Court of Appeal

Published June 7, 2007

Revenue and Customs Commissioners v Smallwood

Before Lord Justice Sedley, Lord Justice Carnwath and Lord Justice Lawrence Collins

Judgment May 17, 2007

Section 41(2) of the Taxation of Chargeable Gains Act 1992 did not operate to restrict allowable losses that would otherwise have accrued in respect of a taxpayer’s units in an enterprise zone property unit trust when he received distributions that gave rise to a deemed disposal under section 122 of that Act.

The Court of Appeal so held in a reserved judgment, dismissing an appeal by the Revenue and Customs Commissioners from the dismissal by Mr Justice Warren (The Times August 23, 2006; [2006] STC 2050) of their appeal against a determination of a special commissioner, Mr Stephen Oliver, QC, in favour of the taxpayer, Charles St Clair Smallwood.

Mr Michael Furness, QC, for the commissioners; Mr John Watson, solicitor, and Miss Kate Marten, solicitor, for the taxpayer.

LORD JUSTICE LAWRENCE COLLINS said that in March 1989 the taxpayer invested £10,000 in an enterprise zone unit property trust. The trustee spent the subscription, and those of other subscribers, on land and buildings. To the extent that the money was spent on buildings, the taxpayer obtained first-year capital allowances of £9,678, which was set off against his general income for 1988/89.

About 10 years later, the trustee realised a substantial consideration in respect of the property. The realisation of the investment was structured in such a way as not to give rise to any balancing charge on the unit holders.

On February 26, 1999, the taxpayer received a capital distribution of £5,000 on his units. By virtue of sections 99 and 122(1) of the 1992 Act, he was to be treated as if he had disposed of an interest in the units in consideration of that capital distribution which represented some 97 per cent of the then value of the units.

Subject to the effect of section 41(2), which was in issue on the appeal, the taxpayer incurred a capital loss of £4,804. A further part disposal in 1990/00 gave rise to a further capital loss of £61.

The Revenue submitted that section 41(2) of the 1992 Act excluded from sums allowable as a deduction expenditure in respect of which any capital allowance had been made, thus excluding the £9,678 capital allowance already claimed.

If they stood alone, the effect of sections 38(1), 39(1) and 41(2) of the 1992 Act would be that the taxpayer would not have been entitled to deduct the £9,678 as consideration for the purpose of computing a loss, because section 41(2) disallowed expenditure in respect of which a capital allowance had been made.

However, that would give no effect to section 99, which provided that the provisions of the 1992 Act applied in relation to the unit trust scheme as if the scheme were a company and the rights of the unit holders were shares in the company.

The effect of section 99 was that for capital gains tax purposes the unit holder had acquired shares in the unit trust. The consideration was the sum subscribed.

When the units were disposed of, the sum allowable as a deduction was the consideration: section 38(1)(a). Section 39(1) excluded from the sums allowable under section 38 any expenditure allowable as a deduction for income tax purposes.

But such a sum had not been included, and could not therefore be excluded, in the sums allowable under section 38 because it was not included in the consideration of the units.

It also followed that section 41(2) had no application because, like section 41(1), it was concerned with exclusion of sums which would otherwise be allowable.

Lord Justice Carnwath delivered a concurring judgment and Lord Justice Sedley agreed.

Solicitor: Solicitor, Revenue and Customs; Ashurst.

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