Scottish Court of Session Decisions

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2014] 113

XA145/13

 

The Lord President

Lord Malcolm

Lord Tyre

 

OPINION OF THE LORD PRESIDENT

in the APPEAL FROM THE UPPER TRIBUNAL TAX AND CHANCERY CHAMBER

by

SIR FRASER MORRISON

Appellant;

against

THE COMMISSIONERS FOR HM REVENUE AND CUSTOMS

Respondents:

Act: Ghosh QC, Richardson; Maclay Murray & Spens

Alt: Artis; Office of the Advocate General

 

23 December 2014

[1]        I agree with Lord Tyre that, for the reasons that he gives, the appeal should be allowed and that the case should be disposed of as he proposes. 

[2]        Lord Tyre’s reasoning depends to a great extent on the concession by the respondents that the payment made by the appellant in settlement of AWG’s action constituted a “contingent liability” within the meaning of section 49(1)(c) of the Taxation of Chargeable Gains Act 1992, and that it was “enforced” by AWG’s action and its settlement.  The consequence of that concession is that we have heard no submissions from either side on various questions that might have been thought to arise in the interpretation of section 49(1)(c);  for example, whether a contingent liability, if such it was, can be said to have been enforced when the formal settlement agreement involves no acceptance of liability by the taxpayer and is without prejudice to his continued denial of any liability on his part. 

[3]        That concession, having been made in relation to an important provision in a taxing statute, may have significant consequences in other cases.  It is therefore unfortunate that counsel for the respondents was unable to articulate what, in their contention, was the nature of the contingent liability and in what way it was enforced by the action and its settlement.   In the result, as counsel for the appellant insisted, we must simply decide this appeal on the basis that it is undisputed that a contingent liability of the appellant has been enforced. 

[4]        In a matter of this kind, it is inappropriate that a concession by the respondents on the interpretation of a statutory provision of general application should be made orally at the bar.  In my view, any such concession should be made in writing and in clear and precise terms.  Moreover, to enable the court to assess the soundness of the concession, the respondents should give a clear explanation of the reasoning on which it is made.

 

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2014] 113

XA145/13

 

The Lord President

Lord Malcolm

Lord Tyre

 

OPINION OF LORD MALCOLM

in the APPEAL FROM THE UPPER TRIBUNAL TAX AND CHANCERY CHAMBER

by

SIR FRASER MORRISON

Appellant;

against

THE COMMISSIONERS FOR HM REVENUE AND CUSTOMS

Respondents:

Act: Ghosh QC, Richardson; Maclay Murray & Spens

Alt: Artis; Office of the Advocate General

 

23 December 2014

[5]        For the reasons given in the Opinion of Lord Tyre, I agree that this appeal should be allowed.  With reference to the additional remarks of the Lord President, I agree that revenue concessions of this nature should be explained, and set out in writing in clear and precise terms.

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2014] 113

XA145/13

 

The Lord President

Lord Malcolm

Lord Tyre

OPINION OF LORD TYRE

in the APPEAL FROM THE UPPER TRIBUNAL TAX AND CHANCERY CHAMBER

by

SIR FRASER MORRISON

Appellant;

against

THE COMMISSIONERS FOR HM REVENUE AND CUSTOMS

Respondents:

Act: Ghosh QC, Richardson; Maclay Murray & Spens

Alt: Artis; Office of the Advocate General

 

23 December 2014

Introduction

[6]        The appellant was formerly a major shareholder in, and the chairman and chief executive of, Morrisons plc (“MPLC”), a company listed on the London Stock Exchange.  In about June 2000, Anglian Water plc (“AWG”) expressed an interest in acquiring the whole share capital of MPLC.  Discussions took place.  On or about 3 July 2000, the appellant as chairman of MPLC authorised the sending of MPLC’s five year strategic plan to AWG.  The plan included a profit forecast for the year to March 2001.  During the subsequent sale negotiations, further information was provided by the appellant in the same capacity as to the state of MPLC’s business, including a letter dated 11 September 2000 in which an assurance was given that there were no other matters of which AWG should be aware.

[7]        The shareholders of MPLC, including the appellant, accepted an offer by AWG to purchase all issued and to-be-issued ordinary shares in MPLC.  The consideration for the sale was a combination of loan notes and shares in AWG.  By letter dated 23 August 2000 the appellant irrevocably accepted the offer in respect of his 8,668,983 shares and all shares of which he became the registered or beneficial owner thereafter.  The shares and loan notes which he received were later transferred into a trust (“the 2002 Trust”).  The disposal of his shares and loan notes to the 2002 Trust gave rise to a capital gains tax liability.

[9]        The profit forecast turned out to be materially inaccurate.  In August 2002 AWG raised proceedings in the High Court of Justice in London against the appellant and a co-defendant, Mr Stephen McBrierty, who had been the Group Operations Director and executive responsible for developments at the time of the sale.  The statement of claim alleged that AWG had been induced by the defendants’ false representations and misstatements to offer more for the company than it was worth.  The sum sued for was £132 million.  The measure of the damages claimed was broadly the difference between the price paid by AWG for the shares and their alleged actual value at the date of acquisition, plus consequential loss.  In the same action MPLC sought damages from the appellant for breach of fiduciary duty and duties of care owed to it by him as its director and employee.

[9]        The action was defended.  Liability was denied.  The appellant admitted that he had made an implicit representation that he honestly believed that the profit forecast representation was substantially achievable overall, assuming reasonable continuity of management and business and accounting practice.  He asserted that the assurance given in his letter of 11 September 2000 that there were no other matters of which AWG should be aware was given by him as chairman of MPLC and not in his personal capacity, and that it was not a representation by him about the profit forecast.

[10]      In February 2006, shortly before trial, the parties settled the action.  A settlement agreement was entered into in terms of which AWG and MPLC undertook to release the appellant, Mr McBrierty, and each of the persons listed in a schedule thereto as “the Morrison interests”, including the appellant’s immediate family and related trusts, from any liability that he or they might have.  The settlement figure was £12 million and was paid by the appellant without acceptance of liability.

[11]      The appellant then claimed an adjustment of £12 million to the capital gains tax liability that he had incurred on disposal of the AWG shares and loan notes to the trust.  The adjustment was sought under section 49 of the Taxation of Chargeable Gains Act 1992 (“the Act”), on the ground that the payment in settlement of the High Court action constituted the enforcement of a contingent liability in respect of a representation made on the disposal of his shares in MPLC.  The claim was refused by the respondents on the ground that the payment of £12 million under the settlement agreement was not part of the consideration, whether contingent or otherwise, for the share exchange in 2000, and so could not be brought within section 49. 

[12]      The appellant appealed against that decision to the First Tier Tribunal (“FTT”).  In a decision published as Mr Ben Nevis at [2012] UKFTT 377 (TC), the FTT held that the appellant fell within the ambit of section 49(1)(c) and was therefore entitled to the benefit of the adjustment in terms of section 49(2).  The respondents appealed to the Upper Tribunal.  On 11 October 2013, the Upper Tribunal (Lord Glennie) upheld the respondents’ appeal.  The appellant now appeals to this court against the decision of the Upper Tribunal, which is published as HMRC v Morrison at [2013] UKUT 0497 (TCC).

[13]      The issue for determination by this court is whether the settlement payment of £12 million by the appellant was made for a contingent liability in respect of representations made on a disposal by way of sale of the appellant’s shares in MPLC within the meaning of section 49(1)(c) of the Act, so as to require an adjustment of the appellant’s liability to capital gains tax under section 49(2).  A second issue, namely whether the appellant’s costs of defending the AWG action were also a contingent liability, was decided by the FTT in favour of the respondents, and the appellant’s appeal against that decision was refused by the Upper Tribunal.  The latter decision has not been appealed.

 

The statutory framework

[14]      Section 48(1) of the Act (as amended) states:

“In the computation of the gain consideration for the disposal shall be brought into account without any discount for postponement of the right to receive any part of it and, in the first instance, without regard to a risk of any part of the consideration being irrecoverable or to the right to receive any part of the consideration being contingent; and if any part of the consideration so brought into account subsequently proves to be irrecoverable, there shall be made, on a claim being made to that effect, such adjustment, whether by way of discharge or repayment of tax or otherwise, as is required in consequence.”

 

Section 49 provides:

 

“(1)      In the first instance no allowance shall be made in the computation of the gain-

(a)        in the case of a disposal by way of assigning a lease of land or other property, for any liability remaining with, or assumed by, the person making the disposal by way of a assigning the lease which is contingent on a default in respect of liabilities thereby subsequently assumed by the assignee under the terms and conditions of the lease,

 

(b)        for any contingent liability of the person making the disposal in respect of any covenant for quiet enjoyment or other obligation assumed as vendor of land, or of any estate or interest in land, or as a lessor,

 

(c)        for any contingent liability in respect of a warranty or representation made on a disposal by way of sale or lease of any property other than land.

 

(2)        If any such contingent liability subsequently becomes enforceable and is being or has been enforced, there shall be made, on a claim being made to that effect, such adjustment, whether by way of discharge or repayment of tax or otherwise, as is required in consequence…”

 

The settlement agreement

[15]      The settlement agreement contained the following recitals:

“Recital (5): “In proceedings in the High Court of Justice Chancery Division, Claim Number: HC03C00478 initiated by AWG and MPLC in 2003 it was claimed against [the appellant] and Stephen McBrierty (“SMB”) that [the appellant] had made representations to AWG in connection with the said sale which were false as a result of which he was liable to compensate AWG for the reduced value of the shares sold.  AWG claimed that it was entitled to receive £132 million by way of such compensation.”

 

Recital (6): “The Proceedings have been contested by [the appellant] and SMB and a trial of them is now due to commence on 13 February 2006 with an estimated duration of 9 months.”

 

Recital (7): “The parties have agreed to dispose of all claims between them by this entry into this Agreement…."

 

The agreement further narrated as follows:

 

“1.8. AWG and MPLC hereby acknowledge that:-

 

1.8.1 Sir Fraser’s willingness to enter into this Agreement and to pay the sums mentioned below

 

1.8.2 is not an acceptance of liability on the part of Sir Fraser

 

1.8.3 is without prejudice to the continued denial on the part of Sir Fraser of any liability on his part.

 

1.9 The parties hereby agree that they enter into this agreement without reliance on any representation or warranty made by or on behalf of any party.”

 

On this basis, the appellant undertook to pay a total sum of £12 million to AWG, with interest on any late payment, and the parties undertook to release one another from all claims of any kind.

 

Decision of the First Tier Tribunal

[16]      The FTT recorded (at paragraphs 7 and 8) the following matters of agreement between the parties:

“7.  It is common ground that, if the payment and costs are to be treated as contingent liabilities within section 49(1)(c) TCGA, then ESC D52 will apply.

 

[Extra-Statutory Concession D52 has the effect, in the present case, of applying section 49 on the occasion of the appellant’s disposal of the AWG shares and loan notes to the 2002 trust, if and to the extent that it would have been applicable if the sale of the MPLC shares in exchange for the AWG shares and loan notes had been a disposal for capital gains tax purposes.]

8.  It is common ground that, if the settlement payment and costs are to be treated as contingent liabilities within section 49(1)(c) TCGA, they were enforced by AWG’s action and its settlement.”

 

The terms of this concession by the respondents have caused some difficulty and I return to it below.  As a consequence of the concession, the FTT did not consider the application of section 49(2).

[17]      The FTT found that the appellant made the representation concerning MPLC’s profit forecast in his capacity as director of MPLC, but held that it was nonetheless made on the disposal of his shares.   The capacity in which he acted in making the representation was irrelevant for the purposes of section 49(1)(c).  The FTT held, however, that as there had been no evidence of the extent to which the amount paid to settle the action was attributable to the appellant’s contingent liability arising from the profit forecast representation, the decision could be one in principle only, with quantification being remitted for further discussion between the parties.

 

Decision of the Upper Tribunal

[18]      The Upper Tribunal allowed the respondents’ appeal.  The reasoning of the Upper Tribunal judge, Lord Glennie, is set out at paragraphs 61 to 65 of his decision as follows (with case citations inserted): 

“[61]    In my opinion, what the court has to assess in the case of a contingent liability in respect of a warranty or representation made on a disposal by way of sale is whether the liability is ‘directly related to the value of the consideration’ received by the taxpayer on the disposal of the property: see per Lord Jauncey in [Garner v Pounds Shipowners and Shipbreakers Ltd [2000] 1 WLR 1107] at p 1112E-F, restricting the application of the remarks of Walton J in [Randall v Plumb [1975] 1 WLR 633].  This must be the test to apply in determining whether [the appellant’s] liability in respect of the profit forecast representation (or other representations made by him as chairman of MPLC in connection with the sale to AWG) is of a character that requires it to be taken into account in the computation of the chargeable gain, thus requiring an adjustment under section 49(2).

 

[62]      If the question is framed in this way, as I consider it should be, it admits of only one answer.  The liability of [the appellant] on representations made by him as chairman of MPLC in connection with AWG’s purchase of its whole share capital is wholly distinct from the consideration received by him for his shares in MPLC.  He received his price for his shares by virtue of his ownership of the shares.  It was the same price per share as was received by any other shareholder.  Had he received more, because of his position as chairman, he would have been in the same position as the taxpayer in [Gray’s Timber Products v HMRC [2010] STC 782].  So also, if he receives less at the end of the day because of things which he said or did as chairman of MPLC, that is equally unrelated to the price received by him as shareholder for his shares.

 

[63]      Mr Ghosh emphasised in his submissions that capacity was irrelevant.  The tax was a tax on a chargeable gain by [the appellant] as an individual, and the capacity in which he was acting when he made that gain was irrelevant.  In principle I agree.  But the fundamental question, as I have sought to explain, is whether the liability is ‘directly related to the value of the consideration’. Every case will turn on its own facts, but in the present case the question of capacity (in the sense of which ‘hat’ [the appellant] was wearing at what time) helps to show that that direct relationship is absent.

 

[64]      Nor have I overlooked the submission made by Mr Ghosh that sub-paragraph (c) of section 49(1) in contrast to the other two sub-paragraphs, makes no reference to the capacity in which the person making the disposal makes the representation on which he is subsequently held liable.  As a purely textual submission, there is obviously some force in that point, though my reasoning in the previous paragraph provides the answer to this point too.  It seems to me that Mr Ghosh’s argument, if correct, would involve a construction of sub-paragraph (c) which allowed a matter to be brought into account which was not directly related to the value of the consideration.  If, for example, sub-paragraph (c) did not exist, it could hardly be argued that [the appellant’s] liability on the representation made by him as chairman should be taken into account in establishing the amount of the consideration received by him for his shares, requiring a valuation exercise similar to that canvassed in Randall v Plumb.  Mr Ghosh’s argument leads to the result that, by including sub-paragraph (c) within the contingencies dealt with in section 49(1), Parliament intended to extend the type of contingent liabilities which could be taken account of in assessing the consideration and the chargeable gain.  This would run counter to what I perceived to be common ground between Mr Artis and Mr Ghosh – and whether common ground or not, it reflects my view of the matter – namely that the purpose and effect of sections 48 and 49 was simply to provide a mechanism for dealing with certain types of contingency, and not to innovate upon the type of contingency which might relevantly be taken into account.

 

[65]      For these reasons, I consider that the FTT was wrong to conclude that [the appellant’s] contingent liability on the profit forecast representation made by him as chairman of MPLC was a contingent liability falling within section 49(1)(c) so as to require an adjustment under section 49(2).  In those circumstances, the appeal on the first issue succeeds.”

 

[19]      Lord Glennie mentioned certain further matters that had been canvassed in argument before him.  Firstly, he noted that he had raised some doubts about whether a liability for misrepresentation or negligent misstatement was in fact a contingent liability as explained by Lord Guest in Winter v IRC [1963] AC 235 at 262, namely “a liability which depends for its existence upon an event which may or may not happen”.  He pointed out that a representation of existing fact, such as the existence of an honest belief in the accuracy of a profit forecast, was either true or false when it was made, so that any liability arising from it was not contingent on the occurrence of a future event.  He noted, however, that section 49(1)(c) clearly contemplates that there may, for the purposes of that section, be a liability, which it describes as a “contingent liability”, in respect of a representation made on a disposal by way of sale. 

[20]      Secondly, Lord Glennie noted that some attention had focused on whether liability under the settlement agreement was attributable to the profit forecast representation alone (this being the only representation admitted by the appellant) or was attributable in addition to the various other misrepresentations and misstatements pleaded against the appellant in the High Court proceedings.  He expressed the view that this did not matter, since all representations and statements relied upon  by AWG were made by him in the same capacity and fell to be considered in the same way as the profit forecast representation.  I agree, and I use the expression “representations” to refer to the profit forecast representation and also the other representations and statements by the appellant that were relied on by AWG in the High Court action.

[21]      Thirdly, Lord Glennie indicated that if he had been in favour of the appellant’s position, he would have dealt with quantum in the same way as the FTT dealt with it, i.e. by remitting it for further discussion between the parties to assess what part of the settlement payment related to the representations, including but not limited to the profit forecast representation, made by the appellant as chairman of MPLC on the purchase by AWG of its shares.

 

Grounds of appeal
[22]      The appellant submitted that the Upper Tribunal had erred

• in attaching conclusive significance to the capacity in which a taxpayer acted in making the representations giving rise to a contingent liability; and

   

• by importing a requirement into section 49(1)(c) to demonstrate a direct relationship between a contingent liability and the value of the consideration received.

 

Submissions on behalf of the appellant

[23]      In advancing the first ground of appeal, the appellant placed emphasis on the fact that sections 49(1)(a) and (b) were specific in referring to the person on whom the contingent liability rested, the source of the liability, and the capacity in which it attached to him.  By contrast, section 49(1)(c) referred to “any contingent liability in respect of a warranty or representation made on a disposal by way of sale or lease…” It avoided any need to identify the person who made the representation or any capacity in which he did so.  There was no reason in principle to read section 49(1)(c) as if it contained such a requirement.  Accordingly, the Upper Tribunal’s reliance on the capacity in which the appellant had made the representation, which was the only reason given for its conclusion that the liability was not “directly related to” the value of the consideration received, lacked any sound basis. 

[24]      In respect of the second ground of appeal, the appellant submitted that the Upper Tribunal had erred in holding that the relevant question in determining whether there was a contingent liability within the meaning of section 49(1) was whether the liability was directly related to the value of the consideration received by the appellant on the disposal of the property.  This gloss on the wording of section 49(1), derived from the speech of Lord Jauncey in Garner v Pounds, was unwarranted.  Where an allowance fell to be given for a liability falling outside the terms of section 49 (such as the contingent liability to repay in Randall v Plumb or the payments to third parties in Garner v Pounds), this could only be achieved through an analysis of what the consideration was for the disposal.  The focus of section 49 was different.  In determining whether section 49 was engaged, the question was whether the contingent liability was of a type specified in one of its sub-paragraphs.  There was no basis in principle or authority for interpolating into section 49(1) a requirement that the contingency be “directly related to the value of the consideration”.

[25]      Since (i) the appellant’s liability to make the payment was contingent and the profits representation was made on the disposal of the MPLC shares, and (ii) the contingent liability was enforced by AWG through its action against him, the appellant was entitled to an adjustment pursuant to section 49(2).

 

Submissions on behalf of the respondents

[26]      On behalf of the respondent it was submitted that the Upper Tribunal had correctly concluded that the test in determining whether a contingent liability in respect of a representation fell within section 49(1)(c) was whether it was directly related to the value of the consideration received by the taxpayer on the disposal of the property concerned. 

[27]      Section 49 required to be construed purposively.  It was not a charging provision but part of the machinery for computation of a chargeable gain.  Its effect was not to give a new allowance for the specified contingencies but to postpone the time at which account might be taken of them.  Contingent liabilities not falling within section 49(1) were taken into account, if at all, when establishing the amount of the consideration received.  A sum paid to satisfy or extinguish a collateral right or liability was not part of the consideration for the asset disposed of.  Allowance was made for a contingent liability in the computation of a gain only if it bore upon the amount or value of the consideration received.  It followed that in order to be answerable to the statutory description, a contingent liability had to be

• incurred in the capacity or role of seller;
• incurred on the disposal of the asset sold and not in another transaction; and
• relevant to the computation of the gain, in the sense that enforcement of the liability has had the effect of reducing the value of the price or other consideration received on the sale of the asset so as to reduce the gain made.

[28]      The Upper Tribunal had been correct to conclude that the £12m paid by the appellant did not fall within section 49.  The predominant purpose of payment had been to settle litigation that had been directed against the appellant and his colleague for having made representations, as chairman and director, concerning MPLC’s affairs.  They were also sued by MPLC for breach of fiduciary duty.  The damages sought by AWG were based, broadly, on the alleged actual value of the company compared with the price paid by AWG for the whole company and not just the appellant’s shareholding.  He was not sued on the contract for the sale of his shares but in tort as an officer of the company who made the representations.  The basis of the action would have been the same had the appellant had no shares to sell.  It was settled without acceptance of liability.  The appellant retained the full value of the consideration received for his shares.  No adjustment to the gain made on the sale of the shares was therefore required in consequence of the payment. 

 

The meaning of “contingent liability”

[29]      The meaning of the expression “contingent liability” was discussed by the House of Lords in Winter v IRC.  Lord Reid (at page 249) described a contingent liability as “a liability which, by reason of something done by the person bound, will necessarily arise or come into being if one or more of certain events occur or do not occur”.  Lord Guest (at page 262) defined a contingency as an event which may or may not occur, and a contingent liability as “a liability which depends for its existence upon an event which may or may not happen”.  These definitions envisage that the contingency which may give rise to the crystallisation of the liability is an event that is yet to occur (or not occur).  In the context of section 49, whose terms have not materially altered since the original 1965 capital gains tax legislation, it seems to me that the expression must be given a somewhat broader meaning.  The contingent liabilities described in section 49(1)(a) and (b) are capable of including liabilities which emerge after the date of the disposal but which arise as a consequence of a state of affairs already in existence at that date.  Section 49(1)(b), for example, could apply to a liability arising as a consequence of a defect in the title of a seller of land which, although in existence at the date of the disposal, does not come to light until later.  It follows that when construing the expression “contingent liability” in section 49(1)(c), it is unnecessary to identify an event which, at the time of a disposal by way of sale, may or may not happen.

[30]      As I have already noted, it was common ground before the FTT that if the settlement payment was to be treated as a contingent liability within section 49(1)(c), it was “enforced by AWG’s action and its settlement”.  Counsel for the respondents stated that that remained the respondents’ position.  He further confirmed that it was not part of the respondents’ case to dispute that a contingent liability had been incurred; their position was that the contingent liability was not a relevant one because it did not enter the computation of the value of the consideration received by the appellant for his shares.  It was not, however, clear to me exactly what liability of the appellant was accepted by the respondents as having been a contingent liability.  Nor was counsel able to explain the respondents’ concession that the contingent liability was enforced by AWG’s action and the settlement of that action.  At issue is a question of the construction of a statutory provision which has seldom come before the courts for elucidation.  In my view, the concession, and the reasons for it, should have been clearly set out in writing.

[31]      In order to address the question whether the contingent liability incurred by the appellant fell within the scope of section 49(1), it is necessary, in my view, to identify the contingent liability that was incurred by him and “enforced by AWG’s action and its settlement”.  The liability was to make a payment of damages to AWG.  The contingency in which that liability would arise was where a representation made in connection with the sale of the MPLC shares turned out not only to be wrong but to be actionable because it was made fraudulently or negligently.  It is, of course, the case that the payment of £12 million by the appellant to AWG was made expressly without acceptance of liability on the part of the appellant and without prejudice to his continued denial of any liability.  But that is beside the point.  Given the particular use of the expression in section 49(1), at the time when the appellant made the representations which formed the basis of AWG’s claims, he incurred what is properly characterised as a contingent liability.

 

Did the appellant’s contingent liability fall within the scope of section 49(1)?

[32]      The argument on behalf of the respondents that found favour with the Upper Tribunal was that in order for a contingent liability to be incurred “in respect of a warranty or representation made on a disposal by way of sale”, the liability had to be directly related to the value of the consideration received by the taxpayer on the disposal.  Reliance was placed on the decisions in Randall v Plumb and Garner v Pounds.  Because the representations were made by the appellant in his capacity as director of MPLC in connection with the sale of the company, they were not, according to the respondents’ analysis, directly related to the value of the consideration received by the appellant by virtue of his ownership, in his private capacity, of some of the share capital of MPLC.  In my opinion this argument is unsound for two reasons.

[33]      In the first place, I agree with the appellant that it is important to bear in mind that Randall v Plumb and Garner v Pounds were concerned with contingent liabilities not falling within section 49(1).  In Randall v Plumb, Walton J rejected a submission by the Crown that contingent liabilities not falling within the predecessor of section 49(1) should simply be disregarded, on the ground that this would fail to produce “an intelligibly just scheme of taxation”.  That being so, Walton J was able to find what he regarded as a fair solution by adjusting the value of the consideration for the disposal to take account of the risk that the sum received might fall to be repaid.  Where, however, one is concerned with a contingent liability which does fall within one of the sub-paragraphs of section 49(1), there is no need to make an adjustment to the value of the consideration because the method of dealing with the contingency is specified in the statute.  Section 49(2) provides that in the event of enforcement of the contingent liability, such adjustment “as is required in consequence” takes place by way of discharge or repayment of tax or otherwise: in other words, by direct relief.  It does not require or permit adjustment of the value of the consideration and it is not in my opinion permissible to read the section as if it did.  The focus of the section is on ascertainment of the chargeable gain and not on valuation of the consideration.

[34]      Nor does the observation of Lord Jauncey in Garner v Pounds take the matter further for the respondents.  Again that case was concerned with ascertaining the consideration for a disposal when the circumstances did not fall within what is now section 49.  Lord Jauncey was merely making the point that a contingency relating to matters which do not directly bear on the value of the consideration should not necessarily be taken into account.  In the present case no issue of ascertaining the amount of the consideration arises, and Lord Jauncey’s observation is not in point.

[35]      In the second place, even if, as the respondents submitted and the Upper Tribunal held, section 49(1)(c) should be construed as imposing a requirement that the contingent liability be directly related to the value of the consideration received by the taxpayer on disposal of the property, I am not persuaded that that requirement is not met in the present case.  The respondents’ contention that it is not met has a very narrow basis: it rests upon the capacity and the context in which the appellant made the representations giving rise to his contingent liability.  In my view, the capacity in which the representations were made should not be regarded as making a critical difference.  In contrast to subparagraphs (a) and (b) of section 49(1), there is no reference in subparagraph (c) to the capacity of the person making the disposal.  As to the context, no intelligible distinction can be drawn between AWG’s purchase of MPLC and its purchase of all of the issued shares in MPLC.  The representations made by the appellant related to the purchase of all of the issued shares in MPLC, including his own shares.  The basis upon which the appellant’s personal contingent liability arose was that he made the representations which induced the purchase of the shares, including those owned by himself.  In these circumstances I consider that the representations are properly described as having been made on a disposal by way of sale of the shares.  The requirements of section 49(2) for adjustment of the computation of the appellant’s chargeable gain are therefore met.  I am further satisfied that this conclusion reflects the reality that after making the payment in settlement of AWG’s claim, the gain realised by the appellant on disposal of his shares was reduced by £12 million.

 

Disposal
[36]      For these reasons, I propose that the appeal be allowed.  There remains, however, the issue of whether the whole, or if not what part, of the settlement payment made by the appellant was attributable to representations made by the appellant giving rise to the contingent liability falling within section 49(1)(c).  The FTT did not feel able to make a finding on this issue.  The Upper Tribunal, had it found in the appellant’s favour, would have remitted the matter for further discussion between the parties in the first instance.  Lord Glennie, at paragraph 69, identified the issue as being

“…what part of the £12 million was paid in settlement of the claims by AWG for misrepresentation or negligent misstatement as a whole, covering all the various representations and statements relied on by AWG in the High Court action, but obviously not the other claims by AWG, whether against [the appellant] or others, and not the claim by MPLC.” 

 

I agree, and I propose that the case be remitted to the FTT to proceed as accords.