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Procedure.Tax
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N2-3. Deeming provisions
General principles​
"[27] There are useful but not conclusive dicta in reported authorities about the way in which, in general, statutory deeming provisions ought to be interpreted and applied. They are not conclusive because they may fairly be said to point in different directions, even if not actually contradictory. The relevant dicta are mainly collected in a summary by Lord Walker in DCC Holdings (UK) Ltd v Revenue and Customs Comrs [2011] 1 WLR 44, paras 37-39, collected from Inland Revenue Comrs v Metrolands (Property Finance) Ltd [1981] 1 WLR 637, Marshall v Kerr [1995] 1 AC 148; 67 TC 56 and Jenks v Dickinson [1997] STC 853. They include the following guidance, which has remained consistent over many years:
(1) The extent of the fiction created by a deeming provision is primarily a matter of construction of the statute in which it appears.
(2) For that purpose the court should ascertain, if it can, the purposes for which and the persons between whom the statutory fiction is to be resorted to, and then apply the deeming provision that far, but not where it would produce effects clearly outside those purposes.
(3) But those purposes may be difficult to ascertain, and Parliament may not find it easy to prescribe with precision the intended limits of the artificial assumption which the deeming provision requires to be made.
(4) A deeming provision should not be applied so far as to produce unjust, absurd or anomalous results, unless the court is compelled to do so by clear language.
(5) But the court should not shrink from applying the fiction created by the deeming provision to the consequences which would inevitably flow from the fiction being real. As Lord Asquith memorably put it in East End Dwellings Co Ltd v Finsbury Borough Council [1952] AC 109, at 133:
“The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.” (Fowler v. HMRC [2020] UKSC 22, Lord Briggs)
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Context may limit the scope of a deeming provision
"[40] The true position, I think, is that the successor is no more to be taken to have obtained ownership than the predecessor is to be assumed to have had it in the first place. The role of section 78(1) is to explain how property should be valued where it has passed from the predecessor to the successor without a sale. It is not to deem property to have passed or, more specifically, to deem the predecessor to have had ownership or the successor to have achieved it. The provision does not state that property is to be deemed to belong to the successor, and no such inference can be drawn from property's being treated "as if … it had been sold". Section 78(1) has a valuation function. It says nothing about whether section 24(1)(b) is satisfied.
[41] I am reinforced in that view by section 78's failure to deal with matters which it might have been expected to address if the effect of that provision had been to deem ownership to transfer to the successor...
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[44] Doubtless, the legislation could be read in the way [the taxpayer] suggested if section 78(1) were understood to deem machinery and plant to belong to a successor. However, the fact that section 78(1) says nothing about when any deemed "belonging" is to terminate is still, I think, telling: the draftsman would, as it seems to me, be likely to have said something on the topic if section 78(1) had been intended to deem a successor to have title to property which he did not in fact own, a point to which comparison with sections 61(4) and 155(3) gives extra weight. Further, the draftsman would probably have addressed the valuation issues which could arise..." (Inmarsat Global Limited v. HMRC [2022] EWCA Civ 1076, Newey LJ)
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"[53] ... We agree with Inmarsat that deeming property to be “sold” to a person is capable of carrying with it a deeming that the property is to “belong” to that person. However, we do not consider that to be an “inevitable” consequence. The relevant question is whether, having due regard to the purpose of s78, and the statutory scheme of which it forms part, Parliament intended the deeming provision to extend as far as treating Inmarsat to be the owner of the Satellites, even though it did not actually own them.
[54] In this regard, we consider that HMRC are correct to emphasise the point that, if s78(1) were intended to establish a deemed “belonging” of plant and machinery, in the absence of a real “belonging”, it might have been expected to deal with further matters such as when the deemed belonging comes to an end and what is to happen when it does. Yet s78 does not address such points. That is in contrast with other provisions that deem machinery to belong to someone other than the real owner." (Inmarsat Global Limited v. HMRC [2021] UKUT 59 (TCC), Adam Johnson J and Judge Richards)
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“The restricted ambit of these deeming provisions is made clear both by their context and by express provision. They appear in a schedule which is concerned solely, as its heading makes clear, with the application of taper relief. The entire contents of the schedule are directed to taper relief. This would, in my view, be enough but the express terms of section 2A(7) and paragraph 1 of schedule A1 make clear the purpose and limited application of the provisions of the schedule.” (HMRC v. Stolkin [2014] UKUT 165 (TCC), §33, Richards J).
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Fiction only intended to apply for specific purpose, not generally
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"[33]...If one asks, as is required, for what purposes and between whom is the fiction created, it is plainly not for the purpose of rendering a qualifying diver immune from tax in the UK, nor adjudicating between the UK and South Africa as the potential recipient of tax. It is for the purpose of adjusting the basis of a continuing UK income tax liability which arises from the receipt of employment income. Therefore to apply the deeming provision in section 15(2) so as to alter the meaning of terms in the Treaty with the result of rendering a qualifying diver immune from UK taxation would be contrary to its purpose. It would also produce an anomalous result." (Fowler v. HMRC [2020] UKSC 22, Lord Briggs)
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"[94] The purpose of section 78(1) is to value property which has passed from a predecessor to a successor without a sale (see paragraph 40 above). The mechanism to achieve that valuation is an assumed (but fictitious) sale of that property at open market value by the predecessor to the successor. The central error in Inmarsat's case lies in seeking to press that statutory fiction further, to deem ownership of the property to have passed to the successor. That is not what section 78(1) provides and is not what the statutory fiction created by section 78(1) was intended to do; nor is it an inevitable corollary of that statutory fiction. Inmarsat's case offends the principles summarised in Fowler, set out at paragraph 36 above." (Inmarsat Global Limited v. HMRC [2022] EWCA Civ 1076, Whipple LJ)
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Fiction only applying for the purpose of a particular section (not whole Act)
"The taxpayer's principal argument was that s 24(11) requires the court to assume that the provisions of the arrangement dated 31 January 1978 had been contained in the will of the testator who died on 27 February 1977. But s 24(11) only requires that 'this section shall apply as if' the provisions of the arrangement had been contained in the will. As I have indicated, s 24 deals with the consequences of death and nothing else. The arrangement constituted a settlement under which Mrs Kerr was the settlor because she alone could constitute the trust fund and dictate the terms of the arrangement. There is nothing in s 24 which requires s 80 of the 1981 Act to be applied as if Mrs Kerr had not constituted the trust fund or dictated the terms of the arrangement." (Marshall v. Kerr [1994] STC 638 a 642)
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Frequently difficult to prescribe the full extent of the deeming
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"[44] Moreover, in deciding the scope of a deeming provision, it is important to bear in mind the obvious difficulties that Parliament has in prescribing the full extent of that deeming. As Neuberger J, as he then was, said in Jenks v Dickinson (Inspector of Taxes) [1997] STC 853 at 878:
"…[By] its very nature, a deeming provision involves artificial assumptions. It will frequently be difficult or unrealistic to expect the legislature to be able satisfactorily to [prescribe] the precise limit to the circumstances in which, or the extent to which, the artificial assumptions are to be made."" (Inmarsat Global Limited v. HMRC [2021] UKUT 59 (TCC), Adam Johnson J and Judge Richards)
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Do not depart from the real world further than the hypothesis compels
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"I accept [HMRC's] arguments, which require one first to identify what was the property settled by the arrangement and then to ask the question, 'Is there anything in s 24 which requires one to assume a state of facts inconsistent with Mrs Kerr having been the settlor of the property so identified?
...
...consequence (2) does not require one to assume (contrary to the true facts) that Mrs Kerr did not 'dispose' of any property when she executed the arrangement but only that such disposition did not give rise to a chargeable event.'" (Marshall v. Kerr [1994] STC 638 a 649 and 651, Lord Browne-Wilkinson)
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"[45] Finally in this regard, a deeming provision necessarily involves a statutory hypothesis that is at odds with the “real world”. However, this does not mean that, when a deeming provision is engaged, the “real world” is irrelevant as the deeming provision must be applied to real world facts and circumstances. As Schiemann LJ observed in Hoare v National Trust (1998) 77 P&CR 366 in the context of the statutory “rating hypothesis” that applied in order to determine the rateable value of a non-domestic heriditament:
"The statutory hypothesis is only a mechanism for enabling one to arrive at a value for a particular hereditament for rating purposes. It does not entitle the valuer to depart from the real world further than the hypothesis compels. The Tribunal rightly accepted that in some respects it has to stay in the real world. It looked at the hereditament as it was; it took the actual assets of the actual tenant… into account."" (Inmarsat Global Limited v. HMRC [2021] UKUT 59 (TCC), Adam Johnson J and Judge Richards)
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But take as far as purpose makes it necessary
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"[46]...More controversial was the submission, contained in the skeleton argument of [the taxpayer], to the effect that it may be necessary to apply a fiction set out in a deeming provision “further than … is necessary in order to give effect to the legislative purpose”. That submission prompted [HMRC] to argue that there could never be any justification for applying a statutory fiction further than is “necessary”.
[47] We consider the difference between the parties was more apparent than real, however. We understood [the taxpayer] to be saying no more than that the ultimate task is one of purposive construction. Giving effect to that statutory purpose might result in the fiction being taken further than might, at first sight, appear justified by the words used. But one is still bound only to go as far as is necessary, and no further." (Inmarsat Global Limited v. HMRC [2021] UKUT 59 (TCC), Adam Johnson J and Judge Richards)
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Reject a construction that leads to absurdity
"In summary, in my judgment the effect of giving the deeming provision in s 24(7) the effect contended for by the taxpayer would 'lead to injustice and absurdity' and should be rejected. The deeming provisions in s 24 do not require one to assume that the actual settlor of the arrangement was not the settlor." (Marshall v. Kerr [1994] STC 638 a 649 and 654, Lord Browne-Wilkinson)
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Deeming statutory test to be met negates any need to consider that test
"[24] It is not difficult to ascertain the purpose of the deeming provision in section 471(3). The causation questions which can arise under section 471(1) may be difficult and may give rise to disagreement among judges as has occurred in this case. To avoid such difficult questions, subsection (3) creates a bright line rule: if a person’s employer (or a person connected to that person’s employer) provides the employee the right or opportunity to acquire a securities option, that right or opportunity is conclusively treated as having been made available by reason of the employment of that person (unless subsections (a) and (b) apply). This involves a straightforward examination of the agreement or transaction to ascertain who conferred the right or opportunity. The question is not concerned with the reason why the employer conferred the right or opportunity. In this case the correct question was: did Vermilion confer the 2007 option on Mr Noble’s nominee while Mr Noble was its employee? The answer is that it did. In my view, the Lord President was correct to state that the first question to be addressed is whether section 471(3) applies, precisely because it circumvents the potentially more difficult questions of causation to which section 471(1) may give rise. What Parliament has done in enacting section 471(3) is to make clear that if an employer makes available, in this case confers by contract, a securities option, that option is treated as being an employment-related securities option." (HMRC v. Vermilion Holdings Ltd [2023] UKSC 37, Lord Hodge)​
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Examples
- Treating an activity as a trade does not alter the meaning of trade
[31] So the question is whether section 15 gives a different meaning to the relevant terms. That is not how a deeming provision works generally, nor does section 15(2) in particular. Section 15(1) uses “employment” and “employment income” in exactly the same way as is prescribed by sections 4, 6 and 7 of ITEPA, and the phrase “performance of the duties of employment” in section 15(2) again uses “employment” in the same way. Section 15 is about the taxation of income arising from the performance of those duties of employment but, introduced by the word “instead”, provides that the income is to be taxed as if, contrary to the fact, it was profits of a trade.
[32] Section 15 also uses “trade” in its conventional sense and does not therefore alter the meaning of “enterprise” in article 7, it being common ground that enterprise is descriptive of a business, and that business includes trade. In short, nothing in section 15 purports to alter the settled meaning of the relevant terms of the Treaty, viewed from the perspective of UK tax law. Rather it takes the usual meaning of those terms as its starting point, and erects a fiction which, applying those terms in their usual meaning, leads to a different way of recovering income tax from qualifying divers." (Fowler v. HMRC [2020] UKSC 22, Lord Briggs)
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- Deeming a sale at open market value does not deem successor to own something it did not own
"[40] The true position, I think, is that the successor is no more to be taken to have obtained ownership than the predecessor is to be assumed to have had it in the first place. The role of section 78(1) is to explain how property should be valued where it has passed from the predecessor to the successor without a sale. It is not to deem property to have passed or, more specifically, to deem the predecessor to have had ownership or the successor to have achieved it. The provision does not state that property is to be deemed to belong to the successor, and no such inference can be drawn from property's being treated "as if … it had been sold". Section 78(1) has a valuation function. It says nothing about whether section 24(1)(b) is satisfied." (Inmarsat Global Limited v. HMRC [2022] EWCA Civ 1076, Newey LJ)
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- Deeming provision can result in debt owed to oneself
"[46] Here, the statutory fiction of s49(1), interpreted in line with St Barbe Green, is that trust property, subject to trust liabilities, is beneficially held by the trust beneficiary, here, Mrs Pride. The purpose of the statutory fiction is plainly to bring the trust assets and liabilities into (in this case) Mrs Pride’s estate for inheritance tax purposes. The persons between whom the statutory fiction is to be resorted to, are plainly Mrs Pride (personally) and the trust in which she had a beneficial interest, namely the property trust. Thus, when another part of the Act - in this instance, s103 - asks whether Mrs Pride “incurred” the debt comprised in the trust liability in question, it seems to us it is an inevitable consequence of Mrs Pride’s deemed ‘holding’ of the liability, that she did ‘incur’ the debt; and that this is not an unjust, absurd or anomalous result. We acknowledge the slight oddity of Mrs Pride being deemed to have incurred the debt represented by the loan notes when, at the time the debt was created (back in 2002), Mrs Pride was herself the creditor; however, this is not in our view an unjust, absurd or anomalous result (in terms of its substantive effect on inheritance tax) - it just means that, had Mrs Pride not transferred the loan notes to the children’s trust, Mrs Pride’s estate would have had equal and offsetting assets and liabilities represented by the loan notes (subject, as provided for in s5(3), to any provision in the Act to the effect that the liability side of the loan notes was not to be taken into account)." (Pride v. HMRC [2023] UKFTT 316 (TC), Judge Citron)
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- Trust IIP holder deemed to have incurred the trust debts themself
"[228] As regards the second part of his first proposition, we think that, contrary to his submission, there is a necessary implication in the language of Section 49 that the debts of the settlement should be treated as having been incurred by the person owning the interest in possession, for the reason which follows. The starting point in the analysis is the judgment of Mann J in St Barbe Green. It is clear from that judgment that Mann J saw Section 49 as bringing within the estate of the deceased the whole of the settled property in which the deceased had an interest in possession but as requiring the settlement liabilities to be deducted in valuing that settled property. In other words, Mann J was not saying that the effect of the section was that the deceased did not have an interest in possession in the portion of the gross settlement assets which did not exceed the liabilities of the settlement. (Were that to be the case, then the answer in relation to the Section 102 Property issue, the Section 102A issue and the Election issue as set out above would be very different.) Instead, Mann J was saying that the effect of the section was to confer on the holder of an interest in possession deemed beneficial ownership of the gross settlement assets but to take into account in valuing those assets the liabilities of the settlement. Since that is the effect of Section 49, who else apart from the holder of the interest in possession - which is to say the deemed beneficial owner of the gross settled assets - should be treated as having incurred the liabilities which are to be taken into account in reducing the value of the gross settled assets? Those assets are deemed to be beneficially owned by the holder of the interest in possession but to have a reduced value to that holder by reference to the liabilities in question. We think that a necessary implication arising from that process is that the liabilities have been incurred by the holder of the interest in possession." (Executors of Elborne v. HMRC [2023] UKFTT 626 (TC), Judge Beare)
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