Revenue & Customs v Smallwood

For capital gains tax purposes, the statutory fiction applying to an unauthorised unit trust as if it were a company must be applied coherently. Expenditure on property acquired by the notional company is treated as expenditure of that company, even where the expenditure gives rise to capital allowances for the unit holders. It is therefore excluded from the company’s base cost under section 39(1) of the Taxation of Chargeable Gains Act 1992, but not from the unit holders’ base cost in their notional shares, because it was not consideration for acquiring those shares. Section 41(2) is not a free-standing provision of wider scope. It reintroduces only expenditure that would otherwise fall within section 39(1), and applies where the very expenditure in question gives rise to the allowance.

HMRC appealed from the decision of the Special Commissioner, His Honour Stephen Oliver QC, dated 3 November 2005. The respondent had invested in an enterprise zone property unit trust and obtained capital allowances attributable to expenditure on the trust’s property. Later distributions were treated as part disposals of his units and generated allowable losses.

The central issue was whether section 41(2) of the Taxation of Chargeable Gains Act 1992 restricted those losses by excluding from the allowable deductions expenditure in respect of which capital allowances had been made. The issue depended on the interaction of sections 39(1), 41(1), 41(2), 99 and 122.

1. Appeal dismissed. The Special Commissioner’s conclusion was upheld.
2. Section 99 of the Taxation of Chargeable Gains Act 1992 requires the trust to be treated as a notional company and the unit holders’ rights as shares. The unit holders are treated as acquiring those notional shares for their subscriptions. The subscription monies are treated as assets of the notional company, and the acquisition of the property is treated as an acquisition by that company for the purchase price.
3. Accordingly, the purchase price is not consideration given by the notional shareholders for their shares. The expenditure on the property is expenditure of the notional company for capital gains tax purposes. Section 39(1) therefore excludes from the company’s base cost expenditure in respect of which the unit holders obtained capital allowances. It does not also exclude that expenditure from the base cost of the unit holders’ notional shares.
4. That result accords with the approach to deeming provisions stated in Marshall v Kerr [1993] STC 366 and approved on appeal [1995] 1 AC 164. The statutory fiction must carry its necessary consequences, but only to the extent required by the statutory scheme.
5. Section 41(1) operates as an exclusion from the exclusion in section 39(1). Where the computation nevertheless produces a loss, section 41(2) reintroduces the relevant expenditure. It is not a free-standing provision wider than section 39(1). The phrase “in respect of it” refers to the expenditure itself giving rise to the capital allowance; it does not extend to expenditure which requires a further application or use before the allowance arises.

• High Court (Chancery Division): dismissed HMRC’s appeal from the decision of the Special Commissioner dated 3 November 2005.