Full Judgment
INCOME TAX
Capital gains--COMPUTATION--Indexation allowance--Quantification--English judgment.
FACTS
Assets were purchased in 1952 and were disposed in 1987. Scheme of indexation became effective in 1965. The taxpayer was assessed to capital gains tax for the year 1986-87 on the basis that the indexation allowance introduced by the Finance Act, 1982 was to be deducted from the whole of the amount of the gain accruing to the taxpayer between 1952 and 1987.
HELD
For the purposes of s. 86(4) of the U. K. Finance Act, 1982, the 'unindexed gain' from which the indexation allowance was to be deducted was to be construed in the context of s. 86(2) as meaning the chargeable gain; that, accordingly, the taxpayer's liability to tax was to be computed by applying the time-apportionment provisions of paragraph 11 of Schedule 5 to the Capital Gains Tax Act, 1979, to the gain accruing between her acquisition and disposal of the assets and the allowance deducted from that amount.
CONCLUSION
Indexation allowance as introduced in 1982 was to be allowed against the gain after it had been computed in accordance with Chpater II of Part II of the 1979 Act, including the time apportionment provisions of Para 11 of Schedule 5 which by statutory assumption was the gain accruing after 6-4-1965.
Application :
Not relevant for India.
U K Capital Gains Tax Act 1979 Sch.V,Para11
U. K. Finance Act 1982 s.86
6 February 1992. The following judgment s were handed down.
NOLAN L. J. The taxpayer, Mrs. Schofield, inherited a Chinese cabinet and a French mirror under her fathers will. The combined market value of these items at the time of her fathers death, which occurred on 19 April 1952, was $250. On 10 February 1987 the taxpayer sold the cabinet and the mirror at auction in London for a combined price of $15,800. The auctioneers charges and other incidental expenses at the sale amounted to $1,462. The difference between the value of the two items on 19 April 1952 and the net proceeds of sale received by the taxpayer on 10 February 1987 was therefore $14, 088.
Capital gains tax was introduced by the Finance Act 1965 with effect from 6 April of that year. Section 19(1) of the Act of 1965, now re-enacted as section 1(1) of the Capital Gains Tax Act, 1979, provided, inter alia :
'Tax shall be charged in accordance with this Act in respect of capital gains, that is to say chargeable gains computed in accordance with this Act and accruing to a person on the disposal of assets.'
It is not in dispute that for capital gains tax purposes the taxpayer must be taken to have acquired the cabinet and the mirror, which for present purposes may be treated as a single asset, on 19 April 1952 for a consideration of $250. Further, although the Act does not spell this out in term, it is not in dispute that where an asset is disposed of by way of a sale at arms length, as in the present case, the first step in calculating the gain, or loss, on the disposal is to take the consideration for the sale -in this case $15,800 - and to deduct from it the sums described in what in now section 32(1) of the Act of 1979, that is to say, putting it shortly, (a) the cost of acquisition, in this case deemed to be pound 250; (b) the amount spent on improving the asset or defending the owners title to it prior to sale, in this case nil; and (c) the costs of disposal, in this case pound 1,462. Finally it is not in dispute that the net figure of 'gain' thus established - pound 14,088 - falls to be reduced for the purposes of the charge to tax by two factors. One i the restriction on the amount of chargeable gains accruing on the disposal of assets owned on 6 April 1965, which has been in force since the Act of 1965 was passed. The other is the 'indexation allowance' which, so far as individuals are concerned, applies to any disposal of an asset on or after 6 April 1982. These results follow from the provisions of Chapter II of and Schedule 5 to the Act of 1979 as amended Chapter II is headed 'Computation', and begins with section 28 which provides :
'(1) The amount of the gains accruing on the disposal of assets shall be computed in accordance with this Chapter, and subject to the other provisions of this Act [and sections 86 and 87 of the finance Act 1982]. (2) Every gain shall, except as otherwise expressly provided, be a chargeable gain. (3) Schedule 5 to this Act (which restricts the amount of chargeable gains accruing on the disposal of assets owned on 6 April 1965) shall have effect.'
Section 29, so far as material, provides by sub-section (1) that 'the amount of a loss accruing on a disposal of an asset shall be computed in the same way as the amount of a gain'. Section 29A provides for disposals or acquisitions to be treated as if they were made at market value if, inter alia, they were effected by way of gift. There then follows a sub-heading 'Computation of gains', followed by section 30 which provides :
'The following provisions of this Chapter, and Schedule 5 to this Act, shall have effect for computing for the purposes of this Act the amount of a gain accruing on the disposal of an asset.'
One of those 'following provisions' is section 32, to which I have already referred. I turn next to the provisions of Schedule 5 which deal with assets held on 6 April 1965. The broad purpose of these provisions is to ensure that the charge to capital gains tax is confined to gains accruing after that date - to ensure, in other words, that the charging provisions introduced by the Act of 1965 do not have retrospective effect. This purpose is achieved in one or other of two ways. The first way is to treat the asset as if it were sold and immediately required by the owner at its market value on 6 April 1965. This method is compulsory in the case of certain specified assets, such as shares quoted on the stock exchange, or land with development value. It could also be adopted in the case of other assets if the taxpayer so elected, under what is now paragraph 12 of Schedule 5. If no such election has been made the chargeable element in the gain is calculated on the 'straightline apportionment' basis, set out in what is now paragraph 11 of Schedule 5. It is, I think, sufficient to quote sub-paragraphs (2) and (3) of paragraph 11, which provide :
'(2) On the disposal of assets by a person whose period of ownership began before 6 April 1965 only so much of any gain accruing on the disposal as is under this paragraph to be apportioned to the period beginning with 6 April 1965 shall be a chargeable gain. (3) Subject to the following provisions of this Schedule, the gain shall be assumed to have grown at a uniform rate from nothing at the beginning of the period of ownership to its full amount at the time of the disposal so that, calling the part of that period before 6 April 1965, P, and the time beginning with 6 April 1965, and ending with the time of the disposal T, the fraction of the gain which is a chargeable gain is T/P + T.'
In the present case, the taxpayer did not make an election under paragraph 12 of Schedule 5 and therefore her chargeable gain fell to be computed on the straightline or time-apportionment basis. So computed, the full amount of the gain being pound 14,088, the period of ownership before 6 April 1965, P, being 12 11/12' and the total period of ownership, P + T, being 34 10/12' the taxable element as calculated by the taxpayer is pound 8,864. But this, in the terms of section 28(1), is 'subject to' the indexation allowance for which provision is made by section 86 and 87 of the Finance Act 1982. These sections were very substantially amended by the Finance Act 1985. I set them out in the amended form in which they were in force at the time of the disposal by the taxpayer in the present case. Section 86 provides :
'(1) This section applies to any disposal of an asset -(a) which occurs on or after 6 April 1982. ... (2) In relation to a disposal to which this section applies - (a) the unindexed gain or loss means the amount of the gain or loss on the disposal computed in accordance with Chapter II of Part II of the Capital Gains Tax Act 1979 and, if there is neither a gain nor a loss on the disposal as so computed, the unindexed gain or loss shall be nil; and (b) relevant allowable expenditure means..... any sum which, in the computation of the unindexed gain or loss, was taken into account by virtue of paragraph (a) or paragraph (b) of sub-section (1) of section 32 of that Act...... (4) The following provisions of this Chapter have effect to provide for an allowance (in those provisions referred to as the indexation allowance) which, on a disposal to which this section applies, is to be set against the unindexed gain or, as the case may be, added to the unindexed loss so as to give the gain or loss for the purposes of the Capital Gains Tax Act 1979 as follows. - (a) if there is an unindexed gain, the indexation allowance shall be deducted from the gain and, if the allowance exceeds the unindexed gain, the excess shall constitute a loss; (b) if there is an unindexed loss, the indexation allowance shall be added to it so as to increase the loss; and (c) if the unindexed gain or loss is nil, there shall be a loss equal to the indexation allowance.'
Section 87 provides :
'(1) The provisions of this section have effect for the purpose of computing the indexation allowance on a disposal to which section 86 above applies. (2) The indexation allowance is the aggregate of the indexed rise in each item of relevant allowable expenditure; and, in relation to any such item of expenditure, the indexed rise is a sum produced by multiplying the amount of that item by a figure expressed as a decimal and determined..... by the formula (RD - RI) v RI where - RD is the retail prices index for the month in which the disposal occurs; and RI is the retail prices index for March 1982 or the month in which the expenditure was incurred, whichever is the later.... (5) For the purposes of this section - (a) relevant allowable expenditure falling within paragraph (a) of sub-section (1) of section 32 of the Capital Gains Tax Act 1979 shall be assumed to have been incurred at the time when the asset in question was acquired or provided;......'
If the amendments to the indexation allowance had ended there, the allowance would have fallen to be calculated by reference to the sum of pound 250 at which the taxpayer was deemed to have acquired the cabinet and the mirror in 1952. This remarkable consequence was, however, avoided by virtue of section 68(4) and (5) of the Act of 1985 which provide :
'(4) For the purpose of computing the indexation allowance on a disposal of an asset to which this sub-section applies where, on 31 March 1982, the asset was held by the person making the disposal, it shall be assumed that on that date the asset was sold by the person making the disposal and immediately required by him at its market value on that date. (5) Sub-section (4) above applies to a disposal - (a) which occurs on or after 6 April 1985...... and (b) in respect of which a claim is made that sub-section (4) above should apply;......'
The taxpayer duly made a claim under section 68(5) and the combined market value of the cabinet and the mirror on 31 March 1982 is agreed to have been pound 10,000. The rise in the retail prices index between March 1982 and February 1987, expressed as a decimal, was 0.264. The indexation allowance appropriate for the deemed purchase price of pound 10,000 was therefore 2,640. The sole question raised by this appeal is whether the indexation allowance is to be taken into the reckoning before or after the application of the time apportionment provisions of paragraph 11 of Schedule 5 to the Act of 1979. The case for the taxpayer is that the time apportionment rules should be applied first. On that basis the allowance of pound 2,640 should be set against the gain of pound 8,864 on which the taxpayer would be liable to be taxed apart from the allowance. This would produce a net gain of pound 6,224. Since the tax-free allowance for an individual during the year of assessment in question was pound 6,300 the resulting tax liability would be nil. The case for the Crown is that the indexation allowance should first be set against the total net gain from 19 April 1952 to 19 February 1987, that is to say pound 14,088, leaving a figure of pound 11,448. That, say the Crown, is the amount which should be time apportioned in order to arrive at the taxable gain, Under the time-apportionment rules pound 7,189 out of the pound 11,448 would fall on the post 6 April 1965 side of the line. That, therefore, is the amount on which tax should be charged. The tax bill on this basis is pound 266.70.
I need hardly say that we are not being asked to adjudicate simply on a claim by the Crown against this taxpayer for pound 266.70. The case is a test case, whose outcome will determine the liability of very many other taxpayers who acquired assets before 6 April 1965, who disposed of them during the period from 6 April 1985 to 5 April 1988, and whose gains are computed on the time -apportionment basis. As regards disposals after the latter date the law has been changed again. By virtue of section 96 of the Finance Act 1988 the general rule now is that all assets held on 31 March 1982 and disposed of on or after 6 April 1988 are deemed to have been sold and required by their owner at their market value on 31 March 1982. Paragraph 11 of Schedule 5 now survives only for the very limited purposes set out in paragraph 10 of Schedule 8 to the Finance Act 1988.
The crucial question in the present case turns on the construction of section 86(2) (a) and (4) of the Act of 1982 as amended. Does the unindexed 'gain' defined in section 86(2) (a) against which the indexation allowance is to be set under sub-section (4) mean the gain computed before or after the time-apportionment provisions of paragraph 11 are applied The difficulty lies in finding the meaning of the word 'gain'. Does it mean the whole gain or the chargeable gain We were referred by counsel to a number of other provisions in the legislation in which the word is used sometimes to connote the net gain or real gain accruing between acquisition and disposal, and sometimes to connote the chargeable gain. At first sight, section 28(2) of the Act of 1979 seems to provide the key, with its statement that every gain shall, except as otherwise expressly provided, be a chargeable gain. This fits well enough with, for example, paragraph 11(8) of Schedule 5 to that Act, where the reference to 'any gain' in paragraph 11(8) (b) clearly means 'any chargeable gain'. But as sub-paragraph (10) of the same paragraph 11 shows, there is no magic in the word 'gain'. It may mean either the true gain or the chargeable gain according to the context. On this aspect of the matter I agree with the judge and the special commissioner, both of whom took the view that the meaning of the word 'gain' in the context of section 86(2) (a) was not to be found by scrutinising other provisions of the legislation. The meaning is to be found by applying the normal canons of construction to the sub-section itself.
The sub-section defines the unindexed gain as the amount of the gain on the disposal computed in accordance with Chapter II of Part II of the Act of 1979. It is now common ground, though it was not so before the commissioner, that for this purpose Chapter II of Part II includes Schedule 5. Prima facie it must follow that the words 'computed in accordance with Chapter II' mean, inter alia, 'computed in accordance with paragraph 11 of Schedule 5'. The Crown, however, deny that this is so. Mr. Warren, appearing for the Crown, submitted that paragraph 11 is not a 'computation' provision : it provides only for the apportionment of a gain computed by reference to other provisions of Chapter II and Schedule 5. I do not accept this submission. Schedule 5 is brought into effect by section 28(3) under the general heading of 'Computation', and by section 30 under the specific heading of Computation of gains'. The latter section provides in terms that Schedule 5 to this Act 'shall have effect for computing for the purposes of this Act the amount of a gain accruing on the disposal of an asset'. The whole purpose of that Schedule is to ensure that, in the case of assets held on 6 April 1965, the capital gains tax provisions apply only to gains, or losses, accruing or deemed to accrue after that date. In other words, the purpose which it serves is the computation of the chargeable gain, or allowable loss. For this reason alone, giving the words of section 86(2) (a) their normal meaning in the context in which they appear, I would prefer the taxpayers argument to that of the Crown in the absence of some clear indication to the contrary.
There are, however, two further indications in the statutory language which lead me to prefer the arguments for the taxpayer. The first, which is very simple, is the sequence contemplated by section 28(1). The amount of the gain is to be computed in accordance with Chapter II, including Schedule 5, and subject to sections 86 and 87 of the Act of 1982. These words seems to me to contemplate the application of the time-apportionment formula before the indexation allowance is given. If Parliament had intended the contrary, I would expect the sub-section to being by saying that 'subject to the provisions of sections 86 and 87 of the Finance Act 1982' the gains were to be computed in accordance with Chapter II.
The second indication is that, by the terms of section 86(4), the indexation allowance is to be set against the unindexed gain or, as the case may be, added to the unindexed loss 'so as to give the gain or loss for the purposes of the Capital Gains Tax Act 1979'. If the Crown is right, this must be taken to mean, in the circumstances of the present case, 'so as to give the gain for the purposes of applying the time apportionment provisions'. To my mind, however, by far the more natural meaning of the phrase 'for the purposes of the Capital Gains Tax 1979' is for the general purposes set out in section 1 of the Act, that is to say for the charging of tax in respect of chargeable gains accruing after 6 April 1965. This accords with the taxpayers case, which is that the allowance, the whole of it, is to be 'allowed' in the ordinary meaning of that work against what would otherwise be a chargeable gain. On the Crowns approach, a part of the 'allowance' is set against the pre-6 April 1965 portion of the gain, and thus operates pro tanto to increase the chargeable gain rather than to reduce it.
In their arguments before us both parties relied, as they had before the judge and the commissioner, on a purposive approach to the statutory language as well s on its natural meaning. For my part, I doubt whether the purposive approach carries the matter much further in the circumstances of the present case. I can see no guide to the purpose which Parliament intended to achieve other than the natural meaning of the language which it has used. Both the result for which the taxpayer contended and the result for which the Crown contended seems to me to be purposes which Parliament might possibly have intended to achieve. A third possibility is that the Parliamentary draftsman, in the midst of his other preoccupations, did not fully take into account the correlation between the indexation allowance and the time apportionment formula. Had he done so, he might be expected to have dealt with the point specifically.
Doubtful as I am, however, about the help which can be gained from what must inevitably be a preconceived view about the purpose of this piece of legislation, I believe that it may well be helpful to measure the language used by Parliament against the standards of common sense. Of course if the statute is unambiguous we are bound by it, whether we think it sensible or not. But if there is a reasonable doubt about its meaning, and if the doubt resolves itself into a choice between a more and a less sensible construction, surely the more sensible construction should prevail.
Mr. Park, representing the taxpayer, argued that the taxpayers construction produced the fairer and more sensible result. First, he said, the charging provisions of the Act were only directed at the proportion of the gain - pound 8,864 - which was deemed to have accrued between 6 April 965 and 10 February 1987. The scheme of the Act, as well as the natural meaning of the word used, would lead one to expect that the allowance should be set against what would otherwise be the chargeable gain. Further, the allowance was calculated solely by reference to price rises between 31 March 1982 and 10 February 1987. It made perfect sense to reduce the chargeable gain accruing between 6 April 1965 and 10 February 1987 by an amount so calculated, but made no sense whatever to treat that amount as having accrued gradually ever since 19 April 1952. Finally, submitted Mr. Park, it was common ground that a taxpayer who elected under paragraph 12 of Schedule 5 for his gain to be computed as if he had purchased the asset at its market value on 6 April 1965 qualified for the full allowance, and it would be unjust if a taxpayer whose chargeable gain was computed by reference to paragraph 11 were deprived of the full allowance.
Mr. Warren, representing the Crown, argued before us as he had before the judge that the purpose of the amended sections 86 and 87 of the Act of 1982 read with section 68(4) of the Act of 1985 was to charge the taxpayer as if there had been no inflation since March 1982. To my mind, the purpose thus attributed to the legislation is altogether to precise. The allowance is rightly called an indexation allowance, not an inflation allowance. The retail price index, on which the allowance is based, is, of course, an index of the price changes of a range of goods and services forming the main part of the budgets of families in the middle income range. It is the most widely known and for general practical and political purposes one of the most use ful of the enormous number of indices which measure changes in the purchasing power of the pound against various commodities, but it bears no direct or necessary relation to changes in the prices of the sort of commodities with which the capital gains tax is normally concerned, such as land, shares and securities, and chattels such as those in the present case which are of a sufficiently high value to fall within the scope of the tax charge. The indexation allowance was no doubt introduced as a result of the very high levels of inflation, in the sense of sharply rising prices of almost all assets, during the 1970s and early 1980s, but by tying it to the retail rice index Parliament was painting with a broad brush. To my mind the Parliamentary purpose cannot be identified any more precisely than by saying that with effect from March 1982 Parliament decided to give a substantial measure of relief, based on the retail price index and therefore easily calculated and easily understood, against tax on all gains realised after that time, irrespective of the precise extent to which the particular gain was due to inflation or to the ordinary laws of supply and demand. It will be noted in this connection that the value of the cabinet and the mirror rose from the agreed figure of pound 10,000 on 31 March 1982 to the sale price of pound 15,800 on 10 February 1987, whereas the indexation allowance for the same period was pound 2,640.
This leads me to a point which appears to have played a crucial part in the decision of the judge. He said [1990] 1 WLR 1447, 1451; [1991] 189 ITR 723, 728 :
'The Crown produced figures, which were not challenged by the taxpayer, demonstrating mathematically that on the assumption that the value of the assets after 1982 kept pace with inflation any gain which had previously accrued would inevitably be eventually turned into a loss. Inexorably, over time the indexation allowance becomes a larger and larger proportion of the total gain, until it exceeds the fraction which, on the taxpayers construction, is time-apportioned to the period after 1965. The higher the annual rate of inflation, the sooner this position is reached.
This would be a bizarre result. It certainly does not give effect to a policy of taxing money gains until 1982 and only real gains thereafter.'
I should say at once that although the figures produced by the Crown undoubtedly lead to the result described by the judge, we were told by Mr. Park that severe criticism has been directed by expert mathematicians outside the revenue against both the assumptions on which those figures are based and the inferences which have been drawn from them. The reason why the figures were not challenged by the taxpayer before the judge, we were told, was that Mr. Allcock, junior counsel for the taxpayer, only received a copy of the graphs on which the figures were set out some 10 minutes before the hearing began. These graphs represented the final instalment of a large volume of mathematical material sent by the revenue to the taxpayers solicitors, some of it (which was in the event unused) about a fortnight before the hearing, but most of it either during the evening prior to the hearing or on the morning of the hearing itself.
A great deal of the material - some 35 pages of it - has been included in the appeal bundle. Apart from allowing counsel to refer to the graphs in support of their arguments, we declined to consider it. Nor were we prepared to consider a detailed criticism of the revenues calculations and methods, prepared by an accountant, which Mr. Park sought to introduce by way of riposte. Simple algebraic formulae, of the kind set out in paragraph 11 of Schedule 5, may be helpful in illustrating the meaning of the words used, but to my mind it would be absurd to seek for the intention of parliament in page after page of abstruse mathematical calculations, all the them founded on arbitrary and controversial assumptions. If material of this sort is ever to be introduced in a tax appeal it should in my judgment be classified as expert evidence, and should be produced before the special or general commissioners where it can be tested by cross-examination of the author, rather than on the hearing of an appeal by way of case stated in the High Court.
In the light of hindsight it is apparent that Mr. Allcock should have objected to the introduction of the material, or at least have asked for an adjournment to consider the final instalments of it, but I do not think that he should be criticised too severely for failing to do so. He was taken by surprise - though no one suggests that this was the intention or which of the Crown or of Mr. Warren - he may well have felt that he had a sufficient grasp of the mathematical arguments as a result of his studies, with the help of expert advisers, of the earlier material, and, of course, he failed to appreciate the importance which the judge would attach to the new material. It is, however, unnecessary for me to say more abut this aspect of the matter because, for the reasons given, I regard the bulk of the material as inadmissible. I accept at once the simple result of the calculations, namely that if inflation in the limited sense of a rise in the retail price index continued, if the value of the asset after 1982 rose in line with that index, and if the law were unaltered in the meantime, the time would eventually come when the indexation allowance would exceed the post-6 April 1965 portion of the total gain on the asset. The higher the annual rate of inflation, the sooner that point would be reached. But even if one takes a continuing rate of 6.7 per cent. per year, which was the average rise in the retail price index from 1952 to 1987, that it would not be reached, as I understand the revenues calculations, until the year 2006. The revenue argument is only valid therefore if we can contemplate Parliament in 1985 assuming a continuing relatively high rate of inflation, and assuming also the indefinite continuation of the time apportionment rules. I cannot regard these as realistic assumptions. There is no branch of our law which is more frequently adjusted to take account of changing circumstances than tax law. In the event, as we know, the straightline apportionment method of computing chargeable gains came to an end for almost all practical purposes in 1988.
There further points were taken by Mr. Warren. The first was that section 86 of the Act of 1982 in its original form contained language which pointed to the conclusion that the 'gain' against which the indexation allowance was to be set was the whole gain, and not merely that part of it which was deemed to have accrued after 6 April 1965. Thus by the original section 86(4) the allowance was to be 'allowed against the gross gain.' The 'gross gain' was defined by the original sub-section (2) (a) as 'the amount of the gain referred to in sub-section (1) (c) above, computed in accordance with Chapter II of Part II of the Capital Gains Tax Act 1979.' And sub-section (1) (c) referred to the disposal of an asset 'on which, disregarding the indexation allowance.... a gain would accrue (whether or not that gain would be wholly a chargeable gain).' Up to this point, I can see the force of Mr. Warrens argument. His difficulty lies in the fact that the original section 86(2) (a) and the words in the original section 86(1) (c) to which I have referred were removed by the Act of 1985. One can only assume that their removal was deliberate. In other respects too the indexation allowance was substantially revised by the latter Act. Thus it removed the requirement that the asset must have been held for at least 12 months before any allowance was obtained; it extended the allowance to the calculation of losses as well as gains; and, as already mentioned, it provided, by section 68(4) for the allowance to be calculated by reference to the value of the asset at 31 march 1982 rather than by reference to its original cost. It seems to me, as it did the judge and the commissioner, that the provisions of the Act of 1982 were too radically altered by the provisions of the Act of 1985 for the language of the former to be taken as a guide to the meaning of the latter.
The second point, which was accepted by the judge, was that the taxpayers argument gave her the best of both worlds. In the words of the judge, at p. 1450; [1991] 189 ITR 727;
'the effect of inflation since 1982 has not only had the obvious consequence of making the consideration on disposal higher than it would otherwise have been, it also has the further consequence, when there is a time apportionment, of increasing the deemed 1965 base cost.'
Accordingly, continued the judge, at p. 1450 [1991] 189 ITR 723, 727 :
'The taxpayer would be getting it both ways he would be given an indexation allowance to put him in the same position as if there had been no inflation since 1982, but his 1965 base figure would be calculated on the footing that there has been.'
There seem to me, however, with respect, to be two difficulties about this approach. One is that it assumes a precise relationship between the rise in the price of the asset and the rise in the retail price index. The other is that, in so for as the decline in the value of money had produced a higher sale price - and thus, of course, a higher 6 April 1965 figure on the time-apportionment basis - this was the very injustice which the indexation allowance was designed to mitigate. It was for Parliament to decide whether it should be mitigated in the form contended for by the taxpayer or in the form contended for by the Crown.
Mr. Warrens third point was advanced in answer to the taxpayers argument that the Crowns construction worked injustice between on the one hand taxpayers whose gain was computed on the time-apportionment basis and on the there hand those who, either by specific provision or by an election under paragraph 12 of Schedule 5, had their gains computed by reference to 6 April 1965 values. The answer was simple, submitted Mr. Warren. The taxpayer could have made an election under paragraph 12, and thus obtained the ful benefit of the allowance. I agree, however, with Mr. Parks submission that this is an oversimplification. An election under paragraph 12, once made, would have been irrevocable, and having made it the taxpayer would have been committed to what might have been a lengthy and inconclusive argument with the revenue about the value of the cabinet and the mirror at a date some 22 years earlier. The burden of proving the correctness of the valuation for which she contended would have rested on her. The cost of the exercise would almost certainly have exceeded the amount of tax at stake. No doubt in recent years price indices and other techniques of valuation have become more highly developed - this presumably is the reason why Parliament has been able to adopt values on 31 March 1982 as virtually the universal starting point for calculating gains from the disposal of assets held on that date - but the provisions of paragraph 11 seem to me to reflect the recognition by Parliament that when the capital gains tax first came into force it simply was not possible to value all assets held at that time. Still less would it be possible to arrive at reliable valuations of specific assets more than two decades after 6 April 1965. In these circumstances I can see no reason why Parliament should have intended, in relation to the indexation allowance, to discriminate in favour of those whose assets were valued on 6 April 1965, and against those whose chargeable gains were calculated on the time-apportionment basis.
I Conclude accordingly that the taxpayers arguments are to be preferred. I would allow the appeal.
Beldam L.J.I have had the advantage of reading in draft the judgment of Nolan L.J.I agree with his conclusion that the taxpayers appeal should be allowed and with the reasons he has given. As we are differing from the judge and because I reached my conclusion by a slightly different route, I add my own observations, Although the appeal was presented to us as raising the sole question whether the indexation allowance provided for by sections 86 and 87 of the Finance Act 1982, as amended by the Finance Act 1985, was to be taken into account before or after the application of the time-apportionment provisions of paragraph 11 of Schedule 5 to the Capital Gains Tax Act 1979 both statutory provisions have a legislative history and were originally set in different contexts to those in which they have to be construed after the passing of the Finance Act 1985. For reasons which I shall attempt to explain, it seems to me that in construing the provisions in their final environment greater assistance is derived from their original legislative framework and the background in which they were introduced than from the exposition of algebraic functions based on selective criterial which weighed heavily with the judge in reaching his decision.
The Finance Act 1965
Capital gains tax was introduced by Part III of the Finance Act 1965. Section 19(1) provided :
'Tax shall be charged in accordance with this Act in respect of capital gains, that is to say chargeable gains computed in accordance with this Act and accruing to a person on the disposal of assets.'
Under the rubric 'Chargeable gains,' section 22 contained rules for the disposal of assets and for the computation of gains. Thus section 22(9) provided :
'The amount of the gains accruing on the disposal of assets shall be computed in accordance with Part I of Schedule 6 to this Act, and subject to the further provisions in Schedules 7 and 8 to this Act......'
And section 22(10) :
'Every gain accruing after 6 April 1965 shall, except so far as otherwise expressly provided by this Part of this Act, be a chargeable gain, but subject to the provisions of Part II of Schedule 6 to this Act (which restricts the amount of chargeable gains accruing on a disposal of assets owned on 6 April 1965).'
Losses accruing on a disposal were by section 23(1) to be : 'computed in the same way as the amount of a gain accruing on a dispoal is computed.' And by section 23(2) :
'Except as otherwise expressly provided, all the provisions of this Part of this Act which distinguish gains which are chargeable gains from those which are not, or which make part of a gain a chargeable gain, and part not, shall apply also to distinguish losses which are allowable losses from those which are not, and to make part of a loss an allowable loss, and part not......'
From the introduction of the tax on capital gains, although the draftsman apparently regarded provisions which distinguished gains which were chargeable gains from gains which were not as being in a different category from provisions which made part of a gain a chargeable gain and part not a chargeable gain, the draftsman did not use the word 'gain' consistently to denote the while of a gain part of which was and part of which was not chargeable to tax. From this and other contexts in the Act. I think the stress laid by Mr. Warren for the Crown on the distinction between the words 'gain' and 'chargeable gain' is misplaced. similarly in section 22(10), 'every gain accruing after 6 April 1965' is a phrase with a different meaning to 'gains accruing on disposals which occur after 6 April 1965.' The provisions of Part II of Schedule 6 to the Act of 1965, which I shall examine in greater detail later, are described as restricting the amount of chargeable gains accruing on the disposal of assets owned on 6 April 1965 but there in no doubt about their object. It is to make it clear that only gains accruing after the Act comes into force are to be liable to the new tax. This accords with the general principle that Acts imposing a liability to tax do not have retrospective effect. In truth the provisions of Part II of Schedule 6 to the Act are provisions which identify the gain which on the disposal of an asset acquired before and held on 6 April 1965 has accrued since 6 April 1965. It is only necessary to identify gains accruing after 6 April 1965 in the case of those assets acquired before and owned on 6 April 1965. Gains accruing after that date may need to be apportioned between the part which is chargeable to tax and the part which is not as, for example, in the case of private residences referred to in section 29 of the Act of 1965.
General rules for computation of capital gains were contained in Part I of Schedule 6. Paragraph 4 allowed the person disposing of the asset to deduct three items from the consideration received on the disposal. They were : (a) the amount of the consideration or its value in money or moneys worth for which he acquired the asset together with the cost of acquisition; (b) the amount of any expenditure incurred for the purpose of enhancing the value of the asset to the extent that the expenditure is reflected in the enhancement of value of disposal, and (c) the cost of the disposal.
Part II of Schedule 6 introduced the specific rules for assets held on 6 April 1965. The purpose of these rules was to give effect to section 22(10), to the principle already stated that the introduction of a tax should not be retrospective and to determine the gain accruing after 6 April 1965. The rules in paragraph 22 of Schedule 6 applied to quoted securities. As it was comparatively easy to fix the value of quoted securities on 6 April 1965, the quoted market value on that day was to be assumed to be the value at which the taxpayer had acquired the, but if the market value when he actually acquired the securities was higher than that on 6 April 1965, so that the assumption that the asset had been acquired at the later value resulted in a greater gain accruing to the taxpayer or a gain where there would otherwise be a loss, or if on that assumption a loss would accrue where taking the actual value given on acquisition would result in a smaller loss or gain, the actual value given at acquisition was to be taken for the computation. However, if by taking the actual value paid on acquisition a loss was substituted for a gain or a gain for a loss, the securities were deemed to have been disposed of without gain or loss accruing on disposal. This provision ensured that unrealised losses or gains at 6 April 1965 were not taken into account in computing the gain on which tax would be chargeable. It did not depend on any election on the part of the taxpayer.
Similar provisions applied to the sale of land with development value. However in relation to other assets which included unquoted securities where the value on a give date might be difficult for both the revenue and the taxpayer to determine, the apportionment by reference to straightline growth of a gain or loss over the period of ownership, but not earlier than 6 April 1945, was introduced. It was implicit in those provisions that the expenditure allowed by paragraph 4 of Schedule 6 was deducted before the apportionment by reference to straightline growth. The gain or loss was then apportioned so that only that part of it assumed to have accrued after the introduction of the tax on capital gains was taken into account.
Paragraph 24(4) of Schedule 6 recognised that an item of expenditure which enhanced the value of the asset would probably have accrued later than the original outlay on acquisition and might have to be apportioned according to the extent to which it was reflected in the enhancement of value at disposal. It also provided for apportionment of a gain between the amount or value of the consideration given at acquisition (paragraph 4(1) (a)) and the amount of expenditure allowable under paragraph 4(1) (b). Where enhancement was attributable to expenditure incurred before 6 April 1965, only the gain attributable to the enhancement and occurring after that date was taken into account. But in a case, for example, in which under paragraph 4(1) (b) enhancement expenditure took place after 6 April 1965 and was fully reflected in the value of the asset on disposal, any gain on that account accrued after 6 April 1965.
Paragraph 25 of Schedule 6 gave to the taxpayer the right to elect that the gain on disposal of the asset should be computed by reference to its market value on 6 April 1965. Making a valuation on that date could be difficult and expensive. Framing the provisions in this way placed the onus on the taxpayer to opt for a computation based on market value although they were not necessarily solely for the taxpayers benefit. It seems equally to the benefit of the revenue to ensure that the cost of fixing the amount of the chargeable gain did not overburden its staff and result in costs out of proportion to the value of tax recovered.
Two further provisions of Schedule 6 to the Finance Act 1965 may in the context be significant. Paragraph 7 of Schedule 6 contains the rules for computing gains accruing on disposal of parts of assets and for gains to be apportioned between the part of an asset disposed of and the part retained. Paragraph 7(3) begins with the words 'Any apportionment to be made in pursuance of this paragraph shall be made before operating the provisions of the last foregoing paragraph....' - a paragraph related to the restriction of loesses accruing on the disposal of an asset by reference to capital allowances and renewal allowances. These words show that it is not difficult to provide that a particular step in the process of computation is to precede another, where that is the intention of the Act. similarly where in paragraph 24(8) the draftsman intends to ensure that the computation of a gain is made over the whole period to which it is referable in the case of part disposals under paragraph 7 he refers to 'bringing into account the entire gain or loss over the period.......' So too in the case of a principal residence, when part of the gain may be taxable and part not, apportioned according to the time it was not occupied as a principal residence, the draftsman identifies the gain over the whole period of occupation as 'the whole of the gain.'
In 1965 the value of a consideration in money or moneys worth did not depreciate due to inflation at the significant rates which prevailed from 1965 onwards.
The Capital Gains Tax Act 1979 :
The provisions of Schedule 6 to the Finance Act 1965 were reproduced in Schedule 5 to the Act of 1979. I agree with Nolan L. J., that the argument advanced before the commissioner that Schedule 5 was not part of the computation provisions of Part II of the Act is unsustainable. Where the form of section 28 of the Act of 1979 which reproduces, but not in identical terms, the provisions found in section 22(9) and (10) of the Finance Act 1965 was dictated by changes within the Act of 1979, I have been unable to discern, but I see no reason to assume that any change in the basic principle that only gains accruing after 6 April 1965 were to be chargeable to tax was intended. Nor do I think that the subsequent amendments to the Act of 1979 made by the Finance Act 1982 affected this principle.
The Finance Act 1982 :
The judge ascribed to the rules introduced in 1982 the intention 'to prevent people from having to pay tax on gains caused by inflation which exist only on paper.' The rules are contained in sections 86 and 87 of the Act of 1982, as subsequently amended. The purpose of the rules may well have been that broadly state by judge but the limited provisions contained in sections 86 and 87 could only be regarded as a first step step towards that aim. They have already been fully set out by Nolan L. J. However, consistently with principle the indexation allowance to be set against a gain computed in accordance with Chapter II of Part II of the Act of 1979 made no allowance for inflation before March 1982. The allowance was based on the increase in the retail price index between March 1982 and the month during which a subsequent disposal took place and was computed by applying to each of the allowable items of expenditure used in the computation of the gain, the rise in the index expressed as a decimal, aggregating the resulting figures to give the sum to the allowed against the gain so as to give the gain for the purposes of the Capital Gains Tax Act 1979 or is the indexation allowance equals or exceeds the gross gain, so as to extinguish it;........ : see section 86(4). I have not overlooked the words of section 86(1) (c) that it shall apply to a disposal of an asset on which
'disregarding the indexation allowance for which provision is made below, a gain would accrue (whether or not that gain would be wholly and chargeable gain),'
or that the gain there referred to is in sub-section (2) (a) referred to as 'the gross gain.' The Crown in its argument sought to persuade us that the words' (whether or not that gain would be wholly a chargeable gain),' though repealed in 1985, were nevertheless of assistance in determining the manner in which the indexation allowance was intended to be applied when it was introduced in 1982.
I do not derive the assistance from those words which Mr. Warren for the Crown suggested I should. It seems to me there is ample scope for them without inferring that the indexation allowance was to be allowed in part against a gain attributed by statutory assumption to a period before the imposition of capital gains tax. On the other hand, I find in section 86(4) a clear indication that Parliament them contemplated the case in which the indexation allowance equalled or exceeded a chargeable gain so as to extinguish it, making provision in section 86(5) (b) that neither a gain nor a loss should result where the gain was exceeded by the indexation allowance. Bearing in mind that the indexation allowance was then to be computed by applying a fraction (expressed as a decimal) to the actual expenditure, it seems tome probable that this result of the allowance would be more likely to occur on a disposal made in the more distant rather than the immediate future. The provisions at least show that Parliament did in 1982 contemplate that the effect of applying the provisions of the indexation allowance could turn what would otherwise have been a gain into a loss.
Although the indexation allowance was based on the rise in the retail price index between March 1982 and the month of disposal, it was computed in part on the cost of acquisition. Having regard to the rampant inflation which had taken place from 1972 to 1982, the longer the asset had been owned the greater would be the owners need to receive an allowance against inflation. If the Crowns argument is correct, a taxpayer who on or after 6 April 1985 disposed of an asset which he had acquired in 1945 would receive but 50 per cent. of an indexation allowance computed on expenditure incurred at acquisition in 1945. I am not surprised that the commissioner regarded such a result as so capricious that he declined from the words used in the Act to attribute to Parliament so irrational an intention.
To find the gain, however described against which the indexation allowance is to be allowed, it is necessary first to identify the relevant allowable items of expenditure. If find considerable difficulty in applying the Crowns order of computation to a case in which the expenditure on acquisition occurred before 6 April 1965 but an enhancement expenditure was made after that date. There is no difficulty in calculating the indexation allowance on each of the items of relevant allowable expenditure which are aggregated to give the indexation allowance, nor any difficulty in then calculating the gain over the whole period of ownership. But if the indexation allowance is set against the gain over the whole of that period before the time apportionment provisions are applied, the taxpayer will receive only a time apportioned indexation allowance in respect of his enhancement expenditure. I cannot see on what rational or sensible basis such a result could have been intended.
For these reasons, I conclude that when the indexation allowance was introduced in 1982 it was to be allowed against the gain after it had been computed in accordance with Chapter II of part II of the Act of 1979, including the time apportionment provisions of paragraph 11 of Schedule 5 which by statutory assumption was the gain accruing after 6 April 1965.
The Finance Act 1985
Next, it is necessary to consider whether the amendments to the indexation allowance introduced by the Finance Act 1985 resulted in a change in the manner in which the indexation allowance was to be applied. Section 68 of that Act contained provisions modifying the allowance. As Nolan L. J. has pointed out, one of the most significant modifications was that contained in sub-section (4) which allowed a taxpayer who disposed of an asset which he had held since 31 March 1982 to substitute the market value on that date for the actual amount of the consideration on acquisition for the purpose of computing the indexation allowance. Another, in section 68(1) (b), was to extend the indexation allowance to a loss incurred on disposal. This and other amendments were effected by the provisions of Schedule 19 to the Act of 1985. I have already indicated my opinion that the changes to the wording of section 86(1) of the Finance Act 1982 do not affect the construction of the relevant provisions. Extending the indexation allowance to cases in which a loss accrued on a disposal, required the words 'gross gain' in section 86(2) to be changed to 'unindexed gain or loss.' The gain or loss in still, however, to be computed 'in accordance with Chapter II of part II of the Capital Gains Tax Act 1979.' Similarly 'relevant allowable expenditure' is consequentially amended. Nor can I see in section 87, which provides for the calculation of indexation allowance, any change which would lead me to conclude that Parliament intended that the indexation allowance fixed as a percentage of an assumed acquisition cost in March 1982 was to be apportioned so That in the case of assets owned before 6 April 1965 only a portion of the allowance would be set against a gain which was chargeable to tax.
The rebasing to 31 March 1982 of the allowable expenditure on acquisition for the purpose of calculating the indexation allowance and the inclusion of losses brought about by or increase by the allowance required the consequential amendment of section 86(4) and (5), but I see no reason why so amended section 86 and 87 should be construed as importing a change in the manner in which the indexation allowance was to be applied, or that only a part of it was to be allowed in the specific case of a gain computed under paragraph 11 of Schedule 5.
Taking this approach to the construction of the combined provisions of the Act of 1979 and the Act of 1982, as amended by the Act of 1985, my conclusion is that the taxpayers construction and not the Crowns is correct.
I would wholeheartedly endorse Nolan L. J.s opinion of the adminissibility of the 17 pages of algebraic formulae in part reproduced in graphical form which clearly swayed the judge to express the view that the Crowns construction 'produced consistency and avoided absurdities.' The absurdity he instanced was 'making a gain which accrued between 1965 and 1982 disappear despite the fact that there has been no subsequent fall in the inflation adjusted value of the asset.' In making the amendment to section 86(4), Parliament must have realised that the indexation allowance computed on the rebased acquisition cost would be more likely to make a gain which accrued between 1965 and 1982 disappear or produce a loss. Despite this, it enacted that a loss so produced or increased was to be available to be set against gains. I find it difficult to understand why, because on certain assumptions that consequence could occur in 2006, it should be regarded as 'absured.'
The Crowns construction still produced the inconsistency that an allowance introduced to make the tax chargeable on capita gains to a limited extent a tax on real rather than on inflationary gains was in the case of unquoted securities to be set partly against a gain excluded in principle from the incidence of capital gains tax, but which in the case of quoted securities was allowed in full against a taxable gain. Moreover the example to which the judge referred of the absurdity produced in the year 2006 was based on specific assumptions which could well be outside the mode. The likelihood of such assumtions and the 17 pages of deductions were not proved and should not have been considered.
If, for the construction of a revenue statute reliance has to be placed on such material, the English language has become greatly impoverished since just over on hundred years ago in Commissioners of Inland Revenue v. Liquidators of City of Glasgow Bank [1881] 8 R. 389, 392 the Lord President, Lord Inglis, pronounced that the language employed in revenue acts was not 'technical language either of the law of England or of the law of Scotland, but language of a popular character, equally intelligible in all parts of the United Kingdom.' Language whose meaning can only be deduced from a sophisticated calculation of the function of selected variables hardly accords with that description.
Glidewell L.J.I have read in draft the judgments of Nolan and Beldam L.JJ.I agree entirely with their reasoning and their comments. I too would therefore allow this appeal.
Appeal allowed with costs.
Leave to appeal conditional on Crown not seeking costs against taxpayer.
Solicitors : Hewitson Becke and Shaw, Cambridge; Solicitor of Inland Revenue.