SPC00443

CAPITAL GAINS TAX – shares sold by trustees, trustees becoming non-resident, and shares of the same class acquired within 30 days – whether the effect of the [“bed and breakfast”] identification rules in TCGA 1992 s.106A is that the shares are deemed to be owned at the time of the deemed disposal on becoming non-resident – no – appeal allowed 

THE SPECIAL COMMISSIONERS

	CLIVE HICKS	Appellant

	- and -

	NICHOLAS JEREMY DAVIES
	(HM INSPECTOR OF TAXES)	Respondent

		Special Commissioner: 	DR JOHN F. AVERY JONES CBE 
						EDWARD SADLER

Sitting in public in London on 26 October 2004

Julian Ghosh and James Henderson, counsel, instructed by Forty-Two UK Limited for the Appellant

Michael Furness QC instructed by the Solicitor of Inland Revenue for the Respondent

© CROWN COPYRIGHT 2004

DECISION

1.	This is an appeal by Clive Hicks against an amendment to his self-assessment return by the Inspector to include gains made on a deemed disposal by trustees of two settlements on their becoming non-resident.  Mr Julian Ghosh and Mr James Henderson appeared for the Appellant; Mr Michael Furness QC appeared for the Inspector.
2.	The case concerns a capital gains tax avoidance scheme under which trustees sold shares, became resident in Mauritius, and then purchased shares of the same class within 30 days.  When the trustees become non-resident the Appellant contends that there is no deemed disposal of assets because the only assets are cash.  The Inspector contends that the capital gains tax identification rules result in the original shares (those disposed of by the sale) being identified with the shares of the same class acquired after the trustees have become non-resident, with the result that the originally-acquired shares are treated as still owned and capable of being the subject of the deemed disposal occurring when the trustees become non-resident.  Although the settlor is interested in the trust and would normally be taxable on the gain on subsequent disposal of the shares, it is common ground that the double taxation agreement with Mauritius (which has since been altered so that this is no longer the result) prevents such a charge.
3.	There was an agreed statement of facts as follows:
Definitions and Abbreviations
(1)	In this Statement of Facts, the following definitions and abbreviations shall be used:
		‘A.I.T.’	A.I.T. Group P.L.C.;
		‘Brewin Dolphin’	Brewin Dolphin Securities Limited, stockbroker, whose registered office is at 5 Giltspur Street, London, EC1A 9BD;
		‘F.I.T.C.O.’	First Island Trust Company Limited, whose registered office is at St James Court, Suite 308, St Denis Street, Port Louis, Republic of Mauritius;
		‘the Double Taxation Convention’  	the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Mauritius for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains, as given effect by the Double Taxation Relief (Taxes on Income) (Mauritius) Order 1981 (S.I. 1981/1121, as amended);
		‘forty-two’	forty-two (uk) limited, whose registered office is at The Bake House, Bradwell Abbey, Milton Keynes, MK13 9AP, agent for the Appellant;
		‘James and Cowper’	Messrs James and Cowper, accountants, of 3 Wesley Gate, Queen’s Road, Reading, Berkshire, RG1 4AP, agent for the Appellant;
		‘the No. 1 Settlement’	The Clive Hicks Family Settlement No. 1 of 2000;
		‘the No. 2 Settlement’	The Clive Hicks Family Settlement No. 2 of 2000;
		‘the No. 1 Trustees’  Mark Martin Reid and Leslie Phillips;
		‘the No. 2 Trustees’  Mark Martin Reid and Sarah Bower;
		‘T.C.G.A. 1992’	Taxation of Chargeable Gains Act 1992; and
		‘T.M.A. 1970’	Taxes Management Act 1970.
The No. 1 Settlement
Creation and Terms
(2)	By a Deed of Settlement dated 21 September 2000 and executed by the Appellant of the one part and the No. 1 Trustees of the other part, the Appellant created the No. 1 Settlement. At all material times, the No. 1 Trustees were resident and ordinarily resident in the United Kingdom. 
(3)	The No. 1 Settlement is a discretionary trust with an ultimate default trust in favour of the Appellant, who is also included within the class of discretionary objects. There being no assignee (as defined in clause 7(b) of the Deed of Settlement), the power of appointing new or additional trustees is vested in the Appellant during his lifetime (clause 11(a)).
(4)	The Appellant transferred 100,000 ordinary shares in A.I.T. to the No. 1 Trustees to be held upon the trusts of the No. 1 Settlement. A proviso to clause 2 of the Deed of Settlement prevents the trustees of the Settlement from selling or otherwise disposing of or dealing with the shares in A.I.T. without the prior written consent of the Appellant during his lifetime.
The Sale, Re-Acquisition and Subsequent Disposal of Shares
(5)	On 24 October 2000, the No. 1 Trustees sold 100,000 shares in A.I.T. for a net consideration of £1,675,999.75. The sale took place at 16:24.
(6)	By a Deed of Appointment and Retirement dated 25 October 2000 and executed by the Appellant of the first part, the No. 1 Trustees of the second part, and F.I.T.C.O. of the third part, the No. 1 Trustees retired as trustees and, pursuant to the power conferred by clause 11(a) of the Deed of Settlement, the Appellant appointed F.I.T.C.O. as the new trustee of the No. 1 Settlement.
(7)	At all material times, F.I.T.C.O. was resident and ordinarily resident in the Republic of Mauritius and not resident in the United Kingdom for tax purposes. The No. 1 Settlement was registered as a trust resident in the Republic of Mauritius for income tax purposes under the Mauritius Income Tax Act on 24 November 2000 and a tax residence certificate confirming this status was issued by the Commissioner of Income Tax on 19 March 2001.
(8)	On 25 October 2000, following the appointment of F.I.T.C.O. as trustee, Mr Denis Sek Sum (acting on behalf of F.I.T.C.O.) instructed Mr John C. Driver (acting on behalf of Brewin Dolphin) to purchase ordinary shares in A.I.T. in such quantity as was possible with the proceeds of the disposal by the No. 1 Trustees on 24 October 2000. Pursuant to this instruction, at 0721 on 25 October 2000 Brewin Dolphin purchased 99,100 shares in A.I.T. on behalf of F.I.T.C.O. for £1,675,999.75. The shares were subsequently held by F.I.T.C.O. on the trusts of the No. 1 Settlement.
(9)	F.I.T.C.O. made the following further disposals of ordinary shares in A.I.T. held on the trusts of the No. 1 Settlement:
9.1	On 21 December 2000, 12,000 shares for a consideration of £141,075.75;
9.2	On 28 December 2000, 15,000 shares for a consideration of £176,387.25;
9.3	On 9 January 2001, 10,000 shares for a consideration of £111,663.75;
9.4	On 23 January 2001, 50,000 shares for a consideration of £548,349.75; and
9.5	On 24 January 2001, 3,600 shares for a consideration of £40,916.63.
The No. 2 Settlement
Creation and Terms
(10)	By a Deed of Settlement dated 10 November 2000 and executed by the Appellant of the one part and the No. 2 Trustees of the other part, the Appellant created the No. 2 Settlement. At all material times, the No. 2 Trustees were resident and ordinarily resident in the United Kingdom.
(11)	The No. 2 Settlement is a discretionary trust with an ultimate default trust in favour of the Appellant, who is also included within the class of discretionary objects. There being no assignee (as defined in clause 7(b) of the Deed of Settlement), the power of appointing new or additional trustees is vested in the Appellant during his lifetime (clause 11(a)). 
(12)	The Appellant transferred 100,000 ordinary shares in A.I.T. to the No. 2 Trustees to be held upon the trusts of the No. 2 Settlement. A proviso to clause 2 of the Deed of Settlement prevents the trustees of the Settlement from selling or otherwise disposing of or dealing with the shares in A.I.T. without the prior written consent of the Appellant during his lifetime.
Sale and Re-Acquisition
(13)	On 13 December 2000, the No. 2 Trustees sold 100,000 shares in A.I.T. for a net consideration of £1,166,999.75. The sale took place at 16:25.
(14)	By a Deed of Appointment and Retirement dated 14 December 2000 and executed by the Appellant of the first part, the No. 2 Trustees of the second part, and F.I.T.C.O. of the third part, the No. 2 Trustees retired as trustees and, pursuant to the power conferred by clause 11(a) of the Deed of Settlement, the Appellant appointed F.I.T.C.O. as the new trustee of the No. 2 Settlement.
(15)	The No. 2 Settlement was registered as a trust resident in the Republic of Mauritius for income tax purposes under the Mauritius Income Tax Act on 22 December 2000 and a tax residence certificate confirming this status was issued by the Commissioner of Income Tax on 16 March 2001.
(16)	On 14 December 2000, following its appointment as trustee, F.I.T.C.O. instructed Brewin Dolphin to purchase ordinary shares in A.I.T. in such quantity as was possible with the proceeds of the disposal by the No. 2 Trustees on 13 December 2000. At 07:30 on 14 December 2000, acting pursuant to this instruction, Brewin Dolphin purchased 99,000 shares in A.I.T. on behalf of F.I.T.C.O. for £1,166,999.75. The shares were subsequently held by F.I.T.C.O. on the trusts of the No. 2 Settlement.
(17)	There were no subsequent disposals of assets held by F.I.T.C.O. on the trusts of the No. 2 Settlement.
The Tax Returns
(18)	On 30 November 2001, a trust and estate tax return was filed by forty-two on behalf of F.I.T.C.O. in respect of the No. 1 Settlement. The tax return outlined the transactions referred to in paragraphs 5, 8 and 9 above. It stated that the total taxable gain accruing to the No. 1 Settlement was zero on the grounds that:
18.1	No net gain accrued on the transaction outlined in paragraph 5 because the consideration received for the sale of the shares is identified with the subsequent re-acquisition costs by virtue of section 106A(5) of the T.C.G.A. 1992.
18.2	Since the assets of the settlement at the time of the retirement of the No. 1 Trustees and the appointment of F.I.T.C.O. comprised only cash, no gain accrued on the export of the No. 1 Settlement to Mauritius.
18.3	No gains accrued on the subsequent disposal of the re-acquired shares by F.I.T.C.O. by virtue of the Double Taxation Convention.
(19)	On 30 November 2001, a trust and estate tax return was filed by forty-two on behalf of F.I.T.C.O. in respect of the No. 2 Settlement. The tax return outlined the transactions referred to in paragraphs 14 and 17 above. It stated that the total taxable gain accruing to the No. 2 Settlement was zero on the grounds that:
19.1	No net gain accrued on the transaction outlined in paragraph 14 because the consideration received for the sale of the shares is identified with the subsequent re-acquisition costs by virtue of section 106A(5) of the T.C.G.A. 1992.
19.2	Since the assets of the settlement at the time of the retirement of the No. 2 Trustees and the appointment of F.I.T.C.O. comprised only cash, no gain accrued on the export of the No. 2 Settlement to Mauritius.
(20)	The Appellant filed a tax return for the year ending 5 April 2001 on 15th January 2002.
The Inland Revenue Enquiry
(21)	Mr A C Jannaway, one of Her Majesty’s Inspectors of Taxes (“Mr Jannaway”), by a letter dated 15 January 2003, gave notice under section 9A of the T.M.A. 1970 of his intention to enquire into the Appellant’s tax return for the year ending 5 April 2001.  By a letter dated 13 November 2002, Mr J. H. Robertson, one of Her Majesty’s Inspectors of Taxes, gave notice of his intention to enquire into the No. 1 Settlement’s tax return for the year ending 5 April 2001 By a letter dated 22 January 2003, Mr J. H. Robertson, gave notice of his intention to enquire into the No. 2 Settlement’s tax return for the year ending 5 April 2001. 
(22)	By a closure notice dated 19 June 2003, Mr Jannaway amended the Appellant’s tax return by including a further sum of £1,130,06.40 in tax due, producing a total tax due of £1,917,192.11. Mr Jannaway’s reasoning is as follows:
22.1	The disposal of 100,000 shares in A.I.T. by the No. 1 Trustees on 24 October 2000 is identified (by virtue of section 106A(5) of the T.C.G.A. 1992) with the 99,100 shares in A.I.T. purchased by F.I.T.C.O. on 25 October 2000. Accordingly, the 99,100 shares had not been disposed of before the No. 1 Settlement became non-resident in the U.K. on 25 October 2000 and must, therefore, have comprised settled property immediately before the emigration of the No. 1 Settlement. Therefore, they are deemed (by virtue of section 80 of the T.C.G.A. 1992) to have been disposed of and re-acquired at that time, giving rise to a chargeable gain of £1,665,871. This amount is not assessable on the No. 1 Settlement but rather on the Appellant (by virtue of section 77 of the T.C.G.A. 1992).
22.2	The disposal of 100,000 shares in A.I.T. by the No. 2 Trustees on 13 December 2000 is identified (by virtue of section 106A(5) of the T.C.G.A. 1992) with the 99,000 shares in A.I.T. purchased by F.I.T.C.O. on 14 December 2000. Accordingly, the 99,000 shares had not been disposed of before the No. 2 Settlement became non-resident in the U.K. on 14 December 2000 and must, therefore, have comprised settled property immediately before the emigration of the No. 2 Settlement. Therefore, they are deemed (by virtue of section 80 of the T.C.G.A. 1992) to have been disposed of and re-acquired at that time, giving rise to a chargeable gain of £1,159,290. This amount is not assessable on the No. 2 Settlement but rather on the Appellant (by virtue of section 77 of the T.C.G.A. 1992).
22.3	Therefore, the Respondent concluded that the Appellant’s chargeable gains ought to be increased by £2,825,161 (£1,665,871 plus £1,159,290) from £1,928,521 to £4,753,682, resulting in an increase of £1,130,064.40 in tax due from £787,117.71 to £1,917,182.11.
(23)	For the same reasons as those given in paragraph 24 above, Mr Robertson issued closure notices dated 11 June 2003 in respect of the tax returns submitted on behalf of both the No. 1 Settlement and the No. 2 Settlement. Both notices concluded that a charge arose on the deemed disposals on 24 October 2000 and 14 December 2000 respectively, but that the gains are not assessable on the trustees but rather on the Appellant as settlor.
(24)	By a notice dated 5 July 2003 and sent by James and Cowper on behalf of the Appellant, the Appellant appealed against the amendment and applied for the postponement of the payment of £1,130,064.40 of tax 
(25)	By a letter dated 16 July 2003, Mr Jannaway acknowledged receipt of the Appellant’s appeal and agreed the postponement of the sum of £1,130,064.40. By a further letter dated 17 July 2003, Mr Jannaway acknowledged the Appellant’s wish that the appeal be heard by the Special Commissioners.
4.	The following additional facts were agreed prior to the hearing:
(1)	The sale and repurchase of the AIT shares over 24-25 October 2000 and 13-14 December 2000 were sales and repurchases in the market, and thus exposed to genuine risks of price fluctuation.
(2)	The sales and repurchases were effective as bed and breakfast transactions i.e. (but for any arguments on this appeal) they represented a genuine disposal and reacquisition of the shares on an arm’s length basis.
5.	Section 80 of the Taxation of Chargeable Gains Act 1992 provides 
“(1) This section applies if the trustees of a settlement become at any time (“the relevant time”) neither resident nor ordinarily resident in the United Kingdom. 
(2) The trustees shall be deemed for all purposes of this Act— 
(a) to have disposed of the defined assets immediately before the relevant time, and 
(b) immediately to have reacquired them, 
at their market value at that time. 
(3) Subject to subsections (4) and (5) below, the defined assets are all assets constituting settled property of the settlement immediately before the relevant time…”.
Section 106A provides:
“(1) This section has effect for the purposes of capital gains tax (but not corporation tax) where any securities are disposed of by any person. 
(2) The securities disposed of shall be identified in accordance with the following provisions of this section with securities of the same class that have been acquired by the person making the disposal. 
(3) The provisions of this section have effect in the case of any disposal notwithstanding that some or all of the securities disposed of are otherwise identified— 
(a) by the disposal, or 
(b) by a transfer or delivery giving effect to it; 
but where a person disposes of securities in one capacity, they shall not be identified under those provisions with any securities which he holds, or can dispose of, only in some other capacity. 
(4) Securities disposed of on an earlier date shall be identified before securities disposed of on a later date; and, accordingly, securities disposed of by a later disposal shall not be identified with securities already identified as disposed of by an earlier disposal. 
(5) Subject to subsection (4) above, if within the period of thirty days after the disposal the person making it acquires securities of the same class, the securities disposed of shall be identified— 
(a) with securities acquired by him within that period, rather than with other securities; and 
(b) with securities acquired at an earlier time within that period, rather than with securities acquired at a later time within that period. 
(6) Subject to subsections (4) and (5) above, securities disposed of shall be identified with securities acquired at a later time, rather than with securities acquired at an earlier time. 
(7) Subsection (6) above shall not require securities to be identified with particular securities comprised in a section 104 holding or a 1982 holding. 
(8) Accordingly, that subsection shall have effect for determining whether, and to what extent, any securities should be identified with the whole or any part of a section 104 holding or a 1982 holding— 
(a) as if the time of the acquisition of a section 104 holding were the time when it first came into being; and 
(b) as if 31st March 1982 were the time of the acquisition of a 1982 holding. 
(9) The identification rules set out in the preceding provisions of this section have effect subject to subsection (1) of section 105, and securities disposed of shall not be identified with securities acquired after the disposal except in accordance with that section or subsection (5) above. 
(10) In this section— 
“1982 holding” has the same meaning as in section 109; 
“securities” means any securities within the meaning of section 104 or any relevant securities within the meaning of section 108. 
(11) For the purposes of this section securities of a company shall not be treated as being of the same class unless they are so treated by the practice of a recognised stock exchange, or would be so treated if dealt with on that recognised stock exchange.”
Contentions of the parties
6.	Mr Ghosh, for the Appellant, contends:
(1)	Section 106A starts with the actual disposal of the shares, on 24 October 2000 in the case of the No.1 trust and by sub-s (5) identifies those shares with the ones acquired on 25 October 2000 so that the shares actually disposed of have the attributes (“identity”) of the shares acquired on 25 October 2000.  The draftsman does not deem the originally-acquired shares not to have been disposed of.  The effect of the section is to deduct not the actual acquisition cost of the shares disposed of but the acquisition cost of the later-acquired shares.  If the draftsman had intended to create the result contended for by the Inspector, then, in relation to the time of deemed disposal when the trustees become non-resident (and when in fact they held cash), there would have needed to be three separate deemings: (a) no disposal of the original shares, (b) the after-acquired shares are the original shares and (c) the after-acquired shares (treated as the original shares) continue to be held throughout.  He points to the triple deeming in s 127, that there is no disposal, no acquisition, and the original shares and the new asset are the same asset acquired when the original shares are acquired.  He also refers to s 263A which applies to deem that there has been no disposal of shares sold and reacquired under the repo regime where the commercial reality is that there is a lending transaction.
(2)	At the time of the deemed disposal the trustees actually held only sterling cash and so there was no defined asset which was deemed to be disposed of.
(3)	Section 106A does not affect (2) above at all.  The identification does not deem the trustees never to have disposed the original shares, or to have held them when they did not.  It is analogous to s 28 considered in Jerome v Kelly [2004] 1 WLR 1409 which fixes the time of disposal as the date of the contract but does not deem the contract to be the disposal, see Lord Walker of Gestingthorpe at [27] quoted at paragraph 11 below.
(4)	 Section 106A is dealing only with computation rules and in particular the way in which shares acquired at different times are identified so as to ascertain the correct base value on a disposal.  It is inconsistent to argue that for computational purposes there is a fiction of non-disposal in applying the identification rules in the circumstances of “bed and breakfast” transactions where the identification rules apply without any such fiction in the different circumstances envisaged by s 106A(4) and s 106A(6):  otherwise a different meaning is required for the concept of “identification” in s 106A(5) from that required to give effect to s 106A(4) and (6).  Further, the exclusion of shares which, by virtue of being acquired prior to 6 April 1998, are subject to the share pooling rules (see s 106A(7)) makes sense if the section is purely computational.  If the section had a wider effect, it would not be restricted in this way. 
7.	Mr Furness QC, for the Inspector, contends:
(1)	Section 106A alters the identity of the shares disposed of.  99,100 of the shares disposed of on 24 October 2000 are identified with (that is, are deemed to be) the shares acquired on 25 October 2000, contrary to the facts.  It follows that 99,100 of the originally-acquired shares cannot have been disposed of.
(2)	The section counters the effect of short-term sale and repurchase transactions in a very laconic fashion, leaving the reader to work out the tax implications of the identification process.  The identification rules imply the following conclusions:
(a)	the sale was a disposal of the after-acquired shares, and not the original shares;
(b)	the original shares must therefore be deemed not to have been disposed of;
(c)	any subsequent disposal of the after-acquired shares must therefore be deemed to be a disposal of the original shares;
(d)	it must therefore be assumed for CGT purposes that the original shares have been owned by the Appellant throughout the period between the disposal of the original shares and the acquisition of the after-acquired shares.
(3)	The consequences of the Appellant’s interpretation is that tax is avoided completely which cannot have been the intention of Parliament and so if there is an alternative interpretation reasonably available to the Tribunal that is to be preferred.
(4)	Although the word deeming does not appear in s 106A the effect is to deem a state of affairs to exist for tax purposes which did not exist in reality.  The following authorities on deeming were relied on:  In Marshall v Kerr 67 TC at 79A Peter Gibson J (sitting as a judge of the Court of Appeal) said
 “For my part I take the correct approach in construing a deeming provision to be to give the words used their ordinary and natural meaning, consistent so far as possible with the policy of the Act and the purposes of the provisions so far as such policy and purposes can be ascertained; but if such construction would lead to injustice or absurdity, the application of the statutory fiction should be limited to the extend needed to avoid such injustice or absurdity, unless such application would clearly be within the purposes of the fiction.  I further bear in mind that because one must treat as real that which is only deemed to be so, one must treat as real the consequences and incidents inevitably flowing from or accompanying that deemed state of affairs, unless prohibited from doing so.”
In support Peter Gibson J cited the well-known passage from the speech of Lord Asquith in East End Dwellings Co Ltd v Finsbury Borough Council [1952] AC 109, 132:
 “If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it….  The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.”
Reference should also be made to the dictum of Millett LJ in Bricom Holdings Ltd v IRC 70 TC 272 at 289A-B, after referring to a dictum of Sir Robert Megarry V-C to the effect that the hypothetical must not be allowed to oust the real further than obedience to the statute compels (see Polydor Ltd and RSO Records v Harlequin Record Shops and Simon’s Records Ltd [1980] 1 CMLR 669, 673):
“But I do not read this as intending to lay down a special rule which requires a statutory hypothesis to be narrowly and literally construed.  The scope of a deeming provision is a question of construction and is not subject to any special rule.  As on any other question of statutory construction, the court must attempt to ascertain the intention of Parliament from the words used in the light of the legislative purpose.  A statutory hypothesis, no doubt, must not be carried further than the legislative purpose requires, but the extend to which it must be carried depends upon ascertaining what that purpose it.”
Reasons for our decision
8.	The difference between the parties is essentially whether s 106A is a deeming provision.  Does it, as Mr Ghosh contends, merely provide computational rules?  Or does it, as Mr Furness contends, deem the shares disposed of to be different from the ones actually disposed of, including any consequences of that deeming?  It is easier to restate the question in relation to the facts.  Taking the essential facts from those of the No.1 Settlement, the No.1 Trustees sold 100,000 AIT shares on 24 October 2000 and (having become non-resident) acquired 99,100 AIT shares on 25 October 2000, and sold 99,100 shares in December 2000 and January 2001.  There is no dispute about the operation of the identification rules in s 106A.  The first applicable rule is that by sub-s (5) you identify 99,100 of the shares disposed of on 24 October 2000 with the 99,100 shares acquired on 25 October 2000.  The second applicable rule is that by sub-s (6) the remaining 900 shares disposed of on 24 October 2000 are necessarily identified with the only other available shares, those originally acquired on a hold-over election on the making of the settlement on 21 September 2000.  When the shares actually acquired on 25 October 2000 are later sold in December 2000 and January 2001 they are identified by sub-s (6) with the only available shares, the originally-acquired ones.  Mr Ghosh contends that the identification is solely computational; he says that the shares actually disposed of on 24 October 2000 have the attributes (“identity”) of the re-acquired shares.  Mr Furness contends that the section goes further and for tax purposes alters the identity of the shares disposed of, in some cases, contrary to the facts, see sub-s (3).  He contends that on the 24 October 2000 disposal the section deems the shares acquired on 25 October 2000 to have been disposed of, and on the final disposal it deems the shares originally settled to have been disposed of.  He contends that at least in the cases where the identification is contrary to the facts, s 106A is a deeming provision which one should take to its logical conclusion.  The logical conclusion of the deeming, he contends, is that all but 900 of the originally-acquired shares are deemed to be still owned, and are therefore capable of being the subject of a deemed disposal under s 80 TCGA 1992.
9.	Section 106A is one of a group of sections under the heading “Share pooling, identification of securities, and indexation,” all dealing with computation.  These include: 
s 104 Share pooling: general interpretative provisions, 
s105 Disposal on or before day of acquisition of shares and other unidentified assets, 
s 105A Shares acquired on same day: election for alternative treatment, 
s 105B Provision supplementary to section 105A, 
s 106 Disposal of shares and securities by company within prescribed period of acquisition, 
s 106A Identification of securities: general rules for capital gains tax (the section in issue in this appeal), 
s 107 Identification of securities etc: general rules [applying for corporation tax], 
s 108 Identification of relevant securities [corporation tax], 
s.109 Pre-April 1983 share pools, 
and so on.  
10.	The form of s 106A is that by sub-s (1) it has effect for capital gains tax when any securities are disposed of.  The effect of the section is that by sub-s (2) “the securities disposed of shall be identified” in accordance with the rules in the rest of the section, even though, as sub-s (3) states, this is different from the actual identity of the securities disposed of.  There then follow the identification rules in sub-s (4), (5) and (6), each sub-section dealing with a different set of circumstances.
11.	Mr Ghosh contended that s 106A is analogous to s 28 which was considered in Jerome v Kelly.  Section 28 provides that “the time at which the disposal and acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed or transferred)…”.  Like s 106A it provides a rule to be applied to compute gains even though the rule is contrary to the facts.  It is not a deeming rule with wider effect.  As Lord Walker of Gestingthorpe said in Jerome v Kelly at [27]: 
“Section [28(1)] appears to be directed to a single limited issue, that is the timing of a disposal.  It does not say that the contract is the disposal, but that a disposal effected by contract and later completion is to be treated, for timing purposes, as made at the date of the contract.  Its language is not so clear and compelling as to lead to the conclusion that Parliament must have intended to introduce a further statutory fiction as to the parties to a disposal.”
12.	We agree that the analogy is close.  Section 106A does not in terms deem anything; it provides a set of rules by which “the securities disposed of shall be identified” even though these are contrary to the facts.  We would echo Lord Walker’s words that its language is not so clear and compelling as to lead to the conclusion that Parliament must have intended to introduce a further statutory fiction, in this case as to when securities are owned.  Like s 28 it has a specific and limited purpose, that of providing a set of rules, to be applied in computing the gain on a disposal of shares, directing how to ascertain the acquisition cost of the shares disposed of and the time at which those shares are treated as acquired – together being key components in computing such a gain.  This is achieved by “identifying” shares. If Parliament had wanted the rules to have wider effect – for example, as the Revenue contend, to treat the shares as retained for capital gains tax purposes beyond the scope of the computational rules – it would have had to use clear and compelling words that it was introducing a deeming provision to be applied for such other capital gains tax purposes.  When the draftsman wants to do that there are plenty of precedents in capital gains tax.  Here he did not.  There is no reason to read into the section the consequence that the trustees owned shares at the time of the deemed disposal when they did not, any more than to read into it that when they sold shares on 24 October 2000 they were entering into a bear transaction (one in which the disposal precedes the acquisition) when they were not.
13.	Even if we did consider the section to be a deeming section in so far as it identifies shares contrary to the facts, the only purpose of the deeming is to make the computation.  If it is deeming it is a case of not carrying a statutory hypothesis further than the legislative purpose requires, as Millett LJ said in Bricom.  Here the legislative purpose is solely to make the computation.
14.	We have illustrated the interpretation of s.106A with the facts of the No.1 trust but exactly the same result follows for the No.2 trust.
15.	A puzzling feature of Mr Furness’s case, which does not arise on the view we have taken on the interpretation of s 106A, is how the identification rules should be applied to a deemed disposal and reacquisition.  On a literal wording one is told to identify the deemed disposal with the deemed reacquisition under s 105, which by s 106A(9) has priority over the s 106A rules, as a transaction carried out on the same day, or within sub-s (5), which makes the deemed disposal pointless.  Mr Ghosh did not suggest that the provisions should be interpreted in this way.  But if one does not identify the deemed disposal with the deemed reacquisition, should not the 24 October 2000 disposal be identified with the deemed re-acquisition rather than the actual acquisition on 25 October 2000, and the deemed disposal be identified with the actual acquisition on 25 October 2000?  These questions were not explored and do not arise on our interpretation of s 106A, and no doubt would not make any difference to the result.
16.	We agree with Mr Furness that the result of our decision cannot have been intended by Parliament and had there been an alternative interpretation reasonably open to us we might have preferred it.  However, we do not consider that the interpretation put forward by him is one that is reasonably open to us to find.  This is simply a case where Parliament failed to consider the combined effect of s 106A in so far as it negates “bed and breakfast” transactions and the deemed disposal on emigration of trustees.
17.	Accordingly, we agree with Mr Ghosh’s interpretation and allow the appeal in principle because we are not sure if the gain on the disposal of the 900 shares in the No.1 Settlement and the 1,000 shares in the No.2 Settlement is agreed.

JOHN F. AVERY JONES

EDWARD SADLER

SPECIAL COMMISSIONERS
RELEASE DATE: 16 November 2004

SC 3021/04

Authorities referred to in skeletons and not referred to in the decision:
Westcott v Woolcombers [1986] STC 182
NAP Holdings UK Ltd v Whittles [1994] STC 979.