Underwood v Revenue & Customs

This is a renewed application by Mr P J Underwood for permission to appeal against an order dated 31 January 2008 of Briggs J in the Chancery Division by which the judge dismissed Mr Underwood’s appeal against the decision dated 16 May 2007 of the Special Commissioners. The respondent is Her Majesty’s Commissioners for Revenue and Customs. Lloyd LJ refused permission on the papers. The proposed appeal is a second appeal and so permission ought only to be given if the appeal crosses the threshold of CPR 52.13. Lloyd LJ was unconvinced that it did. The submissions to me are that it does.

The story is as follows. Mr Underwood bought some land in Norfolk in July 1990 for £1.4 million with a bank loan of £1 million. The land then suffered a drop in value. On 2 April 1993 Mr Underwood contracted to sell it to Rackham Limited for £400,000 with a contractual completion date of 31 December 1993, later extended to 31 December 1994. Also on 2 April 1993, Rackham granted Mr Underwood an option, exercisable before 31 December 1995, to repurchase the land for £400,000 plus any of various costs incurred in relation to the land by Rackham (in the event there were none) and 10% of the difference between the price so payable and the value of the land at the date of the exercise of the option. On the face of it, that transaction does not appear to have been a particularly commercial one for Rackham to have made, but there was no dispute that the grant of the option was part of a bona fide debt rescue operation and was an arm’s length deal.

By the end of September 1994, the land was valued at £750,000 on the open market, with a £600,000, forced sale value. On 29 November 1994 Mr Underwood entered into a contract to repurchase the land from Rackham for £420,000. £20,000 of that price represented the 10% uplift that Rackham was entitled to if the buy-back option was exercised. It was common ground between the parties that the contract was treated as equivalent to the exercise of the option. Had the option been exercised, the contract thereby constituted would have been required to have been completed 28 days later. The buy-back contract that was instead entered into did not specify a completion date, the relevant provision being, I am told, left blank. At the same time as that contract was made, Mr Underwood contracted to sell the land to Brickfields Estates Limited for £600,000. .

The position was, therefore, that on 29 November 1994 there were three contracts in place. First, Mr Underwood’s contract for a sale of the land to Rackham for £400,000; second, Rackham’s contract for the sale back of the land to Mr Underwood for £420,000; and third, Mr Underwood’s sale to Brickfield for £600,000. If all three contracts had been completed by the formal execution of three transfers, there would have been stamp duty of £14,200. The legal title had, however, throughout remained and still was in Mr Underwood and, on completion as between Mr Underwood and Rackham, there could simply have been an exchange of cheques, with Rackham paying Mr Underwood £400,000 and Mr Underwood paying Rackham £420,000. As between those two parties, the commercial position was that Rackham was entitled to £20,000. All that therefore needed to be done in practice in order to complete the contracts was for Mr Underwood to pay Rackham £20,000 and then transfer the land to Brickfields for £600,000. That is what was done save that the £20,000 was not, I understand, actually paid, but was treated as a liability from Mr Underwood to Rackham, a feature upon which, I understand, nothing turns; and what was done was done pursuant to the parties’ instructions to Mr Cunningham -- the solicitor who acted for all parties -- which was to complete the contracts on 30 November 1994.

The problem that led to the litigation is that Mr Underwood made substantial capital gains in the year ending 5 April 1993. His case is that those gains were negatived by the loss he made in that year upon the sale of the land to Rackham on 2 April 1993 for £400,000, having bought it in 1990 for £1.4 million. The difficulty in his path was, however, that a contract for sale is not itself a disposal for capital gains tax purposes, although when and if a disposal and acquisition under a contract is effected, section 28 of the Taxation of Capital Gains Act 1992 provides that the time at which it is made is the time the contract is made and not, if different, the time the asset is conveyed or transferred. Section 28 is therefore a timing provision, deeming the disposal and acquisition -- when they occur -- to take place at the time of the contract.

The issue before the Special Commissioners and Briggs J was whether, for capital gains tax purposes, there was in November 1994 a disposal of the land by Mr Underwood to Rackham under the 1993 contract. If there was, section 28 backdated that disposal for tax purposes to 2 April 1993. Mr Underwood’s position was that there was such a disposal on 30 November 1994 with, in consequence, that backdating effect. The Revenue’s position was that there was no such deemed disposal on 2 April 1993 because section 28 only applies if an asset is disposed of and acquired under a contract. That will only occur if the vendor disposes of the asset and the purchaser becomes beneficially entitled to it under the contract. The Revenue’s case was that, in the circumstances of the case, neither of those events occurred.

The matters before the Special Commissioners were Mr Underwood’s appeals against assessments to capital gains tax, which the Commissioners dismissed. Their reasoning appears to have been that although the offsetting of the payments respectively due between Mr Underwood and Rackham under the 1993 sale contract and the 1994 repurchase contract constituted payment under those contracts, there was nonetheless no disposal of the land to Rackham giving it the beneficial interest in it for even the briefest moment. This was because, as the cross-payments were set off, there was no moment when Rackham had paid Mr Underwood but Mr Underwood had not paid Rackham.

Briggs J arrived at the same conclusion, that the appeals should be dismissed, but did so by a different route, one under which he found that neither the 1993 nor the 1994 contract was performed. Both contracts, he found, were simply abandoned, the abandonment being settled by way of the payment of the difference between the value of their combined rights and obligations. As the contracts were not performed, it followed that no beneficial interest passed to Rackham under the 1993 contract.

Mr Soares, in support of the present application, submits that the different approaches of the Special Commissioners and Briggs J were both wrong. There is, as he submits and I accept, a good arguable case that, for capital gains tax purposes, a set-off can be regarded as the equivalent to actual payment and that what happened on 30 November 1994 was that Mr Underwood and Rackham are respectively to be regarded as having paid what was respectively due from each to the other under the two contracts. The further argument advanced is that, once that is accepted, it is logically difficult to see how the transactions of 30 November 1994 represented other than the performance of those two contracts. As to Briggs J’s approach, it is said that there was no factual basis for his finding that the parties effectively abandoned the contract and that he was not entitled to make that finding. As to the point that no beneficial interest ever passed to Rackham, it is said that it is difficult to see how Rackham was able to turn the land to account and make a profit of £20,000 unless it is regarded as having acquired a beneficial interest in the land enabling it to make that profit.

The issues raised by the case are of considerable interest and would make an ideal topic for a moot. By itself that does not qualify the appeal as fit for hearing by this court, but with due deference to Lloyd LJ, who did not regard the appeal as crossing the Part 52.13 threshold, I have come to the view that it does. Central to the proposed appeal is the meaning of the concept of a disposal in the field of capital gains taxation and whether there was any disposal to Rackham in this case. Whilst I recognise that the facts are unusual, it appears to me that the court’s determination of the issues raised by the appeal is likely to have an important relevance extending beyond the present case, and the applicant’s skeleton argument instances types of case in which it might. In the circumstances, I have decided that Mr Underwood, is entitled to permission to appeal and I give him that permission.