SPC00530
CAPITAL GAINS TAX – Retirement relief – Section 163 and Schedule 6 TCGA 1992 – Whether in the redetermination of the qualifying period directed by paragraph 14(1) of Schedule 6 the relevant conditions laid down by section 163(5)(b) must be satisfied throughout the putative extended qualifying period – held they must be– appeal dismissed

THE SPECIAL COMMISSIONERS

	NEIL FRASER	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S 
	REVENUE AND CUSTOMS	Respondents

			Special Commissioner: JOHN WALTERS QC 

Sitting in public in London on 16 January 2006

Paul Whiteley, Keens Shay Keens, Milton Keynes, Chartered Accountants, for the Appellant

Michael Gibbon, instructed by the Solicitor for H.M. Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The appeal

1.	The Appellant, Mr. Fraser, appeals against an amendment made to his self-assessment for the year 1996/97 resulting in additional capital gains tax claimed to be due of £25,454.00.  This relates to additional retirement relief for capital gains tax purposes claimed by Mr. Fraser, over and above the amount allowed by the Commissioners (hereinafter “the Revenue”) to be due.  The amendment was made in a Closure Notice sent in a letter dated 7 January 2003 to Mr. Fraser by Mr. C.J. Walmsley, H.M. Inspector of Taxes. In that letter the Inspector set out a computation showing that retirement relief of £240,563 was allowed.  Keens Shay Keens, on behalf of Mr. Fraser, appealed by a letter dated 4 February 2003.
2.	The point in issue is the amount of retirement relief due on Mr. Fraser’s disposal of shares in Fraser Commercial Services Limited (“FCS”).
The facts
3.	The parties agreed a Statement of Facts, which was before me.  An agreed bundle of documents was also before me.  I heard no oral evidence.  I find the following facts.
4.	Mr. Fraser reached the age of 50 years on 3 March 1996.
5.	From August 1986 to September 1991, he was a full time working officer or employee of a company called Fraser Home Electronics Limited (“FHE”), being a director of FHE.  FHE was a trading company.
6.	Mr. Fraser did not at any time own any shares in FHE or voting rights over FHE.
7.	FHE’s core business was the trade of selling electrical goods through various retail outlets in the Milton Keynes area.
8.	In September 1991, the assets and liabilities of FHE were taken over by FCS.  In the same month Mr. Fraser became a full time working director of FCS and remained such until September 1996. He was able to exercise at least 5% of the voting rights over FCS throughout this period.  
9.	The core business of FCS was the trade of procuring and supplying replacement electrical goods for insurance companies.  
10.	On 27 September 1996, Mr. Fraser disposed of his 84.29% shareholding in FCS.  The chargeable gain accruing on this disposal (without any adjustment in respect of capital gains tax retirement relief) was £356,125.
The legislation

11.	The relevant legislation is as follows:
Section 163, Taxation of Chargeable Gains Act 1992 (“TCGA”) – Relief for disposals by individuals on retirements from family business

(1)	Relief from capital gains tax shall be given, subject to and in accordance with Schedule 6, in any case where a material disposal of business assets is made by an individual who, at the time of the disposal –
(a)	has attained the age of 50; 
(b)	…
(2)	For the purposes of this section and Schedule 6, a disposal of business assets is–
(a)	a disposal of the whole or part of a business, or
(b)	a disposal of one or more assets which, at the time at which a business ceased to be carried on, were in use for the purposes of that business, or
(c)	a disposal of shares or securities of a company …
and the question whether such a disposal is a material disposal shall be determined in accordance with the following provisions of this section.
(3)	A disposal of the whole or part of a business is a material disposal if, throughout a period of at least one year ending with the date of the disposal, the relevant conditions are fulfilled and, in relation to such a disposal, those conditions are fulfilled at any time if at that time the business is owned by the person making the disposal or–
(a)	the business is owned by a company–
(i)	which is a trading company, and
(ii)	which is either that individual’s personal company or a member of a trading group of which the holding company is that individual’s personal company; and
(b)	that individual is a full-time working officer or employee of that company  …
(4)	…
(5)	A disposal of shares or securities of a company (including such a disposal of an interest in shares as is mentioned in subsection (2)(c) above) is a material disposal if, throughout a period of at least one year ending with the operative date, the relevant conditions are fulfilled and, in relation to such a disposal, those conditions are fulfilled at any time if at that time–
(a)	the individual making the disposal owns the business which, at the date of the disposal, is owned by the company or, if the company is the holding company of a trading group, by any member of the group; or
(b)	the company is the individual’s personal company and is either a trading company or the holding company of a trading group and the individual is a full-time working officer or employee of the company or, if the company is a member of a group or commercial association of companies, of one or more companies which are members of the group or association;
and … the operative date for the purposes of this subsection is the date of the disposal.

(9) Part I of Schedule 6 shall have effect for the interpretation of this section as well as of that Schedule.

SCHEDULE 6

PART I

1(1) This paragraph … [has] effect for the purposes of this Schedule and sections 163 and 164.
(2) In the provisions referred to above–
…
“full-time working officer or employee”, in relation to one or more companies, means any officer or employee who is required to devote substantially the whole of his time to the service of that company, or those companies taken together, in a managerial or technical capacity;
…
…
…
“personal company”, in relation to an individual, means any company the voting rights in which are exercisable, as to not less than 5 per cent., by that individual;
…

4(1) In this Schedule–
(a)	“material disposal of business assets” has the same meaning as in section 163;
(b)	…
(c)	…
(d)	…
and “qualifying disposal” means any of the disposals referred to in paragraphs (a) to (d) above.
(2) Any reference in this Schedule to the qualifying period is a reference to the period of at least one year which–
(a)	in relation to a material disposal of business assets, is referred to in subsection (3), subsection (4)(a) or subsection (5) (as the case may require) of section 163;
(b)	…
(c)	…
…
(3) In relation to a qualifying disposal, any reference in this Schedule to the amount available for relief is a reference to the amount determined in accordance with paragraphs 13 to 16 below.

PART II

13 (1) Subject to the following provisions of this Part of this Schedule, on a qualifying disposal by an individual the amount available for relief by virtue of sections 163 and 164 is an amount equal to the aggregate of–
(a)	so much of the gains qualifying for relief as do not exceed the appropriate percentage of £250,000; and
(b)	one half of so much of those gains as exceed the appropriate percentage of £250,000 but do not exceed that percentage of £1 million;
and for the purposes of this sub-paragraph “the appropriate percentage” is a percentage determined according to the length of the qualifying period which is appropriate to the disposal on a scale rising arithmetically from 10 per cent where that period is precisely one year to 100 per cent where it is 10 years.
(2) …
(3) …
(4) …

14 (1) If, apart from this paragraph, the qualifying period appropriate to a qualifying disposal (“the original qualifying period”) would be less than 10 years but throughout some period (“the earlier business period”) which–
(a)	ends not earlier than 2 years before the beginning of the original qualifying period, and
(b)	falls, in whole or in part, within the period of 10 years ending at the end of the original qualifying period,
the individual making the disposal … was concerned in the carrying on of another business (“the previous business”) then, for the purpose of determining the amount available for relief on the qualifying disposal, the length of the qualifying period appropriate to that disposal shall be redetermined on the assumptions and subject to the provisions set out below.
(2) For the purposes of the redetermination referred to in sub-paragraph (1) above, it shall be assumed that the previous business is the same business as the business at retirement and, in the first instance, any time between the end of the earlier business period and the beginning of the original qualifying period shall be disregarded (so that those 2 periods shall be assumed to be one continuous period).
(3) The reference in sub-paragraph (1) above to a person being concerned in the carrying on of a business is a reference to his being so concerned personally or as a member of a partnership or, if the business was owned by a company, then as a full-time working officer or employee of that company … and the reference in sub-paragraph (2) above to the business at retirement is a reference to that business which, in relation to the qualifying disposal, is referred to–
(a)	in subsection (3), subsection (4) or subsection (5) of section 163 where the qualifying disposal is a material disposal  of business assets;
(b)	…
(c)	…
(4) …
(5) If the earlier business period ended before the beginning of the original qualifying period, any extended qualifying period which would otherwise result from the operation of the preceding provisions of this paragraph shall be reduced by deducting therefrom a period equal to that between the ending of the earlier business period and the beginning of the original qualifying period.
(6)…
(7) In relation to the expression “the original qualifying period”, the question whether a disposal is a qualifying disposal and whether the period relating to that disposal is a qualifying period shall be determined without regard to the requirement that the length of the period be at least one year.
(8) This paragraph shall not apply if the extended qualifying period resulting from the operation of subparagraphs (1) to (7) would be a period of less than one year.”

12.	From these provisions it can be seen that in this case the relief attaches to Mr. Fraser’s disposal of shares in FCS, being a material disposal of business assets pursuant to section 163(1), (2)(c) and (5) TCGA. This is common ground.
13.	In particular, Mr. Fraser’s disposal of shares in FCS is a material disposal of business assets because throughout a period of at least one year ending with the date of disposal (27 September 1996) FCS was Mr. Fraser’s personal company (more than 5% of the voting rights in FCS were exercisable by him), FCS was at all material times a trading company, and Mr. Fraser was a full-time working officer or employee of FCS.  That disposal is also a “qualifying disposal” for the purposes of Schedule 6, TCGA. Again, all this is common ground.
14.	Turning to the quantum of relief available, which is the issue in this appeal, this is an amount arrived at, inter alia, by applying “the appropriate percentage” to the gains qualifying for relief: see: para. 13(1), Schedule 6, TCGA.  
15.	“The appropriate percentage” is ascertainable by reference to the length of the “qualifying period”, which is, at least at first sight, the period of at least one year ending with the date of disposal (27 September 1996) during which FCS was Mr. Fraser’s personal company and a trading company, and during which Mr. Fraser was a full-time working officer or employee of FCS (see: para.4(2) Schedule 6 and section 163(5) TCGA).
16.	There is, however, provision, made by paragraph 14, Schedule 6, to lengthen the “qualifying period” if, as in this case, prima facie it would be less than 10 years.  It is prima facie 5 years in this case, because FCS was Mr. Fraser’s personal company – and the other conditions were satisfied in relation to FCS – between September 1991 and September 1996. 
17.	The contention in this appeal is as to the proper interpretation of paragraph 14, Schedule 6, and whether it applies to the facts of Mr. Fraser’s case, by reference to his involvement, before September 1991, with the company FHE.
18.	Paragraph 14 applies if the individual making the disposal (here, Mr. Fraser, in relation to his disposal of the shares in FCS) “was concerned in the carrying on of another business (‘the previous business’)”.  Mr. Fraser was concerned in the carrying on of the business of FHE as a full-time working officer or employee of FHE and that qualifies him as having been concerned in the carrying on of a previous business for the purposes of paragraph 14(1) and (3), Schedule 6.
19.	If, as here, an individual was concerned in the carrying on of a previous business “then, for the purpose of determining the amount available for relief on the qualifying disposal, the length of the qualifying period appropriate to that disposal shall be redetermined on the assumptions and subject to the provisions set out” in subparagraph (2) of paragraph 14, Schedule 6 – see: paragraph 14(1), Schedule 6.
20.	The relevant assumption is “that the previous business [the business of FHE] is the same business as the business” which was owned by FCS at the date Mr. Fraser disposed of his shares in FCS, 27 September 1996 – see: paragraph 14(2) and (3), Schedule 6, with reference back to section 163(5) TCGA.
21.	The question arising in the appeal is whether the application of this assumption in redetermining the length of the qualifying period (which would otherwise be 5 years) increases the amount of relief to which Mr. Fraser is entitled in respect of the disposal by him of his shares in FCS.
The parties’ submissions
22.	Mr. Whiteley, for Mr. Fraser, submits that the assumption under paragraph 14(2) of Schedule 6, that the business of FHE is the same business as the business of FCS, is an assumption that in effect the business of FCS is extended to include, as to duration, the business of FHE.  It follows, he submits, that if the business at retirement, viz: the business of FCS, meets the qualifying criteria of section 163, so does the assumed, lengthened, business. There is no provision requiring that the previous business (the business of FHE) must fulfil any other conditions.  It follows in his submission that Mr. Fraser is entitled to extend his qualifying period for retirement relief purposes from the original qualifying period of 5 years ascertained by reference to FCS to 10 years, when one takes into account the earlier business period during which he was concerned in the carrying on of the business of FHE.
23.	He submits that there is no ambiguity in the legislation with which the appeal is concerned and that it must be given effect according to its plain meaning which, he submits, leads to the result favourable to Mr. Fraser.
24.	Alternatively, if there is any ambiguity, he submits that it cannot be resolved in the Revenue’s favour by reference to certain non-statutory materials which were before me, viz: a Consultation Document dating from March 1984, which relates to proposed technical amendments to section 124 Capital Gains Tax Act 1979 (a predecessor provision to section 163 TCGA), two press releases issued by the Inland Revenue on 19 March and 16 April 1985 respectively, and an extract from the Inland Revenue’s Tax Bulletin issued in February 1997.  He submits that Mr. Fraser has a strong case to the increased amount of relief sought based on natural justice by reference to the time and effort he spent in a managerial or technical capacity, when he was concerned in the carrying on of the business of FHE.
25.	Mr. Gibbon, for the Revenue, submits that Mr. Whiteley’s submissions do not take account of the statutory context of paragraph 14(1) and (3) of Schedule 6.  In particular, when a redetermination of the length of a qualifying period is directed pursuant to paragraph 14(1) of Schedule 6, that redetermination must be made in accordance with the requirements of section 163, in that the redetermined qualifying period must still be a period of at least one year which is referred to in section 163 (3),(4)(a) or (5), as the case may be: see: para. 4(2), Schedule 6. This approach is confirmed by a consideration of the terms of subparagraphs 14(7) and (8) of Schedule 6.  In consequence, there is a requirement in the circumstances of this case that throughout the relevant period of at least one year ending with the date of disposal, the company actually owning the assumed business (see: the assumption directed by paragraph 14(2) of Schedule 6) must have been the individual’s personal company (see: section 163(5)(b)), which in turn means that the individual (Mr. Fraser) must have had at least 5% of the voting rights of any company which (at any time in the extended period) actually owned the business.  Since Mr. Fraser had no voting rights in FHE, he submits, paragraph 14 of Schedule 6 does not assist him by extending his qualifying period.
26.	Further or alternatively, Mr. Gibbon submits that when these provisions are construed purposively (he cites IRC v McGuckian [1997] 1 WLR 991, 998-1000, 1005 per Lord Steyn), they do not provide relief in respect of gains realised by a person who has been an officer or director of a company without having had an equity stake over 5 per cent. He submits that anomalies would follow if Mr. Whiteley’s interpretation were correct.  Finally, he prays in aid certain words from Lord Donovan’s speech in Mangin v IRC [1971] AC 739, 746, viz; “Fourthly, the history of an enactment and the reasons which led to its being passed may be used as an aid to its construction” to admit reliance on the non-statutory materials to which I have referred.  He submits that those materials would resolve in the Revenue’s favour any doubts as to the true construction of the relevant provisions.
My Decision
27.	I consider that I must decide the point of construction at issue by reference to the language of the provisions interpreted purposively (that is, so as to promote what I discern to be Parliament’s purpose in enacting the legislation).  I cannot take into account wider considerations of natural justice. Having regard to judicial consideration of whether reference can be made to the legislative history of an enactment as an aid to its interpretation in Pepper v Hart [1993] AC 593, 65 TC 421, which is much more recent than Mangin v IRC, I am reluctant to interpret Lord Donovan’s words in Mangin as permitting me to place any reliance on the non-statutory materials which have been placed before me.  In the event it has not been necessary for me to refer to them.
28.	The literal construction of the provisions in issue is, in my view, not free from difficulty.  In order for Mr. Fraser to be entitled to a redetermination of the qualifying period appropriate to his disposal of shares in FCS he must show that he was concerned “as a full-time working officer or employee of” FHE in the carrying on of FHE’s business (see: paragraph 14(1) and (3), Schedule 6).
29.	He has, it is common ground, shown that, and the resultant “earlier business period” satisfies the conditions laid down in paragraph 14(1)(a) and (b).  
30.	The next stage is the redetermination of the length of the qualifying period appropriate to the disposal, which is required by paragraph 14(1) of Schedule 6. That redetermination is to be made on the assumption that the business of FHE is the same business as the business of FCS, when Mr. Fraser disposed of his shares in FCS. 
31.	This requires a reference back to paragraph 4(2) of Schedule 6, where the qualifying period is (so far as is relevant to this case) defined as “the period of at least one year which, in relation to a material disposal of business assets, is referred to in” section 163(5).  
32.	This in turn requires reference back to section 163(5), where in the definition of a material disposal of business assets which is a disposal of shares or securities of a company, the reference to “a period of at least one year” is a reference to such a period throughout which relevant conditions are fulfilled. 
33.	The relevant conditions which are in point in this appeal are those provided by section 163(5)(b), namely that “the company is the individual’s personal company and is … a trading company … and the individual is a full-time working officer or employee of the company …”.
34.	As I have said, the redetermination of the length of the qualifying period appropriate to the disposal is to be made on the assumption that the business of FHE is the same business as the business of FCS, when Mr. Fraser disposed of his shares in FCS.  There is no assumption expressly required that the company owning the business is the company (in this case FCS) whose shares are the subject of the material disposal of business assets.
35.	This creates a difficulty in redetermining the length of the qualifying period.  The difficulty is that there is, at any rate initial, uncertainty as to whether it is sufficient that FCS was Mr. Fraser’s personal company (which is what Mr. Whiteley argues) or whether it is necessary (as Mr. Gibbon contends) that FHE should have been Mr. Fraser’s personal company as well.
36.	The reference back to section 163(5)(b), which is required by the scheme of the provisions as I have tried to demonstrate, has a further oddity, namely that it provides the requirement that the company (whether it be FCS or FHE as well as FCS) should be one of which the individual is a full-time working officer or employee.  But, in the circumstances of this case, this simply repeats a pre-condition for the redetermination, namely that the individual making the disposal must have been “concerned in the carrying on” of the previous business – see: subparagraphs 16(1) and (3) of Schedule 6.
37.	This repetition is an indication (albeit indirect) that since Parliament has expressly ensured that an individual seeking to extend the qualifying period by reference to an earlier business period must satisfy, in relation to the company which carried on the previous business (in this case FHE), that he was a full-time working officer or employee of that company, there is no need to revisit that test indirectly by reference back to section 163(5)(b).  And, if this is so, it might be logical to conclude that Parliament has not required the “personal company” test to be satisfied in respect of the company which owned the previous business (FHE), because it has not made any such provision in the place where one would logically look for it, namely subparagraphs 16(1) and (3) of Schedule 6.
38.	As against this, however, and in agreement with Mr. Gibbon’s submissions, I accept that subparagraphs 14(7) and (8) of Schedule 6 directly indicate that a redetermination of the length of a qualifying period requires that all the relevant conditions referable to a period in order that it may count as a “qualifying period” must be satisfied in respect of an extended qualifying period.  Subparagraph 14(7) enables relief to be given by reference to an extended qualifying period even where a period ending with a disposal in which the relevant conditions have been fulfilled (cf section 163(5)) has been less than one year.  Subparagraph 14(8) limits the effect of subparagraph 14(7) by denying relief in respect of an extended qualifying period so arrived at, which is less than one year.
39.	These provisions point to a requirement that the “personal company” test must be satisfied in relation to any company (ie. both FCS and FHE) which, at any time during a putative extended qualifying period, owned the business which is assumed to be the same business as the business at retirement by subparagraph 14(2) of Schedule 6.
40.	On this basis, the duplicated reference to the “full-time working officer or employee” test  (in section 163(5)(b) as well as in subparagraphs 14(1) and (3) of Schedule 6) should not impair the full force of the reference back to section 163(5)(b) and should be treated as (perhaps unintentional) statutory duplication.
41.	Looking at the statutory purpose of the retirement relief code, I accept that it is evident from the provisions as a whole, that retirement relief is intended by Parliament to be confined, in cases where shares are disposed of, in broad terms, to situations where the following four factors are present. (i) The gains must arise from the disposal of shares, (ii) the shares must be in trading companies, and  (iii) the “personal company” test as to ownership must be satisfied as must also (iv) the “full-time working officer or employee” test as to personal involvement. It would be anomalous if, as follows from Mr. Whiteley’s argument, the provision for enlarging relief by reference to an earlier business involvement in the 10 year period before the relevant disposal of shares were to bring in, by a technicality, increased relief notwithstanding that the earlier business involvement did not satisfy all four factors identified.
42.	The statutory purpose of paragraph 14 of Schedule 6 in particular appears to be to allow a just measure of retirement relief even in the case where the disposal which gives rise to the gains sought to be relieved – typically but not always accruing on retirement – is a material disposal of business assets occurring after a relatively short period of ownership, and those business assets were acquired on a reinvestment of other business assets owned during the 10 year period which is relevant for the calculation of the appropriate percentage under paragraph 13 of Schedule 6.  On this basis, an extended qualifying period under paragraph 14 of Schedule 6 would require an earlier disposal of business assets during the 10-year period, and that is what is critically lacking in Mr. Fraser’s case.  
43.	Having regard, therefore, to the statutory purpose as I have discerned it, I conclude that the redetermination of the length of the qualifying period directed by subparagraph 14(1) of Schedule 6 in this case requires the ascertainment of a period of at least one year ending with the date of Mr. Fraser’s disposal of his shares in FCS, throughout which the relevant conditions are fulfilled.  Those conditions – see: section 163(5)(b) – require that the company in fact owning the business (assumed to be a single business pursuant to paragraph 14(2) of Schedule 6) from time to time in the putative extended qualifying period must have been Mr. Fraser’s personal company (and a trading company or the holding company of a trading group). They also require (although this is a duplication of subparagraphs 14(1) and (3) of Schedule 6) that Mr. Fraser must have satisfied the “full-time working officer or employee” test in relation to the company in fact owning the business from time to time in the putative extended qualifying period.
44.	FHE was not (although FCS was) Mr. Fraser’s personal company and, therefore, although he satisfied the “full-time working officer or employee” test in relation to FHE between 1986 and 1991, the length of the qualifying period relative to Mr. Fraser’s disposal of his shares in FCS in September 1996 cannot be extended on a redetermination under paragraph 14(1) of Schedule 6 to include the period from 1986 to 1991.
Questions for Determination
45.	I therefore answer the Questions for Determination, which were put to me, as follows:
46.	The length of the qualifying period applicable to Mr. Fraser’s disposal of his shares in FCS is 5 years.  It is not extended on a redetermination in accordance with paragraph 14(1) of Schedule 6.
47.	The amount of retirement relief to which Mr. Fraser is entitled in respect of gains accruing on the disposal is the amount allowed by the Revenue to be due, namely £240,563.
48.	The Closure Notice which states the agreed amount of the gross gain – £356,125 – less the retirement relief allowed by the Revenue to be due – £240,563 – less an amount of reinvestment relief agreed to be due – £85 – resulting in an amount of chargeable gains accruing on the disposal of £115,477 is consequently upheld.
49.	The appeal is accordingly dismissed.

JOHN WALTERS QC

SPECIAL COMMISSIONER
RELEASE DATE: 30 March 2006
SC 3161/05