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To what extent do taxpayers currently have the choice to treat small disposals as a part disposal as opposed to the treatment required by TCGA 1992, s 122(2)?
Although s 122(2) makes it compulsory to deduct small distributions from the allowable expenditure providing that the expenditure is greater than the distribution, the Inland Revenue, by virtue of the wording of Interpretation No 34 (published, November 1992, in Tax Bulletin 5) gave taxpayers the choice of treatment.
To what extent do taxpayers currently have the choice to treat small disposals as a part disposal as opposed to the treatment required by TCGA 1992, s 122(2)?
Although s 122(2) makes it compulsory to deduct small distributions from the allowable expenditure providing that the expenditure is greater than the distribution, the Inland Revenue, by virtue of the wording of Interpretation No 34 (published, November 1992, in Tax Bulletin 5) gave taxpayers the choice of treatment.
The Inland Revenue has now withdrawn Interpretation 34. The copy of Tax Bulletin 5 on the Inland Revenue website says that 'This article is no longer current (Deleted Index 2004)'.
Does this mean that the concession has been withdrawn, and if so from what date was this effective? If this is not the case, where is the concession now published?
Readers' clarification on this would be most appreciated, as would any other general advice on the subject.
Query T16,616 — D.C.
Reply by 'N.K.'
No, the concession has not been withdrawn and a more accurate description of the current position is that the Revenue's Interpretation RI34 'Small capital distributions' has been superseded by RI 164 'Meaning of “small” in TCGA 1992, ss 23, 116, 122, 133, 243'. The contents of the latter starts with reference to the Revenue's interpretation 'that “small” means 5% or less'. There is also reference to the Capital Gains Manual and that RI34 refers to TCGA 1992, s 122. However because of the judgment in O'Rourke v Binks [1992] STC 703, the Revenue decided to reconsider its interpretation of the meaning of small and, as from 24 February 1997, it was 'a question fact and degree', with each case being circumstantial. It also expanded the allowance factor by accepting that any amount will be treated as 'small' as long as it was £3,000 or less, whether or not it meets the 5% test.
Looking at the phrasing of RI 164 and the use of the words 'can' and 'may' in its penultimate paragraph, D.C. can rest assured that the opt out position still stands and this is confirmed in the Revenue's Capital Gains Manual at CG57836:
'... Any direction by the Inspector under s 122(2) can be ignored if the taxpayer would prefer to treat a small capital distribution as a disposal ...' — N.K.
Reply by 'The Weather Man'
This query raises a fundamental point. As D.C. states, the Internet version of Tax Bulletin 5 now has a note against Interpretation 34 that 'this article is no longer current'. This is a little like telling someone asking for directions that this is not the way they want to go. That is all very well, but would it not be better to tell them what was?
Revenue Interpretation 34 dealt with 'Small capital distributions: direction under TCGA 1992, ss 122(2), 123'. The legislation allowed the receipt of a small capital distribution to be treated as a deduction from allowable expenditure, rather than, as would otherwise be the case, a part disposal. RI34 considered the definition of 'small' in the legislation and concluded:
'In this context [the Revenue] consider the word “small” to mean 5% or less. The effect of the direction is that the distribution is not treated as a disposal but the amount received is deducted from the recipient's allowable expenditure on the shares.'
This was fine until O'Rourke v Binks [1992] STC 703, which held that what is 'small' is a question of fact and degree in the light of the particular case. The Revenue then updated its view with an article in Tax Bulletin 27 (February 1997) and stated that:
'The purpose of the legislation is to avoid the delay and expense of a full computation where this would be disproportionate, and to avoid the need for assessments in trivial cases.
'The “5% test” continues to offer practical advantages and we will continue to accept that any case which meets that test can be regarded as small. To further reduce the likelihood of assessments in trivial cases, we will also now accept that these provisions can apply wherever the amount or value of the receipt is £3,000 or less, whether or not this would fall within the 5% test. This revised approach may be applied to existing cases where the point remains open at the date of publication of this article, 24 February 1997, and to all future cases.
'Exceptionally, taxpayers may wish to suggest that receipts above these limits should nevertheless be regarded as small, in the context of their particular circumstances; or, conversely, that receipts below these limits should not be so regarded. Any such cases will remain to be resolved on their merits, having regard to the dicta in O'Rourke v Binks.'
As D.C. will now appreciate, it would be helpful if the deletion at Tax Bulletin 5 and the revision at Tax Bulletin 27 could be cross-referenced. In the Revenue's defence, its interpretations are not in fact numbered, instead they appear from time to time in Tax Bulletins. Furthermore, and to add to the possible confusion, the numbering of interpretations by LexisNexis Butterworth and CCH differs; for example, CCH's IRInt.159 (Schedule D, Cases I & II: employee share ownership trusts) equates to Tolley's RI 167.
With regards to 'other general advice', D.C. should note that the Revenue accepts that 'this treatment is not compulsory: the recipient can, if he wishes, have the distribution treated as a part disposal' and depending upon the availability of other gains, losses and annual exemption treatment as a part disposal should be considered. This should be tempered by the amounts involved and the additional professional costs of dealing with what might be minor amounts. Additional information on this subject can be found in the Revenue's Capital Gains Manual at CG57835
In conclusion, the Revenue could be a little more helpful. Some kind of consistent referencing of its interpretations would be helpful, as would cross-referencing when changes are made. This type of enabling would be all the more useful in these days of electronic communication, when the Revenue seems to succumb to the temptation to add or remove information from its website without notice or warning. — The Weather Man.
