Scott v HM Revenue and Customs

Corresponding deficiency relief under the Income Tax (Trading and Other Income) Act 2005 is relief from higher-rate income tax. Under section 6(2) of the Taxation of Chargeable Gains Act 1992, it is treated as a deduction from total income only when calculating any unused basic rate band transferable to chargeable gains under section 4(4). The deeming provision does not create negative income, extend the basic rate band by the full amount of the relief, or convert income-tax relief into a corresponding reduction of capital gains tax. Once total income is notionally reduced to nil, no further benefit arises. A general policy of harmonising income tax and capital gains tax rates cannot displace clear statutory language.

Mr Andrew Scott appealed against closure notices requiring capital gains tax on substantial chargeable gains in 2006/07 and 2007/08. He had obtained corresponding deficiency relief from higher-rate income tax arising from deficiencies on life assurance policies.

The First-tier Tribunal dismissed his appeals, and the Upper Tribunal dismissed his further appeal: [2017] UKFTT 385 (TC); [2018] UKUT 236 (TCC). The issue before the Court of Appeal was whether section 6(2) of the Taxation of Chargeable Gains Act 1992 permitted the relief to produce negative total income and thereby extend the basic rate band for capital gains tax purposes.

The appeal was dismissed unanimously. Lord Justice Henderson delivered the leading judgment, with the Master of the Rolls and Nicola Davies LJ agreeing.

1. Corresponding deficiency relief under section 539 of the Income Tax (Trading and Other Income) Act 2005 is confined to determining the taxpayer’s extra liability to higher-rate income tax. Although section 539(1) refers to a deduction from total income, section 539(3) limits the relief to that specified purpose.
2. Section 6(2) of the Taxation of Chargeable Gains Act 1992 modifies section 4(4) by requiring a calculation on the hypothesis that the taxpayer’s income has been reduced by the amount of relief obtained. Since section 4(4) concerns the unused portion of the basic rate band, the relevant income is total income.
3. The hypothesis allows corresponding deficiency relief to reduce total income for the calculation of any unused basic rate band. It does not permit total income to become negative. Once total income has been notionally reduced to nil, the relief cannot create any further unused basic rate band or reduce capital gains tax beyond that point.
4. Income tax and capital gains tax retain distinct structures and reliefs. The general aim of rate harmonisation does not show that Parliament intended an income-tax relief already used against higher-rate income tax to provide an equivalent reduction in higher-rate capital gains tax. Clear and specific wording would have been required, comparable to the express extension of the basic rate limit in section 414 of the Income Tax Act 2007 for Gift Aid.
5. The statutory language was clear. Applying the ordinary meaning of the words in their legislative context, as supported by R v Environment Secretary, Ex p Spath Holme Limited [2001] 2 AC 349 and Edwards v Kumarasamy [2016] UKSC 40, purposive considerations could not justify the wider construction advanced by the taxpayer. The decisions of the tribunals below were correct.

• Court of Appeal (Civil Division): dismissed the appeal against the Upper Tribunal’s decision. [2020] EWCA Civ 21
• Upper Tribunal (Tax and Chancery Chamber): dismissed Mr Scott’s appeal from the First-tier Tribunal. [2018] UKUT 236 (TCC)
• First-tier Tribunal: dismissed the appeals against HMRC’s closure notices. [2017] UKFTT 385 (TC)