Capital gains tax — Compensation for disturbance under section 34 of Agricultural Holdings Act 1948 — Compensation not derived from the disposal of an asset — Sum which Parliament says is to be paid for loss and expense unavoidably incurred on termination of tenancy by notice to quit — No liability to capital gains tax
This was an
appeal by the inspector of taxes against a decision of General Commissioners,
who had upheld an appeal by the present respondent, Robert James Powell,
against an assessment to capital gains tax in respect of compensation for
disturbance under section 34 of the Agricultural Holdings Act 1948. The
compensation had been paid by the respondent’s landlord, Milton Keynes
Development Corporation, in respect of part of Southside Farm, Milton Keynes,
of which the respondent had been the tenant.
Brian
Davenport (instructed by the Solicitor of Inland Revenue) appeared for the
appellant; the respondent appeared in person.
Giving
judgment, TEMPLEMAN J said: For the purposes of this appeal I must assume that
Mr Powell, the respondent, was paid £591 by way of compensation for disturbance
under section 34 of the Agricultural Holdings Act 1948. The question is whether
that sum is liable to capital gains tax in his hands.
Section 34
applies where the tenancy of an agricultural holding terminates by reason of a
notice to quit, and in consequence the tenant quits the holding. If these
conditions are satisfied, then subsection (1) continues, ‘compensation for the
disturbance shall be payable by the landlord to the tenant in accordance with
the provisions of this section.’
Subsection (2) defines the amount of the compensation as ‘the loss or
expense directly attributable to the quitting of the holding which is
unavoidably incurred by the tenant upon or in connection with the sale or
removal of his household goods, implements of husbandry, fixtures, farm produce
or farm stock on or used in connection with the holding,
his claim for compensation.’
Then there is
a proviso that, ‘(a) compensation shall be payable . . . equal to one year’s
rent of the holding at the rate at which rent was payable immediately before
the termination of the tenancy without proof by the tenant of any such loss or
expense as aforesaid; (b) the tenant shall not be entitled to claim any greater
amount than one year’s rent of the holding unless before the sale of any such
goods, implements, fixtures, produce or stock as aforesaid he has given to the
landlord a reasonable opportunity of making a valuation thereof; . . . (d) the
tenant shall not in any case be entitled to compensation in excess of two
years’ rent of the holding.’ The plain
object of this section is to provide by statute that a landlord shall make good
to a tenant the loss or expense which he unavoidably incurs in connection with
the matters mentioned in the section; and to avoid any quibbling and quarrels
about matters it is said that he is not to get less than one year’s rent or
more than two, and if he wants more than one year he must prove his loss. That
is a very sensible provision for giving a tenant compensation for loss or
expense unavoidably incurred. Looking at section 34 by the light of nature and
asking ‘Can that amount be liable to capital gains tax?,’ the answer is,
‘Nonsense; you cannot make a gain out of a sum of money which is given to
compensate for loss or expense which is unavoidably incurred.’
However, that
is not the end of the matter, because one must go to the Finance Act 1965 and
find what, in that Act, the legislature thought and decided was a capital gain
for the purposes of the Act. Section 19(1) of the Finance Act 1965 provides:
‘Tax shall be charged in accordance with this Act in respect of capital gains,
that is to say chargeable gains computed in accordance with this Act and
accruing to a person on the disposal of assets.’ Section 22(1) provides: ‘All forms of
property shall be assets for the purposes of this Part of this Act’; and
subsection (3) states that for the purposes of the Act there is ‘a disposal of
assets by their owner where any capital sum is derived from assets.’ What is said in this case is that Mr Powell
had a lease and that lease was an asset, it was property of some form. He disposed
of that asset by accepting the notice to quit which was given and by getting
out, and he derived a capital sum from the asset when he did so. The capital
sum was the amount of the compensation under section 34, which, as I have said,
was £591. It does not seem to me that the compensation paid under section 34 is
derived from the asset, namely, the lease. It is not derived from an asset at
all: it is simply a sum which Parliament says shall be paid for expense and
loss which are unavoidably incurred after the lease has gone.
Section 22(3)
of the Finance Act 1965 delimits some particular matters which are liable to
charge; paragraph (c) charges ‘capital sums received in return for forfeiture
or surrender of rights, or for refraining from exercising rights.’ But in my judgment this section 34 compensation
is not a capital sum received in return for the surrender of rights. It is not
paid as a result of a bargain in which the tenant says, ‘If I get out, will you
pay me £591?’ It is a sum paid where a
tenant is faced with a notice to quit and must get out. Parliament says that in
these circumstances, which have nothing to do with a surrender, the tenant is
to have a sum by way of compensation for irretrievable loss. So, whether viewed
by the light of nature or by the construction of the Finance Act 1965, I do not
think that this sum is liable to capital gains tax, and the inevitable result
is that the appeal must be dismissed with costs to be taxed.
