Revenue and Customs Commissioners v Blackwell
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 August 2015 |
| Neutral Citation | [2015] UKUT 418 (TCC) |
| Date | 13 August 2015 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Mr Justice Newey, Judge Charles Hellier
Michael Jones, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Appellants
Kevin Prosser QC and Charles Bradley, instructed by Shipleys LLP, appeared for the Respondents
Capital gains tax Taxation of Chargeable Gains Act 1992 (TCGA 1992), s. 38(1)(b) Whether expenditure incurred on an asset and reflected in the state or nature of the asset at the time of disposal Whether expenditure incurred in establishing, preserving or defending title to, or to a right over, the asset.
The Upper Tribunal (UT) has overturned the decision of the First-tier Tribunal (FTT) in Blackwell TAX[2014] TC 03243 finding that 17.5m paid by Mr Blackwell to release him from an agreement restricting the sale of his shares in Blackwell Publishing Holdings Ltd (BP Holdings) was neither expenditure incurred on the asset being expenditure reflected in the state or nature of the asset at the time of the disposal nor expenditure wholly and exclusively incurred in establishing, preserving or defending his title to, or to a right over, the asset and no deduction was possible under the Taxation of Chargeable Gains Act 1992 (TCGA 1992), s. 38(1)(b).
The FTT had allowed Mr Blackwell's appeal against HMRC's refusal to allow a capital gains tax deduction for 17.5m that he had paid to release him from an agreement relating to his shareholding in BP Holdings prior to his sale of those shares. HMRC were appealing that decision.
The agreement that Mr Blackwell had entered into (the 2003 agreement) was with a prospective purchaser of the company, Taylor & Francis Group plc (Taylor & Francis). In exchange for 1m, Mr Blackwell had agreed not to vote against Taylor & Francis acquiring BP Holdings, not to dispose of his shares, not to agree any other offer for his shares, or do anything or permit anything to be done that might impede the acceptance of an offer by Taylor & Francis. When John Wiley & Sons Inc (Wiley) made a much higher offer for BP Holdings than the Taylor Francis offer, Mr Blackwell had paid Taylor & Francis 25m to be released from the 2003 agreement under a new agreement (the 2006 agreement). Of the 25m, Mr Blackwell had paid 17.5m and Wiley had paid 7.5m.
The FTT had allowed a deduction for the 17.5m under TCGA 1992, s. 38(1)(b) finding that:
i) the expenditure was on the assetin the sense that it was incurred in respect of the shares;
ii) the expenditure was wholly and exclusively for the purpose of enhancing the value of the asset because the payment would enable the Wiley bid to be accepted which was for a much higher sum; and
iii) the expenditure was reflected in the state or nature of the asset at the time of the disposal because the state of Mr Blackwell's shares changed when he became free to vote them as he wished.
Accordingly, the FTT had found that TCGA 1992, s. 38(1)(b) was satisfied and allowed the appeal.
The UT, however, did not agree.
There were two limbs to TCGA 1992, s. 38(1)(b); the first related to expenditure on the asset reflected in the state or nature of the asset; the second related to the establishment, preservation or defence of title to, or to a right over the asset.
TCGA 1992, s. 38(1)(b) first required identification of an asset and as the Act was concerned with gains and losses on disposals of assets, that meant the asset at the time of the disposal, not immediately prior to disposal. The notion of asset was what was disposed of rather than what was held.
The requirement that the expenditure be for the purpose of enhancing the value of the asset pointed towards expenditure reflected in the consideration for the disposal and relating to qualities of the asset which would cause a third party to pay more or less for it, rather than a test which looked to the value of the asset to the holder. TCGA 1992, s. 38(1)(b) was concerned with rights and obligations that were acquired, not those which operated exclusively on the vendor. In conclusion, the 17.5m payment could not be reflected in the state or nature of the asset unless the 2003 agreement would have affected a purchaser of the shares.
As there was no question of enforcing the 2003 against a purchaser of the shares, it seemed in the circumstances that the asset that Mr Blackwell sold was not changed by the 2006 agreement and since it was unchanged, its state or nature could not have altered. In finding that the 2006 agreement changed the state of Mr Blackwell's shares, the FTT had made an error or law. At the time of their disposal, the state or nature of Mr Blackwell's shares did not reflect the money paid under the 2006 agreement.
As for the second limb of TCGA 1992, s. 38(1)(b), expenditure on the acquisition of the asset was dealt with by TCGA 1992, s. 38(1)(a) so establishing a right over an asset must mean something different from acquiring such a right. It must mean making good or proving and whilst it could extend to actions to clarify existence of a right, it could not extend to acquiring a right. However, the drafting of the second limb spoke of a right over the asset, which would normally be seen as a separate asset from the primary asset, but as the section was concerned with deductible expenditure on the disposal of a primary asset, that indicated that the draftsman did not mean a right separate from the asset but something which was or became part of the primary asset. The 2006 agreement enabled Mr Blackwell to exercise rights relating to his shares but did not create or establish such rights. The asset remained the same. In conclusion, under the 2006 agreement, Mr Blackwell did not establish, preserve or defend any right over his asset.
The appeal was allowed.
In this case, the FTT had allowed Mr Blackwell a deduction for capital gains tax purposes for 17.5m that he had paid to release himself from an agreement with an earlier prospective purchaser of BP Holdings when a new and higher bidder made an offer for the company. The earlier agreement restricted how Mr Blackwell could vote and prevented him from disposing of his shares. The FTT had found that TCGA 1992, s. 38(1)(b) was satisfied because the expenditure was reflected in the state or nature of the asset at the time of the disposal because the state of Mr Blackwell's shares changed when he became free to vote them as he wished. The UT, however, disagreed finding that as the 2003 agreement could not be enforced on a purchaser, the 2006 agreement did not alter the state or nature of the shares and the expenditure was not reflected in the state or nature of the shares at the time of their disposal. TCGA 1992, s. 38(1)(b) was not satisfied so no deduction was allowed.
[1] This appeal relates to the effect of section 38(1)(b) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), which specifies the expenditure a taxpayer may deduct in computing his capital gains.
[2] In 2006 Mr 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 after making that payment he disposed of those shares. He sought a deduction for that sum under section 38(1)(b) in computing his capital gain on the disposal of the shares. HMRC refused to allow the deduction. Mr Blackwell appealed to the First-tier Tribunal (the FTT) (Judge Richard Barlow and Mr Duncan McBride), which allowed his appeal. HMRC now appeal against that decision (the Decision).
[3] There is no dispute about the primary facts. They are to be found in paragraphs 4 to 23 of the Decision. We take the following summary in large part from the skeleton argument of Mr Kevin Prosser QC and Mr Charles Bradley, who appeared for Mr Blackwell.
[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.
[11] This section provides:
(1) Except as otherwise expressly...
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