A special commissioner decided that any charge to tax on the sale of gilts under an accrued income scheme was excluded by ICTA 1988, s. 715(1)(b) because on no day was the taxpayer entitled to any gilts as defined by the scheme; nor did the deeming provision in s. 715(6), that there had been no transfer of the gilts, apply to treat her as entitled to them on the day.

Facts

The taxpayer was the founder and chief executive officer of a company which carried on a specialist executive search business. She entered into a tax avoidance scheme involving a series of transactions in gilts designed to create a tax deduction for a manufactured interest payment. The way the scheme was intended to work was that the taxpayer made a tax-free capital gain on the difference between the sale (cum div) and the purchase (ex div) to and from a market maker (JPMS) of certain gilts of £1,469,720. Pursuant to a ‘repo’ transaction she paid manufactured interest of £1,511,250 which was deductible from her total income, but she received repo interest of £18,538.77 and additional interest of £1,038.86. Accordingly she claimed tax relief on the balance of £1,491,672.50. Although in principle there was a charge to tax on the sale under the accrued income scheme, the taxpayer contended that the charge did not apply because of ICTA 1988, s. 715(1)(b). The Revenue issued a closure notice contending that the Ramsay principle applied with the effect that no deduction was created (and a smaller amount of income was not taxable). They subsequently abandoned that contention and argued that the deduction was allowable but that the taxpayer was taxable on an amount approximately equal to the deduction under the accrued income scheme. The taxpayer appealed against the conclusion in the closure notice and amendments to her return for 2001–02 to give effect to that conclusion. She argued that the Revenue could not change the basis of their conclusion as stated in the closure notice; and that the accrued income scheme did not give the result for which the Revenue contended.

The Revenue contended that TMA 1970, s. 28A required them to state their conclusions and to amend the self-assessment. They were therefore entitled to make alternative arguments in the course of an appeal. Section 31(1)(b) was the ‘gateway’ for taxpayers who wished to appeal. It was designed to ensure that the taxpayer could appeal only once there had been an amendment to the self-assessment. The appeal commissioners’ duty (and therefore jurisdiction) under s. 50 was to determine the amount of tax payable on the assessment under appeal, which might be higher than that in the amendment. The reference in s. 50(6) and (7) to the self-assessment was to the self-assessment in its amended form; the issue was whether the taxpayer was over- or undercharged by a self-assessment as a whole. The commissioners on appeal had to determine the figure; they were not required to adjudicate on the reasons for the amount tax raised in the assessment. Accordingly, it was open to the tax inspector to argue that the accrued income scheme applied in this appeal.

The taxpayer contended that s. 50(7) had to be read in the context of the particular appeal. The reference in s. 50(7)(a) to the taxpayer being undercharged to tax by a self-assessment was to an undercharge relating to the subject-matter of the appeal. In the context of an appeal against a conclusion stated in a closure notice, and an amendment to give effect thereto, the undercharge to which s. 50(7)(a) referred was to one relating to that conclusion and to that amendment. Accordingly s. 50(7) required the special commissioner to increase the assessment if he upheld, or varied, the conclusion and decided that the amendment to give effect to the (varied) conclusion was inadequate.

Issues

Whether the Revenue could argue that the accrued income scheme applied, contrary to their conclusion stated in the closure notice that the Ramsay principle applied; and whether any charge to tax under the scheme was excluded.

Decision

The special commissioner (Dr John Avery Jones) (allowing the appeal) said that self-assessment made major change to the system of appeals. Section 31(1)(b) (an appeal might be brought against the conclusion or amendment in a closure notice) and s. 50(6) and (7) (the appeal commissioners’ jurisdiction was to determine whether the taxpayer was over- or undercharged by the self-assessment) did not fit well together but s. 50(6) (and similarly s. 50(7)) had to be read in the context of s. 31(1)(b). If, on an appeal against a conclusion or amendment to a self-assessment stated in a closure notice, it appeared to the majority of the commissioners present at the hearing, by examination of the taxpayer on oath or affirmation, or by other evidence, that the taxpayer had been overcharged by an amended self-assessment, the assessment should be reduced accordingly, but otherwise the assessment should stand good. The scope of an appeal against a conclusion or amendment made by a closure notice depended on the facts. In this appeal the conclusion was very specific, that ‘the disposal, acquisition and repo over £31,000,000 nominal of Treasury 93/4% 2002 should be regarded as a composite whole which was circular and self cancelling’. The scope of the appeal therefore concerned those transactions in the gilts and nothing else. There was no need for the appeal system to allow scope for alternative contentions when they were not stated in the closure notice.

The next question was how conclusions of law stated in the closure notice fitted into the system of appeals against the conclusion or amendment. Section 50(6) and (7) were silent on matters of law. Whether a taxpayer was under – or overcharged was to be decided by examination of the taxpayer on oath or affirmation, or by other evidence and the assessment should be reduced or increased accordingly (or stand good). It was inherent in the appeal system that the tribunal must form its own view on the law without being restricted to what the Revenue stated in their conclusion or the taxpayer stated in the notice of appeal. It followed that either party could (and in practice frequently did) change their legal arguments. Accordingly, on the procedural issue, it was open to the Revenue to argue the accrued income scheme issue on the basis that it was a new argument of law related to the facts identified by the closure notice. Section 710(7)(a) determined that a person held securities at a particular time if he was entitled to them at the time, thus incorporating the rule in s. 710(6) that time of entitlement was determined by the time of the agreement. Section 710(6)(b) envisaged two possibilities, first that a person was entitled to securities throughout the day, which meant that, again taking the timing from the agreement to buy or sell, he held them at midnight on day 1 to midnight on day 2; and secondly, that he became and did not cease to be entitled to them on the day.

The distinction between the two parts was that the first looked at entitlement during the whole of the day and the second to entitlement during part of the day. Both parts of s. 710(6)(b) operated by reference to the position at the end of the day. One determined whether a person held securities at the end of the day by applying s. 710(6) and (7)(a). If therefore a person bought and sold (whether in that order or the sale preceding the purchase) securities during the course of a day, he did not hold them on that day. Once the deemed timing rule in s. 710(6) had been applied, the rules in (7) looked to the reality of ownership for the whole day or a part of a day up to the end of the day. When applied to a short sale, the reality was that the period of ownership was non-existent. To say that one became and did not cease to be entitled on the day, implied that there was a period of ownership that started during the day and continued until the end of the day. It was a misuse of language to say that the taxpayer ceased to be entitled to them before he became entitled.

There was no need for the accrued income scheme to apply to a short sale. Looking at the reality of what was evident throughout s. 710(7), at the end of the day the taxpayer was not entitled to any gilts, so it could not be said that she became and did not cease to be entitled to them on that day because that implied that she was still entitled to them at the end of the day. That interpretation did not conflict with a purposive interpretation of s. 715(1)(b) which used the concept of holding securities on a day, meaning either throughout, or at the end of, the day, thus bringing s. 710(7) into play with the necessary consequence that a dealing in the course of a day in securities with a nominal value of more than £5,000 still satisfied the exception in s. 715(1)(b). Accordingly, the taxpayer was not entitled to the gilts on any day within the meaning of s. 710(7) and the relief in s. 715(1)(b) applied. The purpose of s. 715(6) was to prevent the accrued income scheme from applying in the circumstances stated by deeming there to have been no transfer. The purpose did not extend to saying that the consequence must be that the person was still entitled to the securities, seemingly for ever, so that the taxpayer could never rely on s. 715(1)(b) in the future. Accordingly, s. 715(6) was a deeming provision whose purpose was to prevent a double charge by removing any charge under the accrued income scheme by the mechanism of deeming there to have been no transfer (while recognising that there had in fact been one). It would be going beyond the purpose of the deeming to argue that, since there had been no transfer, the taxpayer owned the gilts forever.

(2006) Sp C 549. Decision released 14 June 2006.