Underwood v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE BRIGGS,Mr Justice Briggs |
| Judgment Date | 31 January 2008 |
| Neutral Citation | [2008] EWHC 108 (Ch) |
| Docket Number | Case No: CH/2007/0415 |
| Court | Chancery Division |
| Date | 31 January 2008 |
[2008] EWHC 108 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Briggs
Case No: CH/2007/0415
Mr Patrick C Soares and Miss Hui Ling McCarthy (instructed by Scrutton Bland, Chartered Accountants, Sanderson House, Museum Street, Ipswich IP1 1HP) for the Appellant
( Mr Christopher Tidmarsh QC instructed by Solicitor of HMRC, Somerset House, East Wing, London WC2R 1LB) for the Respondent
Approved Judgment
Hearing dates: 23 rd—24 th January 2008
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
This is an appeal from a decision (“the Decision”) of the Special Commissioners (Mr T Wallace and Dr A N Brice) promulgated on 16 th May 2007 whereby they dismissed an appeal by Mr P J Underwood against two estimated assessments to capital gains tax for the years ending 5 th April 1993 and 5 th April 1995.
The issue in the case is whether the manner in which Mr Underwood and a company known as Paul Rackham Limited (“Rackham”) dealt with the rights and obligations arising from the simultaneous existence of two contracts for the sale and repurchase of land in Thetford, Norfolk (“the Property”), for different prices, gave rise to a disposal by Mr Underwood of his beneficial interest in the Property under the contract of sale, such that it would pursuant to section 28 of the Taxation of Chargeable Gains Act 1992 (“the 1992 Act”) be deemed to have been disposed of at the time of the contract of sale. The respondent (“HMRC”) has contended throughout that it did not, and the Special Commissioners agreed. Mr Underwood claims that it did.
THE FACTS
The issues raised on this appeal involve no contentious questions of primary fact. Rather, they concern the correct legal analysis of how the parties to those two contracts dealt with them, and the application of the 1992 Act to their dealings, once correctly analysed. The relevant facts are to be found set out in admirable detail in paragraphs 8 to 33 of the Decision. While those paragraphs constitute worthwhile background reading, the facts relevant to this appeal may be summarised as follows.
Mr Underwood acquired the Property on 16 th July 1990 for £1.4 million, with the assistance of a loan of £1 million from Royal Bank of Canada (“the Bank”). Not long thereafter the market for property of that type went into serious decline, such that by March 1993 it was professionally valued as having an open market value of £400,000 and a forced sale value of £290,000.
By a contract (“the 1993 Contract”) dated 2 nd April 1993 Mr Underwood agreed to sell the Property to Rackham as beneficial owner, with vacant possession, for £400,000, with a contractual completion date of 31 st December 1993. During the year of assessment which ended three days later he had made substantial chargeable gains on other assets and, although this affected only the timing of the sale rather than the decision to sell, he hoped to crystallise a substantial loss upon performance of that contract. In his tax return for the year ending 5 th April 1993 he claimed a loss in relation to the Property of £1.174 million odd.
On the same day as the 1993 Contract was made, Mr Underwood and Rackham entered into an option agreement (“the Option”) by which Rackham granted to Mr Underwood the right, by notice in writing served at any time before 31 st December 1995, to re-purchase the Property. The price payable upon exercise of the Option was to be £400,000, plus the cost of any capital improvements, maintenance or insurance of the Property by Rackham, plus 10% of any difference between the sum thus identified and the value of the Property on the date of exercise of the option (to be determined if necessary by an expert). The premium for the grant of the option was £1.
The Decision affords no explanation why Rackham was prepared by the combination of the 1993 Contract and the Option to incur all the risks of a fall in value of the Property, while at least potentially limiting itself to only a 10% share of any increase in value. Nonetheless, and after full inquiry by HMRC, it was common ground that the 1993 Contract and the Option were to be treated as arm's length commercial transactions.
The 1993 Contract did not complete, as contemplated, in December 1993, because Mr Underwood was unable to negotiate a redemption of his mortgage of the Property to the Bank. Instead, he and Rackham agreed to extend the completion date to 31 st December 1994.
By the end of September 1994 the Property had substantially increased in value. It was professionally valued at £750,000 on the open market, and at £600,000 on a forced sale. The 1993 Contract had in the meantime not been completed, and accordingly no part of the purchase price had been paid. There was not even a deposit paid on exchange.
By November 1994 Mr Underwood had decided that the best solution to his continuing financial difficulties was to sell the Property to Brickfields Estates Limited (“Brickfields”), a company with which he was connected, and which he controlled, for £600,000. For that purpose, he needed to extricate the Property from the 1993 Contract, and the Option offered a ready means to achieve that objective, albeit at a price. Since Rackham had never taken possession of the Property, it had incurred no costs of improvement, maintenance or insurance, and an assumed £200,000 rise in the market value of the Property meant that his net cost of exercising the option and re-acquiring the Property would be £20,000. After lengthy negotiations with Rackham, rather than simply send an option exercise notice, Mr Underwood and Rackham entered into a contract for the re-purchase of the Property for £420,000, on 29 th November 1994 (“the 1994 Contract”). On the same day, Mr Underwood exchanged contracts (“the Brickfields Contract”) for the sale of the Property to Brickfields for £600,000.
It is common ground that the 1994 Contract was in substantially the same terms as would have arisen by operation of law had the Option simply been exercised. Although the completion date was left blank in the 1994 Contract, since the Option provided for completion 28 days after exercise, the purchase and re-purchase of the Property had by 29 th November been contracted to be completed more or less simultaneously, at the end of December 1994.
Mr Underwood, Rackham, Brickfields and the mortgagees of the Property all used the services of the same solicitor, a Mr Cunningham, who drafted all the relevant contracts. It appears that the parties left him to devise a sensible means of dealing with the consequence of there being simultaneously in existence contracts between the same parties for the sale and re-purchase of the same property for completion at substantially the same time, at prices £20,000 apart.
Since Mr Cunningham's solution to that question lies at the heart of the case, it is worth quoting in full the Special Commissioners' findings as to what he then did, in paragraphs 28 and 30 of the Decision:
“28. Mr Cunningham, who was the solicitor acting for the Appellant, Rackham Ltd, Brickfields, and the two building societies, formed the view that there was no need to execute three transfers of the property, one from the Appellant to Rackham Ltd to complete the 1993 contract, one from Rackham Ltd to the Appellant under the exercise of the option, and one from the Appellant to Brickfields to complete the Brickfields contract. The stamp duty on three separate transfers would have amounted to £14,200. Mr Cunningham concluded that, as the legal title to the property had remained with the Appellant throughout, the Appellant was able to execute just one transfer of the property direct to Brickfields. The position as between the Appellant and Rackham Ltd could be settled by the payment of the sum of £20,000 by Appellant to Rackham Ltd, being the difference between the sale price for the property of £400,000 mentioned in the contract of 2 April 1993 and the amount due to Rackham Ltd from the Appellant for the property under the option agreement (£420,000). Mr Cunningham therefore prepared a transfer of the property from the Appellant to Brickfields and two mortgages, one to each of the two building societies. Mr Cunningham had the funds to be advanced by the two building societies in his client account. Immediately before the completion of the sale to Brickfields there were three contracts in existence: the April 1993 contract as varied for a sale to Rackham Ltd; the contract for resale by Rackham Ltd implementing the option agreement; and the contract by the Appellant to sell to Brickfields.
…
30. The Appellant did not then pay Rackham Ltd the sum of £20,000 under the option agreement but the Appellant was recorded in Rackham Ltd's books of account for the year ending on 31 December 1994 as a debtor in that amount. The Appellant paid the sum of £20,000 to Rackham Ltd on 4 December 1996.”
Those steps left Mr Underwood free to complete his sale of the Property to Brickfields for £600,000, which he did on 30 th November 2004.
ANALYSIS
The question is whether those facts disclose a chargeable disposal of Mr Underwood's interest in the Property which, pursuant to section 28, is to be deemed to have occurred on the date of the 1993 Contract. Section 28(1) provides as follows:
“(1) Subject to section 22(2), and subsection (2) below, where an asset is disposed of and acquired under a contract the time at which the disposal and acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed...
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Underwood v HM Revenue and Customs
...contract, and the parties had simply agreed to substitute a payment of £20,000. 6 This is an appeal from the judgment of Briggs J [2008] EWHC 108 (Ch), [2008] STC 1138, in which he dismissed an appeal from a decision of the Special Commissioners (Mr T Wallace and Dr A N Brice) dismissing a......