Richards and another v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 November 2011 |
| Neutral Citation | [2011] UKUT 440 (TCC) |
| Date | 08 November 2011 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2011] UKUT 440 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Sales J.
A Connelly for the appellant.
A Nathan (instructed by the Solicitor to HM Revenue and Customs) for the respondents.
The following case was referred to in the decision:
Devaynes v Noble ENRENR(1816) 1 Mer 529; 35 ER 767
Capital gains tax - Enterprise Investment Scheme relief - Re-investment - Requirement for money to be "employed" in a qualifying business - Actual expenditure or earmarking of funds - Rule in Clayton's Case - First in, first out - Share subscription money held in investment account - Use to fund trading losses - Taxation of Chargeable Gains Act 1992, Sch. 5B, Taxation of Chargeable Gains Act 1992 schedule 5B subsec-or-para 1para. 1.
This was an appeal against a decision of the First-tier Tribunal ([2009] UKFTT 366 (TC); [2010] TC 00304) refusing an appeal by Skye Inns Ltd against a notice issued by HM Revenue and Customs to the effect that the shares in that company subscribed for by the first appellant (Mr Richards) should be treated as ineligible for Enterprise Investment Scheme (EIS) re-investment relief and also refusing an appeal by Mr Richards regarding related claims for tax relief which had been rejected by HMRC.
In 1998/99, Mr Richards made a chargeable gain of £2,895,489 arising on the sale of shares in a catering company run by him. He re-invested £1,358,805 of the gain in Skye Inns which acquired and operated two public houses. HMRC accepted that that investment satisfied the conditions for EIS re-investment relief under para. 1 of Sch. 5B to the Taxation of Chargeable Gains Act 1992, since they had been wholly employed by Skye Inns within the relevant timescale given by para. 1(2)(g) and (h) of Sch. 5B. In December 2001, Mr Richards invested the balance of his chargeable gain from 1998/99 (£1,536,684) by subscribing for further shares in Skye Inns. It was contemplated that the moneys would be invested by Skye Inns in acquiring a third public house, but that acquisition fell through. It kept the money in an instant access investment account separate from its current account. In the two years to December 2003, Skye Inns traded at a loss. It transferred money from its deposit account to its current account to cover the losses. It also transferred sums to meet certain capital expenditure incurred on renovating and extending the two public houses.
HMRC maintained that the requisite 80 per cent of the further investment had not been "employed" wholly for the purposes of Skye Inns' qualifying activity within 12 months as required by para. 1(2)(g) of Sch. 5B. The FTT dismissed Mr Richards's appeal against HMRC's refusal to allow him to claim EIS investment relief in relation to the further investment. The FTT rejected an argument that the share subscription moneys should be treated as having been spent and so employed in the business by treating every gross cost of the business as having been met out of the share subscription moneys, with all gross income remaining unspent on the deposit account. The only realistic approach was to treat funds raised in the share issue as having been employed in the business only when actually spent on realistic net increases to the net trading assets or when reserved to supplement the current receipts of the trade, either in funding losses or meeting expenses that could be ranked as current business requirements. On that basis 80 per cent of the funds raised had not been employed in the business in the 12-month period.
The appellants' submission was that the proper approach to analysing whether money was "employed" for a qualifying activity for the purposes of para. 1(2)(g) of Sch. 5B was to apply a first in, first out analysis in respect of a company's funds, both with respect to actual and planned expenditure, in accordance with the rule in Clayton's Case (1861) 1 Mer 529.
Held, dismissing the appeal:
1.The approach of the FTT was correct as a matter of law and its application of the law to the facts of the case could not be faulted. The word "employed" in para. 1(2)(g) of Sch. 5B and s. 289(1)(c) of the Income and Corporation Taxes Act 1988 was not defined in the legislation. It was a word which required the money in question actually to be used in some way for the purposes of carrying on the qualifying activity within the relevant one-year period. If the moneys were spent in carrying out the qualifying activity in that period, they would have been "employed" for the purposes of that activity; but the concept of being "employed" for the purpose of an activity extended more widely than that. Moneys would also be employed for the purposes of an activity if the company had earmarked them in the relevant period for some specific purpose, which did not necessarily have to be a purpose calling for expenditure in that period, and was keeping them in reserve for that purpose. In such a case, the company might be found to have employed the moneys for that purpose within the relevant period. Whether moneys had been notionally set aside with sufficient precision for a specific purpose so that they could be said to have been employed for the purpose of a qualifying activity would be a matter for assessment by a tribunal on the particular facts of an individual case. In making such an assessment the tribunal was not obliged to follow the rule in Clayton's Case. Nor was it obliged to adopt a first in, first out analysis of a company's funds. It was very unlikely in most cases that such an analysis would be found to be appropriate on the facts. In the present case, for example, Skye Inns was operating two public houses which had significant income as well as expenditure. It was only necessary to dip into the subscription moneys held in the investment account to the extent that the business in respect of those two properties made trading losses. The subscription moneys were not employed in Skye Inns' qualifying activities until in some sense committed to that activity. The FTT was fully entitled to find that that only occurred as and when Skye Inns suffered net losses (after taking account of its trading income), and that accordingly the condition in para. 1(2)(g) of Sch. 5B was not satisfied.
2.In any event, Clayton's Case only provided guidance regarding the approach to allocation of payments into and out of a single account, but whereas Skye Inns operated two accounts, the investment account and the current account. The subscription moneys were paid into the deposit account, but its business expenses were paid out of the current account into which trading income was also paid. It would not be permissible to amalgamate the two accounts for the purpose of application of the rule in Clayton's Case. In this case, a payment into the deposit account could not be treated as matched by a payment out of the current account.
1.This is an appeal on a point of law to the Upper Tribunal from the decision of the First-tier Tribunal (Tax Chamber) (Mr Howard M Nowlan and Ms Elizabeth Bridge) ("the Tribunal"), dated 15 December 2009, refusing an appeal by Skye Inns Ltd ("Skye Inns") against a notice issued by the respondents ("HMRC") to Skye Inns to the effect that the shares in that company subscribed for by the first appellant ("Mr Richards") should be treated as ineligible for Enterprise Investment Scheme ("EIS") re-investment relief and also refusing an appeal by Mr Richards regarding related claims for tax relief which had been rejected by HMRC: [2009] UKFTT 366 (TC); [2010] TC 00304. The appellants claim that on a proper approach, as a matter of law, the shares are shares eligible for relief and Mr Richards is entitled to EIS re-investment relief in respect of a tranche of investment by him of £1,536,684 by way of subscription for ordinary shares in Skye Inns.
2.The argument before me focused on Mr Richards' appeal. He claims relief against a liability for capital gains tax of £614,673.60, relying on the provisions of paragraph 1 of Schedule 5B to the Taxation of Chargeable Gains Act 1992, entitled "Enterprise Investment Scheme: Re-investment" ("Schedule 5B"). Paragraph 1 of Schedule 5B provides:
1Application of Schedule
-
(1)This Schedule applies where-
(a) there would (apart from paragraph 2(2)(a) below) be a chargeable gain ("the original gain") accruing to an individual ("the investor") at any time ("the accrual time") on or after 29th November 1994;
(b) the gain is one accruing either on the disposal by the investor of any asset or in accordance with section 164F or 164FA, section 169N, paragraphs 4 and 5 below or paragraphs 4 and 5 of Schedule 5C;
(c) the investor makes a qualifying investment; and
(d) the investor is resident or ordinarily resident in the United...
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