This article was first written for and published in the January 2020 edition of Taxation.
When dealing with differences of opinion on a tax problem, Robert Maas reminds us that the HMRC manuals are not the law.
Key points
· The interpretation of a word or phrase in one branch of law does not always translate to another.
· HMRC’s view of the Haines case.
· The aim of the decision in Haines v Hill is different to the context of TCGA 1992, s 165.
· The meaning of ‘consideration’.
· HMRC’s manuals are not a legal interpretation, simply the department’s guidance to its employees.
· Professional guidance if the adviser’s view differs from that of HMRC.
A recent Readers’ Forum question dealt with holdover relief on a transfer of business assets under a court order. Both responses (‘Now you see it…’, Taxation, 21 November, page 25 at tinyurl.com/srh7a9c) asserted that relief was not due, and referred to HMRC’s guidance in its Capital Gains Manual at CG66886. However, it is by no means clear that HMRC’s view is correct. This view is based on the Court of Appeal’s decision in Haines v Hill ([2007] EWCA Civ 1284). In that case, the transfer of an interest in a property in a divorce settlement was held to be a transaction made for consideration in money or money’s worth for the purpose of bankruptcy law.
It needs to be realised, though, that while conceptually we have a single set of laws, that does not mean that an interpretation of a word or phrase made in one branch of the law either can, or ought to, be transposed to another.
In many, if not most cases, the meaning of a word is coloured by the context in which it is used. The Haines case concerned the interstice between matrimonial law and bankruptcy law.
The Haines case
Mr and Mrs Haines bought Strudges Farm in 1997. In 2003, Mrs Haines presented a petition for divorce. A district judge ordered Mr Haines to transfer his half interest in Strudges Farm to Mrs Haines within seven days of decree absolute, which turned out to be by 28 February 2005. Mr Haines seems to have promptly filed his own bankruptcy petition and was made bankrupt as a result on 31 March 2005. Because he had not complied with the order to transfer the half share to his wife, the judge ordered that the property, the only substantial family asset, should be sold and the entire proceeds should go to rehouse the wife and the couple’s six-year old child. He ordered the court to execute the transfer so that the house could be sold which, after payment of the outstanding mortgage, produced £240,000.
The trustee in bankruptcy applied to the County Court for a declaration that the transfer of Mr Haines’ beneficial interest to his ex-wife was a transaction at an undervalue pursuant to the Insolvency Act 1986, s 339, which was void against the trustee, who was therefore entitled to half of the £240,000. The County Court judge felt himself compelled, in what he thought to be the current state of the law, to hold that under a court order in a divorce, the receiving party does not give consideration.
The dilemma
The Court of Appeal was therefore faced with a dilemma. Could it be right that one of the most common orders in matrimonial proceedings, that the husband transfer his interest in the matrimonial home to his wife, could be thwarted by the husband petitioning for his own bankruptcy, with the result that that interest would pass to his creditors, not to his ex-wife?
It held that it was clearly not. The County Court judge had misunderstood the existing law. It is important to stress ‘the existing law’. The Court of Appeal in the case of Re Pope ex parte Dicksee ([1908] 2KB 169) had held that the financial benefit obtained by the wife under a post-nuptial settlement made by the husband within two years of his bankruptcy in consideration of the wife refraining from taking divorce proceedings against him was valid against the trustee in bankruptcy.This was affirmed in a later case Re Abbott (a bankrupt) ([1983] 1 Chancery 45), which confirmed that an ancillary relief order was normally proof against the claims of the trustee in bankruptcy. Accordingly, contrary to the claim in CG68886 that Haines v Hill had changed the law, the Court of Appeal had simply opined that the law on the relationship between matrimonial orders and bankruptcy remains as it has been for the past 110 years.
The chancellor, Sir Geoffrey Vos, held as correct the proposition that, ‘in the ordinary case, a transferee under a transfer made pursuant to [a property transfer] order is to be regarded as having given consideration (in the sense that word is to be understood in this context) equivalent to the value of the property being transferred, unless the case is an exceptional one where it can be demonstrated that the property transfer order was obtained by fraud or some broadly similar exceptional circumstance’.
The context in Haines v Hill was that parliament requires the district judge in a matrimonial case to give first priority to the infant children of the marriage, so it is inconceivable that parliament would have intended the claims of creditors should prevail over those of the infant child – or as Rex LJ put it: ‘It would be ridiculous to suppose that … it had been intended to abrogate by legislation the decisions in Pope and Abbott to the effect that a wife gave valuable consideration for a property transfer by reason of the release of a right or the compromise of a claim.’
Comparison with TCGA 1992, s 165
The context of the need to protect the wife and infant child in Haines v Hill is very different to the context of TCGA 1992, s 165. Indeed, s 165(1) does not even use the term ‘consideration’. It is dealing with the situation where ‘an individual … makes a disposal otherwise than under a bargain at arm’s length’ of a business asset.
An order of a matrimonial court is clearly not a bargain at arm’s length. It is something forced on the disposer by the courts. ‘Consideration’ is mentioned only when one comes to calculate the held-over gain. The basic rule is that the held-over gain is ‘the chargeable gain which would have accrued on the disposal’ (s 165(6)). However, this rule is modified ‘where there is actual consideration (as opposed to the consideration equal to the market value which is deemed to be given by virtue of s 17(1))’. TCGA 1992, s 17(1) deems disposals and acquisitions to be made at market value if the disposal is ‘otherwise than by way of a bargain made at arm’s length’, so it seems to me that s 17(1) applies to a disposal by virtue of an order of a matrimonial court.
The s 165 issue is accordingly whether there is ‘actual consideration’. This is clearly not necessarily the same thing as ‘a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the individual’ (which is the rubric in Insolvency Act 1986, s 339).
The purpose of s 165
What then is the context of s 165? What is parliament seeking to do? It seems fairly clear that the intention is to allow tax on the gain on a non-arm’s length transaction to be deferred to the extent that the gain is not represented by ‘actual consideration’. To the extent actual consideration is received, there is no need to defer the tax because it can be met out of that consideration; it is only to the extent that tax is imposed on notional consideration that a deferral is logical. Logical because parliament does not wish to inhibit transactions involving business assets, and expecting the parties to find tax where the transfer produces no wherewithal to pay that tax could well prevent the transaction taking place.
Clearly, a court order adjusting the division of matrimonial assets to provide for what the court considers to be the needs of the ex-spouse and her infant children falls within the category of transactions that produce no wherewithal to pay the tax. It is hard to see any rational reason why parliament should have thought that, for example, a gift to one’s son warrants deferral but a ‘gift’ to one’s spouse imposed on one by the courts should not be equally worthy of a deferral of the tax. It seems far more likely that parliament felt the two should be treated the same. Deeming giving up one’s rights to financial provision in return for the court making that financial provision to amount to ‘actual consideration’ would offend against that likely intention.
It is noteworthy that ‘actual consideration’ is not defined in s 165. It must therefore be supposed to bear its day-to-day meaning. Would the hypothetical man on the Clapham omnibus regard the phrase as including being forced to give away the asset by the court? I very much doubt it.
Law, policy and HMRC guidance
The HMRC manuals are, of course, the department’s internal guidance to its own staff that have been made available to the public under freedom of information rules. They are not the law and do not even purport to be the law. They are guidance to staff on how HMRC wishes them to interpret the law. I think that I am as capable as the Revenue’s policy specialists at interpreting tax law. I base my advice to clients on the legislation. I have not read most of HMRC’s manuals, although I do dip into them occasionally when I would like to know HMRC’s interpretation of parts of the legislation that I do not find easy to understand.
I make this point because one of the Readers’ Forum respondents said: ‘HMRC guidance is clear on this point and if Spouse takes a different view, they will need to ensure that this is fully disclosed on the white space of the client’s tax return’. I know of no legal or ethical basis for that statement. If it were true, I would be in serious difficulty as I am not familiar with much of HMRC’s guidance, so not in a position to know when my view differs from the department’s. I do not think I can be expected by either parliament or the professional bodies of which I am a member to make myself aware of HMRC’s views on every issue that crosses my desk.
The adviser’s professional obligation
The joint ethical statement, Professional Conduct in Relation to Taxation (PCRT at tinyurl.com/yxtnm6hg), does say (in help sheet A, Submission of tax information and ‘tax filings’): ‘Cases will arise where there is doubt as to the correct treatment of an item … In such cases, a member ought to consider what additional disclosure, if any, might be necessary. For example, additional information should be considered where … HMRC has published its interpretation … on a point, but the client proposes to adopt a different view. The member should refer to the guidance on the Veltema case.’ However, that falls far short of an obligation to tell HMRC if I think that its interpretation of the law is clearly wrong and I propose to complete the client’s tax return in accordance with my own interpretation of it.
Clients do not pay us to read HMRC’s manuals; they pay us to tell them how the law applies to their transactions. I can certainly see that if, at the end of the day, HMRC’s interpretation prevails (which I think most unlikely in this case), not highlighting why I have adopted my view of the law may well forfeit Veltema protection. But if my interpretation prevails, the client is not in need of such protection, so I am happy to leave it to him to decide whether he wants it.
What next?
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