Robert Ames v The Commissioners for HMRC

For the EIS capital gains tax exemption, relief is attributable to shares only where an EIS income-tax-relief claim has been made and given effect by a reduction in the investor’s income-tax liability. Eligibility for income tax relief alone is insufficient.

A court may adopt a rectifying construction only where it is abundantly clear that legislation contains an inadvertent error and what Parliament would have enacted. An anomalous outcome does not meet that standard without clear evidence of legislative mistake.

Where HMRC exercises its unfettered discretion under section 5(1) of the Commissioners for Revenue and Customs Act 2005, it must consider residual exceptional circumstances and material facts. Applying guidance mechanically so as to exclude that residual discretion unlawfully fetters the power.

Mr Ames acquired EIS-eligible shares but made no EIS income-tax-relief claim because his income was below his personal allowance. On a later disposal he claimed that the gain was exempt from capital gains tax.

The First-tier Tribunal dismissed his tax appeal, holding that the exemption required an income-tax-relief claim and a reduction in income-tax liability. It also held that it lacked jurisdiction to admit a late claim: [2015] UKFTT 337 (TC).

On appeal, Mr Ames challenged that construction and sought a rectifying construction. He also sought judicial review of HMRC’s refusal to admit his late claim, alleging a flawed methodology, irrationality and conspicuous unfairness.

1. The tax appeal was dismissed. Under section 150A(2) of the Taxation of Chargeable Gains Act 1992, read with section 150A(11) and section 289B of the Income and Corporation Taxes Act 1988, an amount of EIS relief is attributable to shares only if an individual’s income-tax liability has actually been reduced and that reduction is attributed to the shares. The expression does not mean relief which was merely available but unclaimed.

   That construction was reinforced by section 150A(3). Although that subsection did not directly govern Mr Ames’ case, its references to an actual reduction in income-tax liability supported a consistent reading of the exemption. The 1995 amendment preserved the link between income-tax relief and CGT exemption.

2. No rectifying construction was available. Applying the principles in Inco Europe Ltd v First Choice Distribution [2000] 1 WLR 586, the Tribunal could not be abundantly sure that Parliament intended CGT exemption to operate without income-tax relief, that the link was inadvertent, or what alternative provision Parliament would have enacted. A potentially anomalous result for investors with little or no taxable income did not establish a drafting mistake.

3. The judicial-review claim succeeded on the methodology ground. HMRC accepted that section 5(1) of the Commissioners for Revenue and Customs Act 2005 conferred an unfettered discretion to admit a late claim. Its guidance included a residual category for exceptional cases in which refusal might be unreasonable. The decision maker instead treated only three specified categories as available, and so fettered the discretion.

   HMRC also failed to consider material matters: the late claim would produce no income-tax reduction and would be a formality to preserve a future CGT exemption; Mr Ames’ circumstances made it understandable that he did not appreciate a claim and waiver of personal allowance were required; and HMRC’s own guidance did not address that unusual position.

4. The Tribunal did not separately declare the refusal irrational or conspicuously unfair under R v Inland Revenue Commissioners, ex parte Unilever plc [1996] STC 681. On the information reasonably available to the decision maker, the high public-law threshold was not met. HMRC’s decision of 5 October 2015 was nevertheless quashed and remitted for reconsideration in light of the judgment.

• Upper Tribunal (Tax and Chancery Chamber): dismissed the appeal against the First-tier Tribunal’s tax decision, but allowed judicial review in part by quashing HMRC’s refusal to admit the late claim and remitting it for reconsideration.
• First-tier Tribunal (Tax Chamber): dismissed Mr Ames’ appeal concerning the CGT exemption and held that it had no jurisdiction to admit the late EIS claim or review HMRC’s care-and-management decision: [2015] UKFTT 337 (TC).