Revenue and Customs v D'Arcy

For the purposes of the accrued income scheme, a person cannot cease to be entitled to securities before becoming entitled to them. Where a taxpayer agrees to sell securities short and acquires them later on the same day, entitlement ceases when it is acquired, rather than before acquisition by operation of a deeming provision governing the date of transfer. The statutory test for holding securities on a day is therefore not satisfied where entitlement both begins and ends during that day. The analysis must focus on the specific wording and purpose of the holding provisions. A tax-avoidance motive does not justify adopting a different construction. The accrued income scheme and the manufactured-interest deduction provisions are separate statutory regimes, and an unintended gap between them does not permit the court to rewrite the legislation.

The Revenue appealed against the substantive part of a Special Commissioner’s decision, reported at [2006] STC (SCD) 543, which allowed in principle the taxpayer’s appeal against amendments to her 2001/02 tax return. The taxpayer had entered into repo and associated gilt transactions designed to generate an allowable deduction for a manufactured interest payment.

The parties agreed that the deduction was available. The issue was whether the accrued income charge was excluded by section 715(1)(b) of the Income and Corporation Taxes Act 1988, because the taxpayer did not hold securities above £5,000 on any day in the relevant year. The central question was whether she ceased to be entitled to securities on the same day on which she became entitled to them.

1. The appeal was dismissed. The Special Commissioner had reached the correct conclusion for essentially the right reasons.
2. Section 710(7)(b) of the Income and Corporation Taxes Act 1988 provides that a person holds securities on a day if entitled to them throughout the day, or if he becomes and does not cease to be entitled to them on that day. The ordinary meaning of cease requires prior entitlement. A person cannot cease to be entitled before becoming entitled.
3. Section 710(6), which deems a transfer under an agreement to occur when the agreement is made, does not displace the specific and self-contained tests in section 710(7) for determining whether securities are held at a time or on a day. In a short sale, the vendor ceases to be entitled to the securities when he first becomes entitled to them, but not before.
4. The structure of section 710(7)(b) confirms this interpretation. The test focuses on whether entitlement continues to the end of the day, because only then can income accrue during the relevant period. Where entitlement both begins and ends during one day, no income accrues during the taxpayer’s period of ownership and the accrued income scheme has no relevant amount on which to operate.
5. The Revenue’s construction would also create tension with section 710(7)(a), since the taxpayer would be treated as holding securities on a day at times when she plainly held none. The absence of a compensating accrued income charge did not justify a different construction. The accrued income and manufactured-interest provisions were enacted at different times and for different purposes, and section 727A emphasised their separation. The court was not entitled to close an unintended statutory gap by reference to the taxpayer’s motive.

• Special Commissioner: substantive appeal allowed in principle; decision reported at [2006] STC (SCD) 543.
• High Court (Chancery Division): Revenue’s appeal dismissed.