The Court of Session has found in favour of the taxpayer in Sir Fraser Morrison v HMRC[1], and confirmed that a payment of £12m, made by the taxpayer in an out of court settlement, following a claim for damages for misrepresentation, may be deducted under section 49, Taxation of Chargeable Gains Act 1992.

Background

The taxpayer had been a major shareholder in, and chairman and chief executive of, the construction company Morrisons plc (Morrisons). In June 2000, Anglian Water plc (Anglian) entered into discussions to acquire Morrisons and various documents were provided to Anglian. Following negotiations, Morrisons accepted an offer from Anglian to acquire it. As part of the acquisition, the taxpayer received shares in Anglian. These were transferred into a trust.

In 2002, the taxpayer was sued by Anglian for misrepresentation. Anglian alleged that it had been induced into the deal by a number of false representations and misstatements to offer more for Morrison than it was worth. The action was defended and the parties finally reached an out of court settlement. Under the terms of the settlement, the taxpayer, without accepting liability, paid Anglian £12m.

When the taxpayer disposed of his Anglian shares from the trust he claimed an adjustment to the amount of capital gains tax (CGT) payable to HMRC under section 49, Taxation of Chargeable Gains Act 1992 (TCGA). The taxpayer claimed that the payment of £12m in settlement of the dispute was the enforcement of a contingent liability in respect of representations he had made on the disposal of his shareholding in Morrisons. HMRC denied the claim on the basis that the settlement agreement was not part of the consideration (contingent or otherwise) for the share exchange and therefore did not fall within section 49. The taxpayer appealed to the First-tier Tribunal (Tax Chamber) (FTT).

The law

Section 49(1)(c) TCGA, provides that, in the first instance, in calculating a gain, no allowance is made: "for any contingent liability in respect of a warranty or representation made on a disposal by way of sale or lease of any property other than land". However, section 49(2) provides that: "if any such contingent liability subsequently becomes enforceable and is being or has been enforced, there shall be made, on a claim being made to that effect, such adjustment, whether by way of discharge or repayment of tax or otherwise, as is required in consequence".

The main issue on appeal was whether the taxpayer was entitled to make an adjustment under section 49.

The FTT's decision

HMRC's position centred on a distinction it sought to make between the taxpayer's role as chairman and shareholder. It argued that the settlement payment was attributable to the taxpayer's role as chairman and representations he made when acting in that capacity. That had an effect upon the amount paid for Morrisons but it is distinct from the consideration received by the taxpayer for his shares since he is in that instance acting solely in his capacity as a shareholder. It could not be said, therefore, that liability to pay the £12m was a contingent liability upon the taxpayer as shareholder since the contingent liability was not linked to the calculation of CGT on his share disposal.

The FTT disagreed with HMRC and allowed the taxpayer's appeal. It decided that, in principle, an adjustment could be made under section 49 in respect of the out of court settlement. It left it to the parties to agree quantum. HMRC appealed to the Upper Tribunal (UT).

The UT's decision

The UT allowed HMRC's appeal. It was of the view that the settlement payment was not the enforcement of a contingent liability. The taxpayer had made the alleged misrepresentations and subsequent settlement payment in his capacity as chairman of Morrisons. The CGT liability was linked to his role as a shareholder and not chairman and as a consequence was distinct from the settlement. The taxpayer appealed to the Court of Session.

The Court of Session's decision

The Court of Session did not agree with the UT and allowed the taxpayer's appeal. Lord Tyre was of the view that the capacity in which the representations were made should not make any difference since the acquisition price for Morrisons and the mechanism for the acquisition (the purchase of all the shares) cannot be intelligibly distinguished and section 49 makes no reference to the capacity of the person. The basis of the taxpayer's contingent liability in this case was the representations made to Anglian, the ultimate consequence of which was to lead to the settlement which reduced the value of the gain realised by the taxpayer on the disposal of his shares. The case has been remitted to the FTT to determine how much of the settlement figure can be deducted for CGT purposes.

Comment

Although this case clarifies the scope and application of section 49, TCGA, a critical issue at the heart of the dispute was not dealt with by the court by virtue of a concession made by HMRC. It was conceded that the settlement payment in this case constituted a "contingent liability" which had been "enforced" by Anglian. This narrowed the scope of the debate considerably and it is apparent from the Court of Session judgment that the judges felt there was much to consider on this issue. Can it be said that a settlement payment in the context of an action for false representations undoubtedly constitutes a "contingent liability" within the meaning of section 49? Is that what the draftsman intended when drafting the section? Counsel for HMRC encountered some difficulty in explaining the reasons for HMRC's concession on this issue and it leaves a question mark as to whether this case would have gone the way it did had that concession not been made. It seems unlikely HMRC would be willing to make such a concession in future cases.