O'Sullivan v HM Inspector of Taxes [2005] EWHC 2130 (Ch)

Case No CH/2004/APP/0889[2005] EWHC 2130 (Ch)IN THE HIGH COURT OF JUSTICECHANCERY DIVISION (REVENUE)APPEAL AGAINST THE DECISION OF THE SPECIAL COMMISSIONER(DR DAVID WILLIAMS)Venue Royal Courts of JusticeStrandLondon WC2A 2LLDate Thursday, October 6, 2005
Before
MR JUSTICE LAWRENCE COLLINS
Between
EILEEN O’SULLIVANAppellantD PHILIPRespondent
The appellant appeared in person assisted by Mr H Thompson, accountant for in personMr Michael Gibbon (instructed by the Solicitor of HM Revenue and Customs)appeared for respondent.Hearing: October 6, 2005
JUDGMENT

I Introduction

[1]This is an appeal against a decision of Dr David Williams, the Special Commissioner, dated September 27, 2004, whereby he confirmed an amendment made by the Revenue to an amendment made by the appellant taxpayer, Eileen O’Sullivan (“the appellant”) to her self-assessment return for the year ended April 5, 2000.[2]On May 21, 1999 the appellant sold her single share in a close company, Chiswick Skips Limited. The net proceeds of sale were £1,229,790. The share had been purchased in April 1989 for £1. Indexation relief of 43% (i.e. 43p) was available, leaving a net gain on sale of £1,229,788.58.[3]On January 31, 2001 the Revenue received her self-assessment tax return for 1999/2000. This showed a taper relief reduction of 15% in respect of the gain, and therefore a taxable gain of £1,045,320.29.[4]On October 9, 2001 she submitted an amendment reducing the tax due, on the basis that the taper relief reduction should have been 75%. Subsequently there was an enquiry into the amendment, and a further amendment by the inspector of taxes. II Indexation and taper relief[5]Indexation was introduced by the Finance Act 1982 for disposals on or after April 6, 1982, but was replaced by taper relief in the Finance Act 1998, with effect from the 1998/1999 tax year. Section 121(1) of the 1998 Act amended the Taxation of Chargeable Gains Act 1992 (“TGCA 1992”) by the introduction of section 2A.[6]Section 53(1A) of TGCA 1992 (inserted by the Finance Act 1998, s 122(1)), with effect in relation to disposals on or after April 6, 1998, provided that indexation allowance in respect of changes shown by the RPI for months after April 1998 would be allowed only for corporation tax.[7]By section 2A(3) of TCGA 1992 as amended:
“Subject to the following provisions of this Act, a chargeable gain is eligible for taper relief if (a) it is a gain on the disposal of a business asset with a qualifying holding period of at least one year.”
[8]It is common ground that the sale of the share in Chiswick Skips Ltd was the disposal of a business asset within the meaning of this subsection, and that a chargeable gain was thereby incurred.[9]By section 2A (as it stood for the purposes of the relevant calculation):
“(8) Subject to paragraph 2(4) [of Schedule A1] and paragraph 3 of Schedule 5BA, references in this section to the qualifying holding period for an asset are references – (a) except in the case of an asset falling within subsection (9) below, to the period after 5th April 1998 for which that asset had been held at the time of its disposal; and (b) in the case of an asset falling within that subsection, to the period mentioned in paragraph (a) above plus one year. (9) An asset falls within this subsection if – (a) the time which, for the purposes of paragraph 2 of Schedule A1, is the time when the asset is taken to have been acquired by the person making the disposal is a time before 17th March 1998, and (b) there is no period which in the case of that asset is a period which by virtue of paragraph 11 or 12 of that Schedule does not count for the purposes of taper relief.” (a) except in the case of an asset falling within subsection (9) below, to the period after 5th April 1998 for which that asset had been held at the time of its disposal; and (b) in the case of an asset falling within that subsection, to the period mentioned in paragraph (a) above plus one year. (a) the time which, for the purposes of paragraph 2 of Schedule A1, is the time when the asset is taken to have been acquired by the person making the disposal is a time before 17th March 1998, and (b) there is no period which in the case of that asset is a period which by virtue of paragraph 11 or 12 of that Schedule does not count for the purposes of taper relief.”
[10]By subsection (4): “Where taper relief falls to be applied to the whole or any part of a gain on the disposal of a business or non-business asset, that relief shall be applied by multiplying the amount of that gain or part of a gain by the percentage given by the table in subsection (5) below for the number of whole years in the qualifying holding period of that asset”.[11]By subsection (5), where the number of whole years in the qualifying period is 2 (as contended for by the Inspector and as found by the Special Commissioner), the percentage of the gain which is chargeable is 85%, i.e. there is a 15% taper relief reduction. If the qualifying period is 10 years or more (as contended for by the appellant), the percentage of the gain which is chargeable is 25%, i.e. a 75% taper relief reduction. III The Special Commissioner’s decision and the appeal[12]The Special Commissioner decided as follows:(a) it was not in dispute that Schedule A1 had no relevant effect;(b) the asset therefore fell within section 2A(9) of the TCGA 1992;(c) section 2A(8)(b) applied, and a year was to be added to the relevant period;(d) the holding period was under the clear terms of section 2A(8) the period after April 5, 1998 for which the asset was held, plus 1 year;(e) the disposal took place on May 21, 1999;(f) only whole years counted (section 2A(5)), and so the holding period was 2 years;(g) there was no basis for applying the period of 10 or more years in the table in section 2A(5).[13]In her appellant’s notice, the appellant said that the special commissioner was wrong in law and applied the wrong legal test to determine the qualifying years for taper relief as 2 years when the correct period was more than 10 years. In his skeleton argument on this appeal Mr Thompson, of Thompson & Co., accountants, argues that a fair reading of section 2A is that taper relief applies to the whole period when the asset was held and not merely to the period after April 5, 1998.[14]At the hearing he argued that the expression in section 2A(8) “the period after 5th April 1998 for which the asset had been held at the time of its disposal” was apt to mean the whole period from the date of acquisition because of the phrase “had been held.” The argument was that the phrase would have been “has been held” if it meant only the period from April 5, 1998. IV Conclusions[15]I am satisfied that the appeal must fail, and that the Special Commissioner’s decision was plainly right. The scheme of the legislation, and the wording of section 2A(8) is clear. By section 53(1A) of the TCGA 1992, indexation allowance for months after April 1998 is allowed only for corporation tax, and therefore not for capital gains tax.[16]The issue relates to the length of the qualifying holding period which will be applied under section 2A(4) and (5). By section 2A(8), omitting words which it is accepted have no application:
“(8) …. references in this section to the qualifying holding period for an asset are references – (a) except in the case of an asset falling within subsection (9) below, to the period after 5th April 1998 for which that asset had been held at the time of its disposal; and (b) in the case of an asset falling within that subsection, to the period mentioned in paragraph (a) above plus one year.” (a) except in the case of an asset falling within subsection (9) below, to the period after 5th April 1998 for which that asset had been held at the time of its disposal; and (b) in the case of an asset falling within that subsection, to the period mentioned in paragraph (a) above plus one year.”
[17]I consider that there is no basis for the argument for the appellant that the ordinary meaning of the expression “had been held” is apt to include the whole of the period from acquisition in 1989. The plain meaning of the subsection is that the qualifying period is the period after April 5, 1998 for which the asset had been held at the time of its disposal, namely just over a year. The expression “had been held” was inevitable as a matter of grammar since ex hypothesi the asset has been disposed of, and the expression “has been held” would be wrong on any view. In addition it would be anomalous if both indexation allowance and taper relief were available for the same period.[18]The Special Commissioner was therefore plainly right to decide that taper relief was to be granted on the basis of a qualifying period of one year, plus one year under section 2A(8)(b), the “bonus year”.[19]The appeal will therefore be dismissed.