Summary
The First Tier Tribunal (FTT) has found in Ames v HMRC Commissioners [2015] UKFTT 0337 (TC) that a taxpayer who did not make a claim for Enterprise Investment Scheme (EIS) income tax relief exemption in relation to his shares in a company was consequently unable later to claim the much more valuable capital gains tax (CGT) exemption when those shares were sold.
Various Human Rights Act arguments were (somewhat predictably) rejected.
Details
Skventure UK Limited was a company concerned with indoor skydiving experiences. Owing to personal circumstances and internal disagreements, Mr Ames stopped working for the company in April 2005 having invested £50,000 in shares before he left. In the years following his departure the company prospered and in June 2011, he sold his shares for £333,200. He did not include his gain of £272,540 in his self-assessment, believing there to be no capital gains tax on disposal.
HMRC soon opened an enquiry and amended Mr Ames' self-assessment return to include the gain, on the basis that a claim of EIS income tax relief is a necessary pre-condition CGT exemption. The taxpayer had made no such EIS income tax relief claim, having had no taxable income in the relevant year. His late claim for such relief was not permitted, HMRC failing to be satisfied he had a reasonable excuse.
In considering his appeal the FTT considered whether the relevant pieces of legislation, namely the Taxation of Chargeable Gains Act 1992 (TCGA) and Income and Corporation Taxes Act 1998 (ICTA), were being given the effect Parliament intended. The taxpayer attempted to argue that the legislation was not being given that effect, pointing to a later-introduced provision of TCGA (s150A(3)(c)) that enabled an individual to obtain full capital gains tax exemption on disposal, despite having insufficient tax to utilise all his EIS relief. In spite of his argument, the FTT emphasised that the November 1994 Budget Press Release justified the introduction of s150A(3)(c) so that ‘the capital gains tax exemption will not be restricted where an investor has insufficient income tax liability to make full use of the relief’, and had not been introduced so that the capital gains tax exemption could be claimed by somebody with eligible shares who did not use the relief. The FTT made clear that the taxpayer’s lack of a claim for EIS relief and lack of a reduction in income tax attributable to his shares were fatal to his argument.
Despite neither party raising the issue, the FTT clarified the taxpayer’s situation with regard to human rights. Holding that Article 1 of the First Protocol (A1P1) was applicable in such cases, the FTT considered relevant case law and concluded that when primary legislation is in question, the effect of that legislation must be greatly disproportionate to the legitimate aim its existence pursues for a taxpayer to succeed in these circumstances. In this case, the FTT held this threshold to be far from satisfied, casting doubt over the utility of human rights claims in this area by noting the wide margin of appreciation given to ECHR states with regard to taxation.
Further accepting that the FTT had no jurisdiction to allow a late claim or grant a right of appeal against HMRC’s refusal to allow such a claim, the FTT concluded that the taxpayer’s only remedy would be judicial review of HMRC’s decision. The FTT did consider whether section 118(2) of the Taxes Management Act 1970 might allow a late claim on the basis of reasonable excuse, but to the taxpayer’s disappointment was unable to interpret the legislation accordingly.
In the words of the FTT, the explicit requirement of ICTA that an individual makes a timeous claim meant that, EIS relief not being automatic, the taxpayer’s failure to make such a claim was ‘the end of the matter’.
Comment
The outcome of this case was somewhat predictable on both grounds. It does serve to highlight, however, the need to make EIS claims (even if no income tax is at stake).
While readers of the tabloid press might assume that the Human Rights Act routinely overturns UK laws, nothing could be further from the truth in tax matters. The state is given a 'wide margin of appreciation' when it comes to tax and it is very rare indeed for Human Rights' challenges to succeed.
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