On 23 December 2014, the Court of Session (the Scottish equivalent of the Court of Appeal) heard an appeal (Morrison v HMRC  XA145/13113) against the Upper Tribunal decision and found in favour of the taxpayer.
The case considers whether £12m paid by Sir Fraser Morrison to the purchasers of the Morrison group in an out of court settlement, following a claim for damages for misrepresentation, can be deducted from his gain on the disposal of his shares.
The Upper Tribunal had decided that he could not claim a deduction under TCGA 1992, s 49 because he had made various representations in relation to the profitability of the group in his capacity as Chairman of the group, rather than as vendor of the shares.
However, the Court of Session has overturned this decision, taking the view that the capacity in which the representations were made was not relevant. The key question was whether the contingent liability arose as a result of circumstances that were in existence at the time the parties entered into the transaction.
The court concluded that, in reality, Sir Fraser Morrison’s gain had been reduced by £12m, and has remitted the case to the First-tier Tribunal to decide how much of the settlement figure can be deducted for CGT purposes.
The Upper Tribunal decision was surprising and could have had implications for many share sales, where it is not unreasonable for the Chairman of the company to make representations to potential purchasers, especially before entering into formal negotiations for a sale. Now that the Court of Session has overturned this ruling, we are almost back where we thought we were in relation to contingent liabilities in connection with share sales.
It will be interesting to see whether HMRC appeal.
If you require any further information in relation to contingent liabilities arising under warranties on a company sale please ring the TaxDesk on 0845 4900 509 and ask for Paul Howard.