MV Endearvour & Ors v Inland Revenue [2004] UKSC SPC18440 (04 March 2004)

Chargeable gains – disposal by fishing partnership of vessel, licence and Track Record in one transaction – whether disposal of one single asset – NO – whether in computing CGT on disposal of vessel any loss is restricted by reference to capital allowances given – YES.

Human Rights Act 1988, whether infringement in tax appeal of Articles 6(1), 8(1) or First Protocol Article 1 – NO.

THE SPECIAL COMMISSIONERS

M V Endeavour and connected appeals
by

J Fullarton, J Jamieson, J J Pottinger	Appellants	
- and -		
Commissioners of Inland Revenue	Respondents	

	Commissioners:	T Gordon Coutts, Q.C
		Dr Nuala Brice

Sitting in London on 13 & 14 January 2004

Mr H Thompson of H A S Thompson & Co, for the Appellants

Mr B F Jolly, HMIT, Appeals Unit Scotland, for the Respondents

© CROWN COPYRIGHT 2004.

DECISION

Introductory
The dispute in this matter arises from the disposal of a fishing vessel, its licence and fishing quota owned and operated by a partnership of five fishermen, three of whom are Appellants.  The appeal was lodged in about July 2000 following revenue assessments.  Correspondence and contentions were produced thereafter by both sides in relation to the partnership accounts and the assessments on the individual partners.  Ultimately the matter proceeded towards a hearing and on 29th September 2003 a Special Commissioner held a hearing for Directions in an attempt to isolate the issues between the parties.  To an extent that was successful save that in the course of the subsequent hearing a contention was introduced claiming that the Revenue’s base for calculation was inaccurate.  Despite the fact that this contention did not figure at the Directions hearing and related to a year of assessment remote from that under appeal the Respondent agreed to look again at base cost in that respect as undernoted.

There were further contentions put forward in relation to the effect, if any, of the Human Rights Act 1998 and in relation to expenses.

The Issues before the Tribunal
With the addition noted above and another issue about two TV appliances the issues before the Tribunal were those agreed at the Directions hearing as being:

(a)	whether, for the purposes of Capital Gains Tax, the disposal on 8 February 1998 of the fishing vessel M V Endeavour (registration number LK 173) for the sum of £1,300,000 constituted the disposal of a single indivisible asset (as argued by the Appellants) or of three separate assets being the vessel for £900,000 and the Licence and “Track Record” for £400,000 (as argued by the Respondent);

(b)	whether, in the computation of any gain or loss on such disposal, there should be excluded from any deduction any expenditure in respect of which a capital allowance has been made having regard to the provisions of sections 39 and 41(1) and (2) of the Taxation of Chargeable Gains Act 1992;

(c)	whether the Convention in Schedule 1 of the Human Rights Act 1998 applies to this appeal and, in particular –

(i)	whether the Appellants had a fair hearing “within a reasonable time” within the meaning of Article 6.1;

(ii)	whether the Appellants’ right to respect for their private and family life within the meaning of Article 8.1 has been infringed;  and

(iii)	whether the Appellants’ right to protection of property within the meaning of Article 1 of the First Protocol has been infringed;

	(d)	whether the Respondent has behaved wholly unreasonably in connection with the hearing of the appeal within the meaning of Regulation 21 (orders for costs).

	The Evidence
The Tribunal had available evidence both in the form of witness statements and other documents as well as oral testimony.  The oral evidence came from two partners, Mr Pottinger and Mr Jamieson.  A witness statement from Mr Sinclair was produced which the Commissioners agreed to consider for what it was worth, bearing in mind that it had not been subject to cross examination.  There was oral evidence for the Respondent from Messrs Wardle and McLeman, Inspectors of the Respondent and James Hamilton Brown, the Managing Director of the purchasing company.

The Appellants led evidence to the effect that they thought that they were disposing of one asset when the partnership sold the vessel.  The partnership had begun to trade on 28th November 1988.  At that time there were eight partners and it was stated by the Appellants’ witnesses that three of these had left, two being paid their capital of £20,000 by the partnership and the third, later, was paid a sum stated to be £70,000.  The partners said that they left their accounting affairs in the hands of Chartered Accountants and they employed an Agent, Mr Sinclair, who looked after the day-to-day running and provisioning of the boat and arranged for sales of the fish caught.  The sale had been arranged by contract, being an offer in writing and a verbal acceptance thereof.  The partners denied that they had ever agreed to an apportionment of the price.

The person concerned in the purchase of the vessel, Mr Brown, Managing Director of Caledonian Fisheries spoke to the practice of selling separately a vessel, its quota and fishing licence as being something which occurred from time to time.  His company was interested in acquiring all three items but in terms of the contract left the apportionment of the total price between the three items to be agreed between the parties later.

Findings in Fact
From the evidence before us and the documents we find the following matters of fact established or not in dispute.  The M. V. Endeavour was operated by a partnership originally of eight persons;  two of these retired receiving a repayment of their capital of £20,000, a third left but was paid £70,000.  There was no evidence of the composition of that sum nor indeed of its date or of its having been disclosed in the partnership accounts.  The Endeavour did not prosper and made losses which were, ultimately, agreed by the parties at the sum of £15,453.

The remaining partners shared equally in profits and losses.

On 6th February 1998 an offer to purchase the vessel together with its gear and equipment, its licence and Track Record (“the quota”) in the sum of £1,300,000 was agreed and the requisite transfer of registration took place.

A feature of that contract was, by clause 10, that the value of the licence and associated Track Record as part of the price stated was to be mutually agreed.

After a telephone conversation between Mr Sinclair, the Appellants Agent and the Office Manager of the purchasing firm, at that time Mr Brown, the licence was valued at £400,000, thus leaving £900,000 as the price for the vessel.

Mr Sinclair, as Agent for the partnership had authority to agree such a valuation with Mr Brown.

A licence, a Track Record or trade quota and a vessel are separate assets each of which can be and frequently are separately sold.

Despite a dispute at the hearing about whether or not the matter of apportionment was agreed as the contract envisaged we have no hesitation in finding, not only that it was so agreed and binds the partnership but also that the apportionment was a reasonable estimate of the value of the asset transferred.  We accept the evidence of Mr Brown in that regard.

We accordingly find, as a matter of fact, that in the sale of the vessel, its licence and quota, three separate assets were involved each of which were capable of a separate value.  In the event, only the division between the vessel and the other matters were of importance and the valuation of the vessel governed the division of the price for tax purposes.

In relation to the second matter under dispute there was evidence, and we find, that in relation to the vessel, capital allowances had been given which on sale required to be reclaimed by way of a balancing charge.  The net result was that there was no chargeable gain or allowable loss in relation to the vessel.  The £400,000 sum received from the sale of the Licence and Track Record gave rise to a chargeable gain after deducting the cost of the licence and taxation allowance.

The Statutory Framework
The Taxation of Chargeable Gains Act 1992 provides:

(1)	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;

Assessment of a gain accruing in the partnership, contrary to the common law situation in Scotland is specifically legislated for to provide that each partner is liable for the tax as an individual.

The matter of a bundle of assets being sold together had been earlier considered in relation to the Finance Act 1965 section 19 by the House of Lords in Aberdeen Construction Group Limited v The Inspector;  1978 SC(HL)72 where Lord Wilberforce (at page 79) in dealing with an argument that a composite consideration could be regarded as such for Capital Gains Tax purposes said:

“It is clear, however, that the Capital Gains Tax legislation prevents the matter being looked at in so simple a manner ….. because it imposes the tax on disposal of assets” (Finance Act 1965, section 19).  So it is necessary to consider separately each asset disposal, in the light of rules which apply to that asset.

We conclude that we are bound by that Decision.  We are fortified in that view by the terms of the contract of sale and must disregard the subjective approach of the Appellants who thought that the disposal was of one asset.  The evidence is clear that there were at least two assets sold, one of which was the vessel.

Offset of Losses

Sections 39 and 41(1) & (2) of the Taxation of Chargeable Gains Act 1992 provide no basis in statute for individuals to offset a capital gains loss on another asset against a gain on an asset sold, or against income.  By section 2(2) of the 1992 Act losses under that Act are to be relieved against chargeable gains and accordingly may not be relieved against profits chargeable to income tax.  The argument that there had been double taxation because no relief was allowed against profits of trade in the present case is unstateable.

Argument under the Human Rights Act
The Appellant contended that he had not had a hearing within a reasonable time and so the Article 6.1 of the Act had been contravened.  He also suggested that Protocol 1 and Article 8 being those dealing with the protection of property and respect for family life had also been contravened.

In relation to Article 6 the argument is unsustainable having regard to the decision of the ECHR in Ferrazzini v Italy (2001) STC1314 where it was clearly stated by the majority that the Court considered that tax disputes fall outside the scope of Civil Rights and Obligations despite the pecuniary effects which they necessarily produce for the taxpayer.

The ratio of that case also disposes of the argument under the First Protocol.

It is difficult to envisage that the present circumstances involve an infringement of the right to respect for private and family life.  There was no convincing evidence of any such, even if it had been a sound matter in law in light of the above judgement.

The Appellants contentions under the Human Rights Act are dismissed.

Expenses
Expenses may be awarded if a party has acted wholly unreasonably.  It is difficult to argue that a winning party has acted wholly unreasonably in pursuing a claim but it is a possibility.  In the present case the proceedings were somewhat prolonged but it could not be affirmed that the Respondent was wholly to blame and that the Appellants were wholly reasonable in their approach.  The correspondence, demonstrating the giving and withdrawing of concessions and varying contentions, would argue against that.  There will be no award of expenses.

Determination
We therefore on the whole matter determine:

(1)	that the appeals against the 1997/98 Revenue Amendments in the amounts of £675,180 being Case 1 profit derived from a balancing charge of £690,633 less trade loss of £15,453;  and £382,516 of Capital Gains to be divided equally among each of the five partners in M. V. Endeavour for the purposes of their 1997/98 self-assessments are dismissed on the basis that the disposal of the fishing vessel for £1,300,000 constituted the disposal of three separate assets being the vessel for £900,000 and the Licence and Track Record for £400,000, noting that

The Respondents have agreed
(a)	to reduce the resulting balancing charge on the disposal of the vessel by £1,049, being the capital expenditure incurred on two television sets;  and

(b)	to review the CGT base costs for the various assets disposed of, to take account of earlier partnership changes.

(2)	that in computing the Capital Gains Tax gain or loss on the disposal of the vessel – any loss shall be restricted by reference to capital allowances given, that is £36l,511 – Section 39 and Section 41(1) & (2) of the 1992 Act.

(3)	that there has been no breach of the Appellants rights under the Human Rights Act 1998 and that the Respondents have acted lawfully within Taxes Management Act 1970.

(4)	that the Respondent have not acted unreasonably with regard to the appeals no award of expenses against is made the Respondent.

T GORDON COUTTS, QC

DR A N BRICE