument relied on the fact that the interpretative provisions in s. 288(1) are to be applied “unless the context otherwise requires”. The Tribunal were satisfied that it could not have been Parliament's intention to withhold relief simply because a person connected with the transferor who did not himself have any connection with the company happened to be non-UK resident, therefore the definition of control required some modification and that the way that this could most easily be done was in fact by importing the words in s. 167(3) (above) into s. 167(2).
In the event that the Tribunal had decided that the literal interpretation of s. 167(2) should prevail, Mr Reeves advanced a further argument under s. 3 of the Human Rights Act 1998 that invokes art. 14 ECHR (prohibition of discrimination) and A1P1 (protection of property).
The Tribunal considered that there was clearly discrimination on the basis of Mr Reeves' status as a person with a non-resident wife and children as compared to a person with a resident wife and children. They rejected the FTT's reasoning that because Mr Reeves was not treated any differently from any other person with a non-resident wife and children there had been no discrimination because to say that there are other people in the same class who are also discriminated against is not a basis for concluding that there is no discrimination. They did not accept that the discriminatory treatment of Mr Reeves was “justified and proportionate” because of the anomalous position it created. The application of s. 167(2) because of the mere existence of a relative who was not UK resident for tax purposes was entirely unexpected and operated as a potential trap for taxpayers, and it was also arbitrary because there was no reason for a taxpayer to be treated differently in such circumstances. Hence they concluded that a literal interpretation of s. 167(2) would infringe on Mr Reeves' rights under art. 14 in conjunction with A1P1 by depriving him of his possessions (the tax he would have to pay) on a discriminatory basis. It would, however, be possible to read s. 167(2) in a manner that complied with Mr Reeves' rights by reading into s. 167(2) the words in s. 167(3) (as outlined above), so that even if the Tribunal were wrong on the alternative construction of s. 167(2) under domestic law, it could be construed in that way using the more extensive powers in s. 3 of the Human Rights Act.
Mr Reeves also argued that if s. 167(2) were construed either literally or by applying HMRC's purposive construction, there would be a breach of the TFEU provisions on the free movement of capital. However, in view of their conclusions in relation to the first two points, the Tribunal did not consider it necessary to consider this further argument.
This decision will be welcome as it removes a potential trap that would not just catch the unwary! As the Tribunal observed “it would be a very sharp-eyed adviser who would think of checking with his client the tax residence status of all his parents and grandparents, children and grandchildren, brothers and sisters”.
[1] This is an appeal against the decision of the First-tier Tribunal (Judge John Brooks) released on 28 February 2017 dismissing Mr Reeves' appeal against HMRC's disallowance of a claim under section 165 of the Taxation of Chargeable Gains Act 1992 (“TCGA”) for holdover relief from capital gains tax ([2017] TC 05680).
[2] The issue in the appeal is whether Mr Reeves is entitled to claim holdover relief pursuant to section 165 TCGA on a disposal that he made when he gifted his interest in an LLP called BlueCrest to a UK resident company, WHR Ltd, of which he was the sole shareholder. BlueCrest LLP operated a hedge fund business. At the time of the disposal Mr Reeves was resident in the United States and non-resident in the UK for tax purposes. Accruing to Mr Reeves on this disposal was a capital gain of about £33.6 million. He asserts that that gain is held over and attaches to the interest now owned by WHR. If and when WHR disposes of it, WHR may have to pay that charge.
[3] HMRC assert that Mr Reeves is not entitled to holdover relief because that relief is denied by the operation of section 167(2) TCGA. Mr Reeves accepts that the literal wording of the relevant provisions would mean that the disposal does not benefit from holdover relief. But Mr Reeves says that the words cannot possibly mean what they say because it...
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