Whether corresponding deficiency relief could result in ‘negative income’
Our pick of this week's cases
In A Scott v HMRC [2020] EWCA Civ 21 (22 January 2020), the Court of Appeal upheld the decision of the Upper Tribunal rejecting the taxpayer’s claim that his capital gains should be charged at the lower rate as a result of a claim for corresponding deficiency relief (CDR).
Mr Scott had substantial investments in life assurance policies and in 2006/07 and 2007/08 he made claims for CDR under ITTOIA 2005 s 539. The effect of such a claim was that income covered by CDR would be chargeable to income tax at the basic rate rather than the higher rate, but Mr Scott considered that the claims should have a similar effect on his chargeable gains, so that they were chargeable at the lower rate of 20% rather than at the higher rate of 40% (under the rules in force at that time).
Mr Smith argued that, in calculating his unused basic rate band for CGT purposes, his total income should be reduced by the full amount of the CDR, producing a negative total income figure. This negative figure should then be deducted from the basic rate limit, extending the unused basic rate band beyond the normal basic rate limit. Only in this way could effect be given to the parliamentary intention of unifying the rates of income tax and CGT.
The court held that, although there was a statutory objective of harmonising the rates of the two taxes, this did not lead to the conclusion that a relief from income tax (CDR) should also operate as a corresponding relief from CGT. In calculating the unused basic rate band, once the total income had been notionally reduced to zero, the relief given by CDR could go no further. There was no longer any income which could be reduced, ‘because negative total income is not a meaningful concept’. A natural reading of the statutory language did not admit of the ‘ambitious construction’ for which Mr Smith contended.
Why it matters: Unsurprisingly, the Court of Appeal agreed with the FTT and the Upper Tribunal in rejecting the taxpayer’s interpretation and the concept of ‘negative income’. The court undertook a very close analysis of the highly complex legislation relating to gains from life assurance policies and the interaction between the income tax and capital gains tax rules. Ultimately, though, when a judge describes the taxpayer’s counsel’s argument as ‘ambitious’ you know that HMRC will be home and dry.
Whether corresponding deficiency relief could result in ‘negative income’
Our pick of this week's cases
In A Scott v HMRC [2020] EWCA Civ 21 (22 January 2020), the Court of Appeal upheld the decision of the Upper Tribunal rejecting the taxpayer’s claim that his capital gains should be charged at the lower rate as a result of a claim for corresponding deficiency relief (CDR).
Mr Scott had substantial investments in life assurance policies and in 2006/07 and 2007/08 he made claims for CDR under ITTOIA 2005 s 539. The effect of such a claim was that income covered by CDR would be chargeable to income tax at the basic rate rather than the higher rate, but Mr Scott considered that the claims should have a similar effect on his chargeable gains, so that they were chargeable at the lower rate of 20% rather than at the higher rate of 40% (under the rules in force at that time).
Mr Smith argued that, in calculating his unused basic rate band for CGT purposes, his total income should be reduced by the full amount of the CDR, producing a negative total income figure. This negative figure should then be deducted from the basic rate limit, extending the unused basic rate band beyond the normal basic rate limit. Only in this way could effect be given to the parliamentary intention of unifying the rates of income tax and CGT.
The court held that, although there was a statutory objective of harmonising the rates of the two taxes, this did not lead to the conclusion that a relief from income tax (CDR) should also operate as a corresponding relief from CGT. In calculating the unused basic rate band, once the total income had been notionally reduced to zero, the relief given by CDR could go no further. There was no longer any income which could be reduced, ‘because negative total income is not a meaningful concept’. A natural reading of the statutory language did not admit of the ‘ambitious construction’ for which Mr Smith contended.
Why it matters: Unsurprisingly, the Court of Appeal agreed with the FTT and the Upper Tribunal in rejecting the taxpayer’s interpretation and the concept of ‘negative income’. The court undertook a very close analysis of the highly complex legislation relating to gains from life assurance policies and the interaction between the income tax and capital gains tax rules. Ultimately, though, when a judge describes the taxpayer’s counsel’s argument as ‘ambitious’ you know that HMRC will be home and dry.
