Blackwell v HM Revenue & Customs

For expenditure to be deductible under section 38(1)(b) of the Taxation of Capital Gains Act 1992, enhancement of an asset’s value is insufficient by itself. In relation to shares, their state or nature is determined by the rights and obligations attached to them, including those arising under the company’s articles. A shareholder’s personal contractual undertaking to a third party does not alter that state or nature.

Expenditure incurred to obtain release from such an undertaking is therefore not reflected in the state or nature of the shares. Nor does it establish, preserve or defend title to the shares, or title to a right over them, where the shareholder’s rights continued to exist throughout. A commercial interpretation cannot displace the restrictive statutory language governing allowable deductions.

The appellant held shares which enabled him to impede a takeover of a publishing company. Under a 2003 agreement with a prospective bidder, he accepted £1 million in return for personal undertakings restricting how he could vote or sell the shares. When another bidder later made a more valuable offer, the appellant paid £17.5 million of his own money to secure release from those undertakings.

He sought to deduct that payment when calculating his chargeable gain on the subsequent disposal of the shares. The First-tier Tribunal allowed his appeal, but the Upper Tribunal allowed HMRC’s appeal in [2015] UKUT 0418 (TCC). The taxpayer appealed to the Court of Appeal.

The central question was whether the payment qualified under either limb of section 38(1)(b) of the Taxation of Capital Gains Act 1992: as enhancement expenditure reflected in the state or nature of the shares, or as expenditure incurred in establishing, preserving or defending title to the shares or a right over them.

1. Appeal dismissed. The £17.5 million paid to obtain release from the appellant’s personal contractual undertakings was not deductible under either limb of section 38(1)(b) of the Taxation of Capital Gains Act 1992. Briggs LJ gave the judgment, with which Patten and Longmore LJJ agreed.

2. Under the first limb, the state or nature of shares is identified by the rights and obligations which the shares confer or impose on a shareholder, including those arising under the company’s articles. The 2003 agreement conferred no proprietary interest in the shares on the third party. It merely imposed personal contractual restrictions on the appellant’s exercise of his existing voting and disposal rights. Making and discharging that agreement therefore left the state or nature of the shares unchanged.

3. It was common ground that the payment was made to enhance the value of the shares. That was insufficient. Section 38(1)(b) requires an identifiable change in the asset’s state or nature distinct from an enhancement in value. Expenditure which removes a restriction personal to the owner does not meet that requirement merely because the release makes the asset more valuable in that owner’s hands.

4. Capital gains legislation should generally receive a commercial and businesslike interpretation, consistently with the approach in W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300. That principle does not create a necessary conflict between commercial common sense and juristic analysis. Clear and deliberately restrictive statutory language governing allowable deductions may produce an outcome which a businessperson considers surprising. The different wording of sections 21 and 22 concerning part disposals did not enlarge the deductions permitted by section 38.

5. Under the second limb, the payment neither established nor re-established the appellant’s title to the shares or to any right over them. His title and the rights attached to the shares existed throughout. The agreement affected only the use he could make of those rights. Paying for its discharge extinguished personal obligations; it did not establish, preserve or defend title.

1. Court of Appeal (Civil Division): Dismissed the taxpayer’s appeal and affirmed the Upper Tribunal’s conclusion that the expenditure was not deductible under section 38(1)(b) of the Taxation of Capital Gains Act 1992.
2. Upper Tribunal (Tax and Chancery Chamber): In [2015] UKUT 0418 (TCC), allowed HMRC’s appeal and held that the expenditure was neither incurred on the shares and reflected in their state or nature nor incurred in establishing, preserving or defending title.
3. First-tier Tribunal: Allowed the taxpayer’s appeal against HMRC’s refusal of the deduction.