Taxation of Chargeable Gains Act 1992

Section 22 of the TCGA 1992 (The Act) seems to far-reaching consequences. The aim of this paper is to analyse its scope and posit a conclusion whether it is too broad or not.

The provision relates to the disposal of assets, and it considers “any capital sum which is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum,”^[1] [emphasis added] as a disposal of asset for the purposes of capital gains tax. Capital sum is defied as any money or money’s worth which is not excluded from the consideration in the computation of the gain.^[2] The term “assets”, as it applies to the section, does not seem to be defined in that section and its definition seems to be pivotal in determining the scope of the provision of the Act.

In Zim Properties v. Proctor^[3], Warner J had to determine what constituted an asset of a taxpayer for the purposes of section 22 of the Act.^[4] The main issue on appeal was whether a sum of money received by a taxpayer from the compromise of his right to take legal actions against another was consideration for the partial or complete disposal of an asset; thus, giving rise to a chargeable gain.^[5] Warner J held that that sum of money did constitute an asset under the provision because an asset for capital gains tax purposes was “something that could be turned to account”^[6] and compensation for the right of a court action was something that could be turned to account. According to His Lordship this seems to be in accordance with the ratio decidendi of O’Brien v. Benson’s Hosiery^[7] where the House of Lords rejected the Court of Appeal’s determination that an asset for capital gains tax purposes must consist of some property in reaching their decision. In light of O’Brien it seems that Drummond v. Austin Brown^[8] was merely an application of the legislation to a particular set of facts, where no principle, apart from the general principle that not every right to payment is an asset for capital gains tax, was evinced. Additionally, their Lordships in Davenport v. Chilver^[9] seem to have held that a statutory right to compensation for irretrievable loss may constitute an asset for capital gains tax purposes. Therefore, it may be appropriate to say that an asset from which a capital sum is derived must not always be the asset that constitutes its immediate source.^[10]

This interpretation of the term “assets” does seem excessively harsh because taxpayers may not get any deductions or reliefs in calculating their capital tax liability if the compensation was derived from their right to take a legal action instead of the underlying asset itself or their contractual rights. Additionally, it was not clear how a loss, dissipation or an extinction of the value of an asset would be treated under the provision. Additionally, the provision is silent on the issue when an insurance compensation is used to restore any loss or damage and it would seem quite harsh if a taxpayer would have to pay capital gains tax on the compensation he receives to restore his capital even though he did not actually gain any capital.

It seems that section 23 and 24 of the Act, and Extra-statutory Concession D 33 issued by the Revenue may have sufficiently mitigated the harshness of the provision. Section 23 of the Act seeks to ensure that if a taxpayer company does not, in effect, gain any capital because he wholly or substantially (so that only a small amount is left ) used the compensation he received form his insurer to restore the asset, then that compensation is exempt form capital gains tax. On the other hand, section 24 of TCGA enables tax payer to reduce their tax liability through deemed dispositions on the occasion of the entire loss or extinction of the loan or the making of a negligible value claim. The ESC D33 was issued by HM Revenue & Customs concerning compensation and damages after the Zim^[11]decision to mitigate the harshness of the decision which seems insufficient. According to it, if a right of action relates to an underlying asset then a compensation receipt can be treated as proceeds for the disposal, or part-disposal of that asset. Various reliefs, such as indexation allowance, taper relief or rollover relief, which may be relevant might be taken into account; and the base cost or 31 March 1982 value of the underlying asset may be taken into account in calculating capital gains tax liability. The HM Revenue and Customs exempt any gain on the disposal of the right of action. Thus, tax payers would not be over taxed. It should be noted that contractual rights are distinguished in ESC D33, and no capital reliefs are available. Although the Revenue may accept that any such compensation was derived from the right of action, if one of the parties does not agree, so that the Zim principle may apply^[12] and capital reliefs would become available in determining the capital chargers.

Thus it is submitted that although section 22 of the Act, in conjunction with the case law, may have been very harsh initially because it would subject a wide range of transactions to capital gains charges without any deductions or reliefs, the subsequent statutory provisions and extra-statutory concessions seems to have sufficiently mitigated that harshness.

Bibliography

Legislation

• Taxable Charges and Gains Act 1992
• Extra-Statutory Concession D33

Cases

• Drummond v. Austin Brown [1984] STC 321
• Davenport v. Chilver [1983] STC 426.
• O’Brien v. Benson’s Hosiery [1979] STC 375, [1980] AC 562
• Pennie v. Kirklees [1989] STC 122.
• Zim Properties v. Proctor [1985] STC 90 (Lexis Nexis)

Manuals

Capital Gains Manual

1

Footnotes

^[1] The Act, s 22(1).

^[2] Ibid., 22 (3).

^[3] [1985] STC 90 (Lexis Nexis) (Zim)

^[4] It should be noted that Zim dealt with Finance Act 1965, s22 which was the predecessor of the current section 22 of the Act.

^[5] Zim, ibid.

^[6] Ibid,

^[7] [1979] STC 375, [1980] AC 562 (O’Brien)

^[8] [1984] STC 321.

^[9] [1983] STC 426.

^[10] Pennie v. Kirklees [1989] STC 122.

^[11] Supra note 3

^[12] Capital Gains Manual at para. 12992e and 12036