In the September Bulletin, I mentioned the decision in Astall v HMRC in which the Special Commissioners had considered the meaning of a relevant discounted security for the purposes of capital gains tax. At the time, this was defined in Schedule 13(3) Finance Act 1996 as a security where the amount receivable on maturity or redemption:
“is or would be an amount involving a deep gain or might be an amount which would involve a deep gain”.
The terms of the security included a redemption option that, if it had been exercised, would have involved a deep gain. The taxpayer (not surprisingly) said that because the amount payable on redemption might involve a deep gain, the definition of a relevant discounted security was satisfied. The exercise of the option may not have been very likely and admittedly the redemption option was inserted for tax reasons, but that was no reason for it to be ignored.
HMRC argued that the possibility of early redemption should be ignored because it was unlikely to take place. The Special Commissioners agreed and said that looking at the position realistically, it was practically certain that the redemption option would not be exercised.
The High Court have confirmed this view, saying that the Special Commissioners’ conclusion cannot be faulted and as there was no realistic possibility of the option being exercised and, therefore, for a deep gain to arise, the security was not a relevant discounted security. It was correct, on the authority of Ramsay and Barclays Mercantile, to construe the requirements for a relevant discounted security by considering all possibilities in such a way to limit those possibilities to real ones.
The difficulty here, of course, is in understanding what this means. The provision does say ”might be an amount which would involve a deep gain” – which expressly envisages a degree of uncertainty – so the question is: How uncertain does it have to be? Every day in betting shops, people are taking wildly different views about what represents a realistic possibility – so whose view is going to prevail? The ordinary person, perhaps, or maybe a Lord Justice of Appeal, or even the person who is actually going to assess the risks in real life? Who knows? I hope we are not going back to the Chancellor’s foot. These rules are hard enough to understand without introducing an extra element of uncertainty.
If a definition is provided by the legislation, it is a bit tough to say that there is another condition that we did not mention – and it is bad luck you don’t satisfy it. If the taxpayer had known about this unspecified condition at the outset (and why should he not be entitled to know) he or she might not have incurred the enormous costs of an appeal. This may have been a tax scheme (which is obviously a bad thing), but that should not mean that principles go out of the window.