Apportionment of Gains pre-6 April 2012 TCGA 1992 s 13 breached EU rights

Mon 01 Dec 2014

The Court of Justice of the EU has issued its judgment in case C-112/14 finding against the UK Government, deciding that TCGA 1992 as it stood before amendment in FA 2013 was not compatible with EU free movement of capital and possibly also freedom of establishment rights.  Thus assessments under s 13 where relevant EU freedoms are in point are not enforceable. The ECJ’s judgment does not address whether the amended s 13 is now compatible with EU law. There are suggestions that as it now stands, it may still breach EU law, but that question has not yet been tested before any court.

Background and current law: apportionments post 5 April 2012

FA 2013 s 62 amended the law retrospectively to 6 April 2012 aiming to make it EU-proof.  Whilst it does not now apportion gains arising:

• to shareholders who control less than 25% of the company’s share capital; or
• on assets used for a trade; or
• where there was no main purpose to avoid tax,

there are arguments that it is still not compliant with EU rights.  The European Commission’s views on compatibility of the amended legislation have yet to be publicised.  The implications (if any) of this decision on in its current form may become evident over the coming weeks.

The former s 13 and the EC’s proceedings

This case came about because the European Commission commenced action against the UK some years ago.   The amendments by FA 2013 s 62 were not made within the time frame stipulated by the EC.

The target of TCGA was, and remains, shareholders in what would be a close company were it UK resident.  When such a non-resident company makes a disposal of an asset and, had the company been UK resident the disposal would have given rise to a chargeable gain, the notional chargeable gain is apportioned to any UK shareholder.  Until 5 April 2012 apportionment was to any person who held more than 10% of the non-UK resident company.  As a result, under s13 those participators were taxed on the gain regardless of whether or not they actually received any of the proceeds.

The Court observed that there was an obvious restriction in free movement as a >10% UK shareholder of a UK-resident close company is not subject to apportionment.  Instead shareholders are only charged on amounts they receive from the company.

Restrictions on free movement are permissible in certain circumstances, e.g. if they are in the public interest, which includes combating tax avoidance.  However, such measures must be proportionate, by limiting their application to wholly artificial arrangements. Fatal to the UK Government’s argument was that s 13 applied equally to wholly artificial arrangements, intended to remove gains from the UK tax net, as to wholly commercial structures, This is a reflection of the limited nature of the exclusions from s13 – and there was no provision for the taxpayer to evidence the economic reality of his participation in the non-resident company.  That the case against was so clear cut is obvious from the very short length of the ECJ’s decision.

The ECJ decision focusses on the old s 13 alone.  As mentioned in tax flash 221, TCGA 1992 s 79B attributes gains to trustees in circumstances where there is no apportionment under s 13 (usually because s 79B(2) denies trustees protection from apportionments in double tax agreements – see s 79B(2)).  As well as apportionments, if there is an identifiable restriction on free movement of capital in the EU, there would seem to be grounds to use the CJEU decision to challenge s 79B apportionments.