Underwood v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rimer:,Lord Justice Lawrence Collins,Lord Justice Goldring,Lord Neuberger of Abbotsbury |
| Judgment Date | 15 December 2008 |
| Neutral Citation | [2008] EWCA Civ 1423,[2008] EWCA Civ 964 |
| Docket Number | Case No: A3/2008/0403 |
| Court | Court of Appeal (Civil Division) |
| Date | 15 December 2008 |
[2008] EWCA Civ 1423
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR JUSTICE BRIGGS
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Neuberger Of Abbotsbury
Lord Justice Lawrence Collins and
Lord Justice Goldring
Case No: A3/2008/0403
CH/2007/0415
Mr Patrick C Soares and Ms Hui Ling McCarthy for the Appellant
Mr Christopher Tidmarsh QC (instructed by the Solicitor for HMRC) for the Respondent
Hearing date: November 19, 2008
I Introduction
A bought land in 1990 for £1.4 million. When the value of the land fell, A contracted in 1993 to sell the land to B Ltd for £400,000, and B Ltd granted A an option to buy back the land at the original contract price plus 10% of any increase in value. In 1994, before the revised contractual completion date, and before any conveyance of the land, A (without formally exercising the option) entered into an agreement to repurchase the property from B Ltd for £420,000, and also agreed to sell the land to C Ltd (a company controlled by A) for £600,000.
The £420, 000 price in the 1994 contract was the 1993 contract price plus 10% of the difference between the 1993 contract price and the increased 1994 value of £600,000.
The solicitor acting for both A and B Ltd prepared a transfer of the land from A to C Ltd without any intervening documentation to reflect the position as between A and B Ltd. A was treated as owing to B Ltd £20,000, which represented the difference between the sale price in the 1993 contract (£400,000) and the sale price in the 1994 contract (£420,000). A sought to establish a loss for capital gains tax purposes on the disposal to B Ltd.
The entry into the 1993 contract for the sale of the land was not itself a disposal for capital gains tax purposes. Section 28(1) of the Taxation of Chargeable Gains Act 1992 (“the 1992 Act”) deems the disposal and acquisition (once they have occurred) to take place at the time of the contract. It deals only with the question of fixing the time of disposal and not with the substantive liability to tax. The time of the contract is deemed to be the time of the disposal only if there actually is a disposal: Jerome v. Kelly [2004] UKHL 25, [2004] 1 WLR 1409, at [11].
The Revenue's position was that the only disposal by A was to C Ltd (and because C Ltd was connected with A, his right to set off the loss was restricted), and that there had been no disposal to B Ltd. The issue therefore was whether (as the taxpayer contended) in 1994 there was a disposal of the asset (the land) to B Ltd; or whether (as the Special Commissioners decided) there was simply a performance of the 1993 contract for sale and the 1994 contract for repurchase by set-off; or whether (as the judge decided) the parties had abandoned any intention to proceed to completion of either contract, and the parties had simply agreed to substitute a payment of £20,000.
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 an appeal by the taxpayer, Mr P J Underwood, against estimated assessments to capital gains tax for the years ending April 5, 1993 and April 5, 1995.
The appeal does not raise any issue of principle, but concerns the (by no means easy) task of characterising, as a matter of law, what the parties did or must be taken to have done when the tripartite transaction was effected in 1994.
II The facts in detail
Mr Underwood acquired land in Thetford, Norfolk (“the Property”) on July 16, 1990 for £1.4 million, with the assistance of a loan of £1 million from the Royal Bank of Canada (“the Bank”). The market for property of that type went into serious decline, and by March 1993 it was professionally valued as having an open market value of £400,000 and a forced sale value of £290,000.
contract of sale and option agreement
By a contract (“the 1993 Contract”) dated April 2, 1993 Mr Underwood agreed to sell the Property to Paul Rackham Ltd (“Rackham Ltd”, a company owned by Mr Paul Rackham) for £400,000, with a contractual completion date of December 31, 1993. In his tax return for the year ending April 5, 1993 Mr Underwood claimed a loss in relation to the Property of about £1.174 million.
On the same day as the 1993 Contract was made, Mr Underwood and Rackham Ltd entered into an option agreement (“the Option”) by which Rackham Ltd granted to Mr Underwood the right, by notice in writing served at any time before December 31, 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 Ltd, plus 10% of any difference between the sum so identified and the value of the Property on the date of exercise of the Option (to be determined if necessary by an expert). The Revenue accepted that the 1993 Contract and the Option were to be treated as arm's length commercial transactions.
Extension of completion date to December 31, 1994
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 Ltd agreed to extend the completion date to December 31, 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.
Sale to Brickfields Estates Ltd
By November 1994 Mr Underwood had decided that the best solution to his continuing financial difficulties was to sell the Property to Brickfields Estates Ltd (“Brickfields”), a company which he controlled, for £600,000. Since Rackham Ltd 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 Mr Underwood's net cost of exercising the Option and re-acquiring the Property would be £20,000.
Contract for re-purchase
After negotiations with Mr Rackham, Mr Underwood and Rackham Ltd entered into a contract for the re-purchase of the Property for £420,000, on November 29, 1994 (“the 1994 Contract”). As the Special Commissioners recorded, the 1994 Contract was treated by Mr Underwood and Rackham Ltd as the exercise of the Option, and it was accepted by Mr Underwood and the Revenue that the 1994 Contract was in effect the exercise of the Option. It was 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.
Contract of sale to Brickfields
On the same day, Mr Underwood exchanged contracts for the sale of the Property to Brickfields for £600,000, a company of which he was the controlling shareholder.
Mr Cunningham
Mr Underwood, Rackham Ltd, Brickfields and the mortgagees of the Property all used the services of the same solicitor, a Mr Cunningham, a partner in Cunningham John, who drafted all the relevant contracts. The judge said that it appeared 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.
The Special Commissioners' findings (paras 28 and 30, which were based on an agreed statement of facts) were:
“28. Mr Cunningham, who was the solicitor acting for [Mr Underwood], 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 [Mr Underwood] to Rackham Ltd to complete the 1993 contract, one from Rackham Ltd to [Mr Underwood] under the exercise of the option, and one from [Mr Underwood] 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 [Mr Underwood] throughout, [Mr Underwood] was able to execute just one transfer of the property direct to Brickfields. The position as between [Mr Underwood] 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 [Mr Underwood] for the property under the option agreement (£420,000). Mr Cunningham therefore prepared a transfer of the property from [Mr Underwood] 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 [Mr Underwood] to sell to Brickfields.
…
30. [Mr Underwood] did not then pay Rackham Ltd the sum of £20,000 under the option agreement but [Mr Underwood] was recorded in...
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