Once upon a time, taxpayers and their advisers could take at face value the wording of a tax statute and ensure with certainty that matters were within, or outside, the clear words of a charging provision. It is, after all, widely accepted that “a subject is only to be taxed on clear words, not on any ‘intendment’ or on the ‘equity’ of an Act” (per Lord Wilberforce in WT Ramsay v IRC [1982] AC 300 (known as ‘the clear words principle’). So, if the wording is clear, the taxpayer is at liberty to ‘work around’ it, or so arrange matters as to fall within an exemption, or outside a charge, as he or she pleases. If the clear words produce an unintended effect, that should surely be recognised as the ‘fault’ or consequence of the efforts of the legislative draftsman or of Parliament. Not now, it seems. If the clear words allow taxpayers to frustrate what the courts infer to be the presumed policy intent of the legislation, the courts will readily seek to apply an interpretation which rectifies the shortcoming in the drafting and imposes a charge in the manner in which it is presumed to have been intended. How far can the courts be expected to go in presuming to rectify the faults of Parliament?
In the UBS/Deutsche Bank case (UBS AG and Deutsche Bank Group Services (UK) Ltd v HMRC [2016] UKSC 13), which came before the Supreme Court in 2016, the court was required to consider if the deliberately constructed rights of securities in a special-purpose company meant that the securities were, or were not, “restricted securities”. The statutory definition of a security which is “restricted” (in s 423 ITEPA 2003 (as amended)) is clear and unambiguous. The terms of the securities in question were carefully crafted so that they fell within that definition and would therefore be exempt from tax on acquisition. If they were so restricted (by being subject to a short-term risk of forfeiture), the taxpayer companies would have succeeded in avoiding many millions of PAYE tax on bankers’ bonuses. However, the Court held that the reference, in s423, to “any contract agreement, arrangement or condition which makes provision to which any of ss(2) to (4) applies” is properly to be construed as being limited to provision having a business or commercial purpose, and not to commercially irrelevant conditions whose only purpose is the obtaining of the exemption, notwithstanding that the legislation makes no reference to such a requirement. The court took it upon itself to presume an intention of Parliament, namely that securities will not be taken to fall within the clear and prescriptive definition in the statute if taxpayers would thereby succeed in gaining exemption from tax notwithstanding a lack of commercial purpose. Of course, had the provisions included, as a requirement for such exemption, a ‘purpose test’, the need to have imposed this extra-statutory requirement would not have arisen. Parliament was surely at fault for having failed to do so.
It had been hoped (by the author, at least) that this was the ‘high water-mark’ of moves by the judiciary to correct errors in, or seek to avoid unintended consequences of, the drafting of tax statutes. Surely, if Parliament fails to ‘cover all bases’, the citizen is – and, in a democracy governed by the rule of law, should be – at liberty to order his or her affairs so as to conform to the letter of the law, albeit with a consequence which might be widely regarded as egregious, selfish and anti-social. Not so, it seems.
The recent judgement of the Supreme Court in Hancock v HMRC ([2019] UKSC 24) is a further example of the court making every effort to avoid taxpayers enjoying the benefit of having relied upon the most obvious interpretation of what are, in this case, clear words in the Taxation of Chargeable Gains Act 1992 (“TCGA”). Here, the taxpayers had taken advantage of the fact that s116(1)(b) TCGA 1992 (which, if it applied meant that a conversion of securities into other securities would qualify for ‘rollover relief’ and therefore defer, but on a later disposal result in, a charge to tax) makes clear reference to two situations: where the original shares consist of or include a QCB and the new holding would not; or where the original shares would not and the new holding would consist of or include a QCB. In the appellant’s situation (deliberately engineered), the original shares included QCBs and the new holding into which they were converted was solely of QCBs, so – it was argued – neither limb of s116(1)(b) applied and, in consequence, the later disposal of the new holding of QCBs should have been exempt from CGT by reason of s115 TCGA 1992.
One response to such an opportunistic move by the taxpayers could have been for HMRC to accept that there is a lacuna in the drafting of TCGA 1992 and arrange for it to be rectified at the next available opportunity to do so, leaving the taxpayers to deal with the opprobrium to be heaped upon them for successfully avoiding tax.
Should government and the courts not accept that such shortcomings are the responsibility of Parliament to correct, not for the justices to do so? As Lady Arden has demonstrated, that is not the view of the Supreme Court: “…the Appellants’ interpretation result would be inexplicable in terms of the policy expressed in these provisions, which is to enable all relevant reorganisations to benefit from the same rollover relief [and not for some only to be treated differently so as to enable a subsequent disposal to be treated as exempt from CGT]”.
To ensure the taxpayers were liable for tax on the gain realised by them, Lady Arden adopted the reasoning of the Court of Appeal that “it is clear that the intention of Parliament was that each security converted into a QCB should be viewed as a separate conversion (which amounts to the same thing as regarding the conversion…as consisting of two conversions, one of QCBs and one of non QCBs).” On that basis, the taxpayers triggered a chargeable gain when the rolled-over securities were disposed of. Further, and because s132 states that sections 127-131 shall apply “with any necessary adaptations” to conversions as they apply in relation to a reorganisation (i.e. providing for there to be a ‘rollover’ not involving a disposal, with the new securities being treated as the same asset acquired as the old securities were acquired), the ‘clear words principle’ was, in Lady Arden’s judgement, observed.
This is subtly different from applying the principle in Luke v IRC [1963] AC 557. That enables a court to adopt a “strained interpretation [of a statute] in place of one which would be contrary to the clear intention of Parliament, although this is limited to, for example, situations in which there is not simply some inconsistency with evident parliamentary intention but some clear contradiction with it – and the intention must be clearly found in the wording of the legislation”.
Of course, and with due respect to her ladyship, in the absence of an express statement of policy in the statute itself (which is not something normally to be found in a taxing statute – perhaps the nearest one comes to a declaration of intent is, for example, s527 ITEPA in relation to EMI options), the policy intention of HMRC and/or Parliament can only ever be inferred from the effect of the words of the Act. Drawing such an inference inevitably involves an element of subjective judgement as to which informed judges may, not unreasonably, differ in their opinions. This is surely what underlay the ‘clear words principle’ – that, and the broader notion that the citizen should not be deprived of his assets without Parliament having clearly stated the basis on which it is to be done.
If, had the appellants in Hancock been correct, the way would have been opened for relatively easy tax avoidance, the answer is surely that this is the price worth paying for ensuring that the citizen is only deprived of his wealth by the clearly expressed will of Parliament – not by what a court might infer to be the broad intention of Parliament (rather than that of HMRC and/or government) which, if the provisions were not fully debated, may not be clear.
David Pett, Tax Barrister 