Taxation – Capital gains tax – Relief – Taxation of Capital Gains Act 1992 – Disposal of properties used for both business and non-business purposes – Claim for Enterprise Investment Scheme relief on gains – Claim for taper relief on remainder of business element – Whether appellant legitimately dividing gains into notional business and non-business elements for purpose of claim to EIS relief – Whether such division possible only in relation to taper relief claim – Application of deeming provision in para 3(5) of Schedule A1 to Taxation of Capital Gains Act 1992 – Appeal dismissed
The appellant submitted a tax return for 2005/06 that included chargeable gains in respect of several properties of which he had disposed, including two mixed- use properties that had been used for both business and non-business purposes. The untapered gain resulting from those disposals was £11,374,910.
The appellant sought to reduce its liability for capital gains tax under section 2 of the Taxation of Capital Gains Act 1992 by claiming two different forms of tax relief on the disposals of the mixed-use properties. First, after dividing the gains into notional non-business and business elements, he claimed Enterprise Investment Scheme relief of £3,499,999 against the full amounts of the non-business gains on the two properties, so eliminating those gains as chargeable gains in that year of assessment. It was not disputed that that claim was valid and the relief was due. Although EIS relief was also claimed against the business element of the gain, it only eliminated part of that gain. Second, the appellant then sought to apply taper relief, at the more favourable rate for business use, to the remainder of the business gains.
The respondents decided that the appellant was not entitled to apply his EIS relief in that way. They first applied the EIS relief, in the total amount claimed by the appellant, to the gains on the mixed-use assets, without any prior sub-division into business and non-business use. They then separated the balance of the gain into business and non-business elements in the proportions claimed by the appellant. The result was that not all the balance of the gain could benefit from the rate of taper relief for business use. The difference in the tax bill was £481,000.
The respondents’ decision was reversed by the first-tier tribunal but was subsequently reinstated by the Upper Tribunal: see [2013] UKUT 165 (TCC). The appellant appealed. The central issue concerned the interaction between the two forms of tax relief and, in particular, the effect of the deeming provision in para 3(5) of Schedule A1 to the 1993 Act providing that, where a gain on the disposal of a business asset accrued on the same disposal as a gain on the disposal of a non-business asset, the two gains “shall be treated for the purposes of taper relief as separate gains accruing on separate disposals of separate assets”.
Held: The appeal was dismissed.
Taper relief was governed by section 2A of, and Schedule A1 to, the 1992 Act. The application of the deeming provisions of para 3 of Schedule A1 was confined to the purposes of taper relief, as was clear both from the wording of section 2A(7), under which Schedule A1 was to have effect “for the purposes of this section”, and from the terms of para 3, all of which had to be read as a coherent whole.
The appellant’s approach to computation was flawed since it involved an attempt to use the deeming provisions of para 3 beyond the purposes of taper relief. While his approach had no impact on the amount of EIS relief which he could claim, and did not involve the use of the deeming provisions in the calculation of EIS relief, it did involve their use in the application of that relief, so as to produce separate net gains in respect of notional business and non-business assets.
Such an approach did not accord with the way in which the EIS and taper relief provisions were intended to operate. Under the overall charging provision in section 2, tax was chargeable in respect of chargeable gains accruing in the year of assessment. The effect of a valid claim to EIS relief was that, to the extent of that claim, gains were deferred and did not accrue in the year of assessment. Thus, when section 2A said that chargeable gains were reduced by applying taper relief, it was the gains accruing in the year of assessment to which the relief was applied, and the gains in question were those which appeared after the application of EIS relief.
The provisions of para 3(3) of Schedule A1 then explained how the gain was to be divided up in accordance with the proportions of business and non-business use. When the chargeable gain had been divided up in this way, the deeming provision in para 3(5) was applied so that, for the purposes of taper relief, the two gains were treated as separate gains accruing on separate disposals of separate assets. However, it was the net gain after the application of EIS relief which was divided into two separate gains in that way for the purposes of taper relief. Paragraph 3(5) did not require the original, real, disposal to be treated as two separate notional disposals of two separate assets, which were then eligible for the application of EIS relief. It merely allowed the separate gains from the disposal of the mixed-use asset to be fed back into section 2A for the calculation of taper relief. Any different conclusion would be inconsistent with the rule that a claim for EIS relief in respect of an asset should be applied before any claim for taper relief: Daniels v Revenue and Customs Commissioners [2005] STC 684 applied.
Further, the provisions relating to EIA relief in Schedule 5B to the 1992 Act provided no basis for a notional sub-division of an asset into business and non-business uses at the stage of the application of EIS relief. The provisions operated on disposals of real assets. While it was possible to seek relief against only part of a gain, that did not enable the taxpayer selectively to apply EIS relief to gains on separate notional business and non-business assets.
Accordingly, the overall position was that EIS relief applied in priority to taper relief. The first task in the case of a mixed-use asset was to calculate the overall gain on the sale of the real asset and apply EIS relief, to calculate the gain that accrued in the year of assessment. Taper relief was then applied to the net gain, which, for that purpose, was to be divided according to the proportions of business and non-business use. At that stage, the taper relief was calculated on the basis of the fiction that there had been separate disposals of separate assets giving rise to separate gains, applying the provisions of section 2A. That did not mean that there were deemed to be separate disposals of separate assets at the earlier stage of EIS relief.
Michael Sherry (instructed by Shipleys LLP) appeared for the appellant; Aparna Nathan (instructed by the legal department of HM Revenue and Customs) appeared for the respondents.
Sally Dobson, barrister
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