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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Stolkin v HM Revenue and Customs  EWCA Civ 447 (10 May 2016)
Cite as:  EWCA Civ 447,  2 All ER 69,  1 WLR 2995,  STC 1731,  WLR 2995,  BTC 19,  STI 1533
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ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
THE HON MR JUSTICE DAVID RICHARDS
 UKUT 165 (TCC)
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE SALES
| MARK STOLKIN
|- and -
|THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS
Aparna Nathan (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondent
Hearing date: 28 April 2016
Crown Copyright ©
Lord Justice Floyd:
"The tax return of the taxpayer respondent, Mark Stolkin, for 2005/06 included chargeable gains in respect of several properties. Some of the properties had been used wholly for business or wholly for non-business purposes but two of the properties were mixed-use properties. The two mixed-use properties were Flat 3, Observatory Gardens, London W8, of which the taxpayer owned 50%, and Lanterns Court, Millharbour, London. The un-tapered gain resulting from these disposals was £11,374,910. The taxpayer made a claim for EIS relief in the sum of £3,499,999, and it is agreed that the claim was valid and the relief was due. In his tax return, the taxpayer divided the gain arising on the disposal of the two mixed-use properties between business and non-business use in accordance with the statutory provisions dealings with taper relief. He sought to apply EIS relief 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, and applying taper relief to the business gains, so far as not relieved by the balance of the EIS relief."
Capital gains tax
"(1) This Schedule applies where-
(a) there would (apart from paragraph 2(2)(a) below) be a chargeable gain ("the original gain") accruing to an individual ("the investor") at any time ("the accrual time") on or after 29th November 1994;
(b) the gain is one accruing either on the disposal by the investor of any asset or …;
(c) the investor makes a qualifying investment; and
(d) the investor is resident or ordinarily resident in the United Kingdom at the accrual time and the time when he makes the qualifying investment and is not, in relation to the qualifying investment, a person to whom sub-paragraph four below applies."
"(1) On the making of a claim by the investor for the purposes of this Schedule, so much of the investor's unused qualifying expenditure on the relevant share as-
(a) is specified in the claim, and
(b) does not exceed so much of the original gain as is unmatched,
shall be set against a corresponding amount of the original gain.
(2) Where an amount of qualifying expenditure on the relevant shares is set under this Schedule against the whole or part of the original gain-
(a) so much of that gain as is equal to that amount shall be treated as not having accrued at the accrual time, but
(b) paragraphs 4 and 5 below shall apply for determining the gain that is to be treated as accruing on the occurrence of any chargeable event in relation to any of the relevant shares."
"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 1 year; or
(b) it is a gain on the disposal of a non-business asset with a qualifying holding period of at least 3 years."
"(1) Section 2A shall be construed subject to and in accordance with this Schedule.
(2) The different provisions of this Schedule shall have effect for construing the other provisions of this Schedule, as well as for construing section 2A."
"(1) Subject to the following provisions of this Schedule, a chargeable gain accruing to any person on the disposal of any asset is a gain on the disposal of a business asset if that asset was a business asset throughout its relevant period of ownership."
"(2) Where –
(a) a chargeable gain accrues to any person on the disposal of any asset,
(b) that gain does not accrue on the disposal of an asset that was a business asset throughout its relevant period of ownership, and
(c) that asset has been a business asset throughout one or more periods comprising part of its relevant period of ownership,
a part of that gain shall be taken to be a gain on the disposal of a business asset and, in accordance with sub-paragraph (4) below, the remainder shall be taken to be a gain on the disposal of a non-business asset.
(3) Subject to the following provisions of this Schedule, where subparagraph (2) above applies, the part of the chargeable gain accruing on the disposal of the asset that shall be taken to be a gain on the disposal of a business asset is the part of it that bears the same proportion to the whole of the gain as is borne to the whole of its relevant period of ownership by the aggregate of the periods which –
(a) are comprised in its relevant period of ownership, and
(b) are periods throughout which the asset is to be taken (after applying paragraphs 8 and 9 below) to have been a business asset.
(4) So much of any chargeable gain accruing to any person on the disposal of any asset as is not a gain on the disposal of a business asset shall be taken to be a gain on the disposal of a non-business asset.
(5) Where, by virtue of sub-paragraphs (2) to (4) above, a gain on the disposal of a business asset accrues on the same disposal as a gain on the disposal of a non-business asset –
(a) the two gains shall be treated for the purposes of taper relief as separate gains accruing on separate disposals of separate assets;
(b) the periods after 5th April 1998 for which each of the assets shall be taken to have been held at the time of their disposal shall be the same and shall be determined without reference to the length of the periods mentioned in sub-paragraph (3)(a) and (b) above."
Order of claiming reliefs
"… The available deferral relief is to be deducted from the chargeable gains accruing in the year of assessment before taper relief is applied. In a sentence, this is because taper relief only applies to chargeable gains that the 1992 Act treats as accruing in the particular year of assessment."
The decision of the First-tier Tribunal
i) The taxpayer was able to choose to allocate his EIS claim against a non-business asset, leaving a gain on a separate business asset to be greatly reduced by the generous measure of taper relief. If that were so, it was odd that the same did not apply to a mixed use asset.
ii) The F-tT compared two cases. In the first, the taxpayer disposed of two adjacent houses, one of which was used for business and one which was not. In the second he owned a single title to the same two houses. It was curious that these two substantially identical examples should be treated differently for taper purposes. It was also curious that the second taxpayer could avoid the consequences of HMRC's construction by effecting a part disposal of the asset, so as only to dispose of the non-business part, followed, a day later, by the residue comprising the business part.
The decision of the Upper Tribunal
"25. On this basis, the taxpayer's claim fails, unless he can point to a statutory authority, applicable to claims for EIS relief, for treating the single gain arising on the disposal of a single mixed-use asset as two gains arising on the disposal of two assets, referable to the asset's business and non-business use.
26. No such authority exists in the provisions for EIS relief or generally in the provisions for the identification and computation of chargeable gains. The taxpayer submits that this is nonetheless the effect of paragraphs 3 and 9 of schedule A1 which, he submits, apply not only for the purposes of taper relief but also for the purposes of claiming EIS relief."
i) The restricted ambit of the deeming provisions was clear from their context and by express provision. The entire contents of the schedule were to do with taper relief. Section 2A(7) and paragraph 1 of Schedule A1 made the limited purpose of the provisions of the schedule expressly clear.
ii) If it had been intended on the introduction of taper relief in 1998 to alter the existing provisions for EIS relief so as to allow the disposal of a single asset to be treated as the disposal of two separate assets, it would have been done in terms.
iii) The distinction between paragraphs 3(2) and 3(5) did not assist the taxpayer. They took effect together for the purposes of taper relief alone.
iv) Notwithstanding the fact that the taxpayer's purpose in seeking to allocate EIS relief to the non-business part of the gain was made in order to take better advantage of the taper relief provisions, the question was whether there was any basis for applying EIS relief in this manner, and there was not.
v) The F-tT's view that it would be odd not to allow mixed use assets to be treated in this way when the taxpayer could elect to claim EIS relief on separate non-business assets, and the other suggested anomalies pointed to by the F-tT, might assist if there was any real ambiguity in the legislation, which there was not.
The arguments on appeal
Lord Justice Sales