[2010] UKFTT 560 (TC)

								
TC00811

Appeal number:  TC/2010/03241

INCOME TAX – Loss relief – Qualifying trading company – Appellants’ shares in “start-up” company carrying on business in UK – Shares exchanged for shares in Canadian company – Canadian company shares disposed of at loss – Whether loss relief available against income – ICTA 1988 s.574
ENQUIRY – Enquiry into availability of loss relief – Enquiry started on basis that loss relief was denied on account of co-ownership of shares – Later HMRC realised that a different condition for relief was not fulfilled – Whether that started a new enquiry – No – TMA 1970 s.9A

FIRST-TIER TRIBUNAL
TAX CHAMBER
 
PROFESSOR SIR PETER LACHMANN
	LADY LACHMANN	Appellants

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE & CUSTOMS (Income Tax)	Respondents

				TRIBUNAL: 	 SIR STEPHEN OLIVER QC
						 LESLIE HOWARD

Sitting in public in Cambridge on 26 October 2010

Professor Sir Peter Lachmann FRS for the Appellants 

Paul O’Reilly, HMRC Inspector, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	The Appellants, Professor Sir Peter Lachmann and Lady Lachmann appeal against Closure Notices issued in accordance with section 28A(1) and (2) Taxes Management Act (“TMA”) 1970 disallowing losses arising on the disposal of shares which had been set off against their general income for 2006/07.

2.	Sir Peter Lachmann (“Professor Lachmann”) appeared and represented himself and Lady Lachmann.  HMRC were represented by Paul O’Reilly, an Inspector.

3.	The first point at issue is whether the disposal of shares in Inflazyme Pharmaceuticals Ltd (“Inflazyme”), a company incorporated in British Columbia, Canada has attracted relief under section 574 Income and Corporation Taxes Act 1988 (“ICTA”).  We refer to that as “the section 574 Issue”.  

4.	The second issue is whether or not HMRC is entitled under the original enquiry notice to change its view as to the reason why the loss cannot be allowed and whether this represents a new enquiry which at the point of notification would be time-barred.  We refer to this as “the New Enquiry Issue”.

The background facts

5.	Between 1998 and 2002 Professor and Lady Lachmann subscribed for shares in a company called Adprotech Ltd.  Adprotech had been incorporated to conduct the research and development into a “biotech” process known as “complement inhibitor”.  Funds were provided by venture capitalists in return for shares as well as by individuals such as Professor and Lady Lachmann.  Adprotech had premises in the United Kingdom from which the business was conducted and it employed staff to conduct the research and development.  

6.	In 2009 Inflazyme made an offer to acquire all the shares in Adprotech.  Inflazyme was a small company with an asthma drug at the trial stage; it needed to broaden its range of activities.  The venture capitalists who had subscribed for shares in Adprotech had by then lost confidence.  A takeover was agreed.  Professor and Lady Lachmann did not support the proposal but were driven to accept.  They received a consideration in the form of shares in Inflazyme.  The value of those shares was substantially lower than the amounts subscribed by them for their original shares in Adprotech.  Their losses at that time were some £49,000 each.  Being a share-for-share exchange, section 127 of Taxation of Capital Gains Act 1992 applied.  The effect of section 127 was to treat the share-for-share exchange as not involving any disposal by Professor and Lady Lachmann. Their original shares (the Adprotech shares) and the new shares (the Inflazyme shares) were, for tax purposes, treated as the same asset.

7.	In a letter of 17 July 2006 to his then Inspector of Taxes, Professor Lachmann had claimed income tax relief on the basis that he and Lady Lachmann had made disposals.  This had been rejected by the Inspector in a letter of 20 September which had explained the effect of section 127.  The same Inspector of Taxes had explained that relief for income tax would not have been available because the relieving section, section 574 of ICTA, did not apply to give relief on disposals by co-owners (and Professor and Lady Lachmann were said to have been co-owners).  

8.	During the year 2006/07 Professor and Lady Lachmann sold their Inflazyme shares.  Their 2006/07 tax returns disclosed these and claimed relief for losses against income.  On 27 February 2006 the Lachmanns made amendments to their CGT returns showing losses of some £57,901 for each of them in respect of the disposals of their Inflazyme shares.  The next relevant event is a letter of 8 December 2008 from the succeeding Inspector of Taxes stating that he intended to “enquire” into the amendments.  The relevant words of the letter are as follows:

“My enquiry is into the loss arising from the disposal of shares in Inflazyme and whether such losses may be offset against income.  I will not be checking other areas of your Return unless your reply, or any further information, gives me reason to do so.”

9.	Throughout 2009 the relevant correspondence was focussed on the question of whether section 574 of relief was available where the loss had arisen on a disposal by Professor and Lady Lachmann as co-owners of shares.  But on 22 December of that year following a referral of the problem by the Inspector to HMRC’s Senior Technical Resource Team, the Inspector was advised that loss relief could not be given due to the fact that Inflazyme was not a qualifying trading company (as that term is defined in section 576(4)) for the purposes of section 574.  Following that advice, the Inspector issued a closure notice for the year ending 5 April 2007 under section 28A(1) and (2) of TMA.  The covering letter of 27 January 2010 explained that no new enquiry had been undertaken and advised Professor and Lady Lachmann of their rights of appeal.  

10.	A letter from Professor and Lady Lachmann of 11 February 2010 stated that they disagreed with the conclusions in the closure notice and appealed against them on the grounds that, first, the issue concerning Inflazyme being a Canadian company was essentially a “new enquiry” and was therefore out of time: second, they had been assured by HMRC that the holding which decided whether relief was due was solely the initial holding, in that case Adprotech: and third they claimed that there should be no interest added to the tax outstanding in view of HMRC’s delays resulting from a point having been taken had subsequently been abandoned.  

11.	We have already summarised the two relevant issues which we now address.

The section 574 Issue

12.	The relevant statutory provisions are these.  Section 574(1) grants relief to individuals who incur losses on disposal of shares in qualifying trading companies.  It reads as follows:
“(1)	Where an individual who has subscribed for shares in a qualifying trading company incurs an allowable loss (for capital gains tax purposes) on the disposal of the shares in any year of assessment, he may, by notice given within twelve months from 31 January next following that year, make a claim for relief from income tax …”

Section 574(4) defines a qualifying trading company.  Among other things it has to satisfy the condition that it “has carried on its business wholly or mainly in the United Kingdom throughout the relevant period.”

13.	Professor Lachmann accepted that, as a matter of fact, Inflazyme had not carried on its business in the United Kingdom.  But, he argued, Adprotech had carried on business in the United Kingdom.  We have already noted the effect of section 127 of TGCA which is to treat the Adprotech shares and the Inflazyme shares as the same asset “acquired as the original shares [i.e. the Adprotech shares] were acquired”.  Thus, viewing the Adprotech and the Inflazyme shares as a single asset acquired between July 1998 and January 2005, one finds that from 2004 until 2006 the company in question (i.e. Inflazyme whose shares were actually disposed of in 2006) had carried on its business in British Columbia, Canada.  We should add that there are no provisions in the tax code that enable a time-apportioned approach to a question of whether and to what extent the company in question is “qualifying trading company”. It follows that Professor and Lady Lachmann had not disposed of shares in a qualifying trading company when they realised their losses in 2006.

14.	This was, we recognise, an inevitable but most unfortunate consequence.  They had ventured their own money in the project.  They had been opposed to Inflazyme’s acquisition.  Moreover, had they received cash from Inflazyme in 2004 in return for the Adprotech shares, relief under section 574 would (more likely than not in our view) have been available notwithstanding the apparent co-ownership of the shares.

The New Enquiry Issue

15.	Professor Lachmann argues that HMRC had embarked on a new enquiry when, at the start of 2010, HMRC changed tack and raised the point that relief under section 574 was excluded, not because of the co-ownership of the shares, but because Inflazyme had been carrying on its business overseas.  The raising of the latter point, it was said, marked the start of a new enquiry and it was out of time.  This was because enquiries into the 2006/7 tax returns of Professor and Lady Lachmann should have been opened by 31 January 2009.  

16.	Section 9A(1) of TMA provides that “an officer of the Board may enquire into a return … if he gives notice of his intention to do so … within the time allowed”.  Subsection (5) of section 9A applies where, as here, the matter arises following an amendment of a return; it provides that “the enquiry into the return is limited to matters to which the amendment relates or which are affected by the amendment”.

17.	The question for us is whether the circumstances of the business carried on by Inflazyme are matters to which the amendments to their capital gains tax returns (of 29 February 2009), showing relief against income for the loss on disposal of the Inflazyme shares under section 574, relate.  We note in this connection that the Inspector’s letters to Professor and Lady Lachmann of 8 December 2008, initiating the enquiry, states that the “enquiry is into the loss arising from the disposal of shares in Inflazyme and whether such loss may be set against income”.  We note also that the fact that Inflazyme was a Canadian company had been known to HMRC since Professor Lachmann’s letter to HMRC of 17 July 2006.  

18.	When the enquiry started it was directed at the question, which was essentially one of law, as to whether, where two individuals have subscribed for the same shares in a company, one of them can be regarded for section 574(1) purposes as having “subscribed for the shares in a qualifying trading company”.  The expressed reasons for the decision appealed against (i.e. that of 29 January 2010 refusing relief) were contained in the letter from HMRC of 11 January 2010.  This raised the fact that Inflazyme had not carried on business in the UK.  The 29 January 2010 letter acknowledged, with an apology, that the reasoning in the 11 January letter was not consistent with that “put forward in previous correspondence”.  Those new reasons, in common with the earlier assertion directed at the co-ownership of the shares, both concern “matters to which the amendment relates”, namely the availability of relief under section 574.  We say this because the structure of section 574 requires that the loss arises from the disposal by the individual in question of the shares in a qualifying trading company.  The loss relief is a single consequence that depends on the fulfilment of the series of interrelated conditions found in sections 574-576.

19.	The enquiry (as stated in HMRC’s letter of 8 December 2008) was into the availability of loss relief against income for the losses arising on disposal of the Inflazyme shares.  The enquiry would, as we see it, have to be directed at ensuring that all the conditions for relief were satisfied.  It would consequently have been an inadequate enquiry if it had confined itself to the co-ownership question and overlooked the place of business test in section 576(4).

20.	For those reasons we are satisfied that no new enquiry was started when HMRC addressed the possibility that section 574 relief was not available because Inflazyme had not carried on its business in the United Kingdom.

21.	We therefore dismiss the appeal.  We add that Professor Lachmann argued that interest should not have been charged during the enquiry period because that period had been prolonged by the fact that HMRC had been pursuing a point which they had subsequently dropped.  While we have sympathy with Professor Lachmann’s plea, we have no authority to make any direction about interest on the outstanding tax.

22.	The parties are informed that this is a full decision.  The Appellants are at liberty to apply for permission to appeal to the Upper Tribunal on a point of law.

SIR STEPHEN OLIVER QC
                                        CHAMBER PRESIDENT

RELEASE DATE: 10 November 2010