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‘If that had gone in, it would have been a goal’. (David Coleman)

I’ve been easy on you recently – all that fun stuff about carrier bags, bridge and zoos. Time for something a bit more hard-core, the calculation of chargeable gains.

Gains (and losses) on disposals of assets are, broadly, computed by deducting allowable expenditure from the disposal proceeds. Section 49(1)(c) TCGA 1992 provides that no allowance is made in the first instance for ‘any contingent liability in respect of a warranty or representation made on a disposal by way of a sale or lease of property other than land’.  However where such a contingent liability becomes enforceable and is enforced, an adjustment can be made (section 49(2)).

The wording of section 49(1)(c) and section 49(2) was recently considered by the Court of Session (Scotland’s supreme civil court) in Morrison v HMRCUnfortunately the decision may be of limited value because of ball-fumbling by HMRC in front of the try line.

In 2000 M sold his shares in Morrison plc (a construction company, not to be confused with the supermarket chain), of which he was chairman, and made a gain. In 2002 the purchaser brought an action for damages claiming that M had misrepresented the profitability of the company at the time of the sale. The action was eventually settled, without admission of liability, by M making a payment of £12 million.

M sought to adjust the earlier capital gains tax calculation on the basis that the payment was made on the enforcement of a contingent liability in respect of representations made by him on the sale of his shares. HMRC denied the claim.

The First-tier Tribunal decided in favour of M in an anonymised decision published as Mr Ben Nevis. Well, it turns out that M was one of Scotland’s wealthiest men so I suppose Scotland’s highest peak was an appropriate alias.

The Upper Tribunal allowed HMRC’s appeal. It found that M had made the alleged misrepresentations and, therefore, the payment, in his capacity as chairman, not as shareholder. Also, the contingent liability had to be directly related to the value of the consideration for the disposal which this was not. M appealed.

Before the Court of Session HMRC argued that, in order to give rise to an adjustment, a contingent liability had to be:

1. incurred in the capacity of seller;

2. incurred on the disposal of the asset sold; and

3. relevant to the computation of the gain, in that enforcement of the liability had the effect of reducing the value of the consideration received on the sale of the asset.

The Court of Session allowed M’s appeal.  Its reasoning was as follows:

1. The capacity in which the representations were made did not make a material difference. There was no reference in section 49(1)(c) TCGA 1992 to the capacity of the person making the disposal.

2. The representations made by M related to the purchase of all the issued shares in the company. The basis on which M’s personal contingent liability arose was that he had made the representations which induced the purchase of the shares, including those owned by him.

3. It followed that the representations were made ‘on a disposal by way of sale’ of M’s shares and the requirements of section 49(2) for adjustment of the computation of M’s chargeable gain were met.

In the Upper Tribunal Lord Glennie had expressed doubts about whether a liability for misrepresentation or negligent misstatement was in fact a contingent liability. In spite of this, HMRC conceded before the Court of Session that the payment made by M to settle the action was a contingent liability within the meaning of section 49(1)(c) which was ‘enforced’ by the bringing of the action and its settlement.

All three judges criticised HMRC for making this concession. Lord Gill, the Lord President, did not mince his words:

‘[2] …The consequence of that concession is that we have heard no submissions from either side on various questions that might have been thought to arise in the interpretation of section 49(1)(c); for example, whether a contingent liability, if such it was, can be said to have been enforced when the formal settlement agreement involves no acceptance of liability by the taxpayer and is without prejudice to his continued denial of any liability on his part.

[3] That concession, having been made in relation to an important provision in a taxing statute, may have significant consequences in other cases. It is therefore unfortunate that counsel for the respondents was unable to articulate what, in their contention, was the nature of the contingent liability and in what way it was enforced by the action and its settlement. In the result, as counsel for the appellant insisted, we must simply decide this appeal on the basis that it is undisputed that a contingent liability of the appellant has been enforced. 

[4] In a matter of this kind, it is inappropriate that a concession by the respondents on the interpretation of a statutory provision of general application should be made orally at the bar. In my view, any such concession should be made in writing and in clear and precise terms. Moreover, to enable the court to assess the soundness of the concession, the respondents should give a clear explanation of the reasoning on which it is made.’

Ouch.  Consider HMRC’s knuckles well and truly rapped. Their Counsel must have been squirming.

The case was remitted to the First-tier Tribunal to determine whether the whole, or, if not, what part, of the settlement payment made by M was attributable to representations made by him giving rise to the contingent liability falling within section 49(1)(c).

A £12 million deduction at 40% would equal a £4.8 million refund. That’s a lot to let slip through your fingers. Unsurprisingly there has been no crowing HMRC press release. Imagine if there had been:

‘HMRC drop the ball: ill-advised concession in Morrison case may cost the taxpayer £4.8 million.

“Aye, every little helps” purred Sir Fraser Morrison when interviewed’.

Tax lawyer specialising in business tax, SDLT and VAT

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