The Court of Appeal held that TCGA 1992, s. 41(2) did not operate to restrict the allowable losses accruing to a taxpayer on a disposal of units in an enterprise zone property unit trust ('EZPUT') since the sum subscribed by the taxpayer for the units was not expenditure in respect of which a capital allowance had been made.

Facts

In March 1989 the taxpayer invested £10,000 in an enterprise zone property unit trust, known as PET8. The trustee of PET8 spent the moneys subscribed by the taxpayer and by other subscribers on land and buildings (the property). To the extent that those moneys were spent on buildings, as distinct from the land, 100 per cent first year capital allowances were obtained. The effect of the Income Tax (Definition of Unit Trusts Schemes) Regulations 1988 (SI 1988/267) (‘the 1988 Regulations’) was that the taxpayer, as unit holder, obtained his share of those capital allowances amounting to £9,678. He claimed those allowances and they were set off against his general income for 1988–89.

Nearly ten years later the property in PET8 was realised in a way which did not give rise to balancing charges on the unit holders and in the tax years 1998–99 and 1999–2000 the taxpayer received distributions of £5,000 and £125 in respect of his units. Those distributions fell to be treated for capital gains tax as part disposals by the taxpayer of his units. The Revenue disallowed the taxpayer's claim for capital losses on the ground that most of the sum subscribed by him for the units was expenditure in respect of which a capital allowance had been made within TCGA 1992, s. 41(2).

The taxpayer appealed contending that s. 41(2) did not operate to restrict the losses accruing to him since the expenditure he incurred in subscribing for his units in PET8 did not give rise to capital allowances. The expenditure which gave rise to the capital allowances was his share of the expenditure by the trustee of PET8. The Revenue contended that s. 41(2) restricted and eliminated the losses that would otherwise accrue to the taxpayer, because to the extent of £9,678 the expenditure incurred in subscribing for his units in PET8 was expenditure ‘in respect of’ which capital allowances were made within the meaning of the subsection.

A special commissioner allowed the taxpayer's appeal, concluding that the words ‘any expenditure’ in the expression ‘any expenditure to the extent to which any capital allowance ... has been or may be made in respect of it’ in s. 41(2) should be interpreted as referring to expenditure comprised in the consideration given wholly and exclusively for the acquisition of the relevant asset, i.e. the £10,000 given by the taxpayer for his units. Capital allowances were not given in respect of that expenditure. Thus s. 41(2) did not apply ((2005) Sp C 509).

The High Court dismissed the Revenue's appeal against that decision ([2006] BTC 741). The Revenue appealed.

Issue

Whether TCGA 1992, s. 41(2) restricted allowable losses otherwise accruing on the disposal of the units because part of the sum subscribed by the taxpayer for the units was expenditure in respect of which a capital allowance had been made.

Decision

Lawrence Collins LJ (Sedley and Carnwath L JJ agreeing) (dismissing the appeal) said that effect had to be given to TCGA 1992, s. 99 which provided that the unit trust scheme was to be treated as if it were a company and as if the rights of the unit holders were shares in the company. It was accepted by the Revenue that the £10,000 was deemed for CGT purposes to have been spent by the taxpayer on the acquisition of a notional shareholding and that by virtue of s. 99 the money used in the purchase of the property is, for the purposes of TCGA, treated as an asset of the notional company and not as an asset of the shareholders. But, the Revenue said, it did not follow that for the purposes of s. 39 and 41 the capital allowance was to be treated as if it were expenditure by the notional company, because there was nothing in s. 99 which required one to assume a state of facts inconsistent with the unit holders having provided the expenditure.

This was not a case in which it could be said that on its face the deeming provision would lead to injustice or absurdity unless given a special interpretation. What was said by the taxpayer was that its effect was that for all purposes the unit holder should be treated as a shareholder and the trust as a company. What was said by the Revenue was that it should not be interpreted to say that it applied for all purposes and to have consequences which were not intended, Marshall (HMIT) v Kerr [1993] BTC 194 considered.

The court rejected the Revenue's argument that the questions posed by s. 39(1) and 41(2) are simply whether any part of the acquisition cost (£10,000) was expenditure allowable as a deduction in computing income tax or in respect of which capital allowances were made, and that they were not affected by the deeming provisions of s. 99.

Section 38 of TCGA 1992 allowed a deduction from the consideration on disposal of the amount of the consideration provided by the taxpayer. The exclusion in s. 39(1) was an exclusion from the sums ‘allowable under section 38’, i.e. the amount of the original consideration provided by the taxpayer. The exclusion was that of'any expenditure' allowable as a deduction in computing income tax. The amount allowable was'the amount or value of the consideration ... given by him ... wholly and exclusively for the acquisition of the asset, together with the incidental costs' (s. 38(1)).

Section 39(1) referred back to s. 38, and s. 41(2) referred back to s. 39. The effect of s. 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 (s. 38(1)(a)). Section 39(1) excluded from the sums allowable under s. 38, any expenditure allowable as a deduction for income tax purposes. But such a sum had not been included (and therefore could not be excluded) in the sums allowable under s. 38, because it was not included in the consideration for the units. Section s. 41(2) had no application, because that section, like s. 41(1), was concerned with exclusion of sums which would otherwise be allowable.

Court of Appeal (Civil Division).
Judgment delivered 17 May 2007.