First-tier Tribunal CGT appeal on foreign currency gains gives rise to interesting jurisdictional points on the Liechtenstein Disclosure Facility

January 20, 2017

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First-tier Tribunal CGT appeal on foreign currency gains gives rise to interesting jurisdictional points on the Liechtenstein Disclosure Facility

The First-tier Tribunal has given a detailed decision in an appeal against discovery assessments to capital gains tax that HMRC made in consequence of the Appellant’s disposal of a property in Switzerland (declared via the Liechtenstein Disclosure Facility, the “LDF”) and associated penalties.  The main issue was which method should was the correct method to calculate the chargeable gain on disposal:

  • Method A (Appellants’ method): Calculate the gain that the Appellants made in Swiss Francs by subtracting the aggregate of the expenditure that they had incurred in respect of that property (in Swiss Francs) from the Swiss Franc disposal proceeds, thus producing a gain in Swiss Francs to be converted into sterling at the exchange rate applicable on the date of disposal for the purposes of calculating their CGT liability.
  • Method B (HMRC method): Convert each item of expenditure incurred in respect of the property, including the cost of acquisition, into sterling at the exchange rate applicable on the date that expenditure was incurred and deduct the sum of those sterling amounts from the sterling equivalent of the sale proceedings (arrived at by converting the Swiss Franc disposal proceeds into sterling at the exchange rate applicable on the date of disposal.

The Tribunal judge found that he was bound by the Court of Appeal’s decision in Capcount Trading v Evans (HM Inspector of Taxes) [1993] STC 11 and the High Court’s decision in Bentley v Pike (Inspector of Taxes) [1981] STC 60, so Method B was correct.  The point of principle arising out of the Court of Appeal’s decision in Capcount was that foreign currency was a distinct asset for CGT purposes.  Thus, expenditure in foreign currency is expenditure consisting of giving up a distinct asset, not expenditure in money, and it falls to be valued by converting the foreign currency into sterling at the exchange rate prevailing on the date of expenditure.  Similarly, receipts in foreign currency are receipts of separate assets which need to be converted into sterling at the rate prevailing on the date of receipt.

HMRC had applied the minimum percentage penalty (20%) in accordance with Schedule 24 of the Finance Act 2007 for deliberate inaccuracies, but the Appellants had also argued that the applicable penalty percentage under the terms of the LDF was 10%.  The Tribunal found that this argument was fundamentally flawed in that the LDF was not a statutory provision and the Tribunal did not have any jurisdiction to consider complaints that HMRC had not honoured their agreement with the Government of Liechtenstein.  Nor did the Tribunal have jurisdiction to consider arguments to the effect that HMRC should have applied a lower level of penalty given their public statements on the LDF: those were public law arguments that would have to be pursued in the courts by way of judicial review.  In any event the Tribunal judge would not have accepted the Appellants’ arguments as he believed that HMRC had applied the LDF correctly.  The Tribunal judge also considered whether HMRC’s perceived failure to apply the LDF amounted to a “special circumstance” which could justify reducing the penalty below the minimum level of 20% under paragraph 11 of Schedule 24.  The Tribunal’s jurisdiction on “special circumstances” – which allows the Tribunal to reach a different decision to HMRC if the Tribunal thinks that HMRC’s decision is “flawed” – was, the Tribunal held, confined to considering HMRC’s approach in light of judicial review principles.  The Tribunal took the view that HMRC had made no error of law in this regard: HMRC had turned their mind to the LDF and applied it in a manner that was reasonable (and in a manner which the Tribunal judge considered to be consistent with the terms of the LDF).

Finally, the Appellants had argued that HMRC should not have pursued enquiries into their tax affairs under HMRC’s Code of Practice 8 because the dispute between HMRC and the Appellants was essentially one of law, namely which method should have been used to calculate the chargeable gain.  However, the Tribunal held that, as a creature of statute, it had no jurisdiction to consider this complaint.  One option available to the Appellants would have been to complain to HMRC and, if not satisfied, to pursue the matter to the Adjudicator’s Office.  Alternatively, they could have considered pursuing a judicial review in the courts.

George Knight and Ingeborg Knight v The Commissioners for Her Majesty’s Revenue & Customs [2016] UKFTT 0819 (TC)