The recent case of Ames v HMRC TC04523 highlights the need for enterprise investment scheme (EIS) income tax relief to be claimed (and obtained) before the CGT exemption can apply on a disposal of the shares. Unfortunately, Mr Ames did not make such a claim (it may be that he did not think it was worthwhile because he only had taxable income of £42 for the year - it is not clear from the judgement) but in any event, without an income tax claim he lost his CGT exemption.
The tribunal set the position out clearly: "We agree with HMRC that the wording of the legislation means that the CGT exemption is only available if an individual's income tax has been reduced following a claim for EIS relief."
There is not a lot of scope for argument here.
However, Mr Ames tried a different approach. He said that the legislation should be read purposively because it was clear that such a capricious literal interpretation could not have been intended by parliament. Somebody with £1 of taxable income is exempt from CGT on the disposal of the shares, but somebody with no income tax liability is denied the exemption. That did not make any sense and indeed we know that literal interpretations should give way to purposive constructions.
HMRC did not agree. It said that the legislation was perfectly clear and could not be read in any other way. That seems fair enough – although I have observed that HMRC does not accept that view when it is advanced by the taxpayer.
The tribunal judge did not agree with Mr Ames. She said that parliament had set out the legislation in a prescriptive manner and there was no room for a purpose which is not the literal meaning of the words.
The tribunal drew attention to the guidance from Lord Hoffman (in an article on tax avoidance in British Tax Review, (2005) BTR 197) who said that it was not for the tribunal to rectify the terms of highly prescriptive legislation in order to include provisions which might have been included but are not actually there.
I have a feeling we will be returning to these words in the future.
This article first appeared in the September Edition of TAXline and is reprinted with permission.