Astall and Another v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Lord Justice Keene,Lord Justice Sullivan |
| Judgment Date | 09 October 2009 |
| Neutral Citation | [2009] EWCA Civ 1010 |
| Docket Number | Case No: A3/2008/1720 |
| Court | Court of Appeal (Civil Division) |
| Date | 09 October 2009 |
[2009] EWCA Civ 1010
Mr Justice Peter Smith
Before: Lady Justice Arden
Lord Justice Keene
and
Lord Justice Sullivan
Case No: A3/2008/1720
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION)
Kevin Prosser QC (instructed by McGrigors LLP) for the Appellants
David Ewart QC & Michael Gibbon (instructed by Solicitor for HM Revenue & Customs) for the Respondents
Hearing dates: 13–14 May 2009
Lady Justice Arden:
This appeal concerns the meaning of “relevant discounted securities” (“RDS”) as defined by schedule 13 to the Finance Act 1996 (“the 1996 Act”). Schedule 13 has now been repealed and replaced by the Income Tax (Trading and Other Income) Act 2005, with which we have not been concerned. The issue in this appeal requires the court to determine whether two similar transactions created RDS as so defined.
By virtue of these transactions, the appellant taxpayers, Mr Astall and Mr Edwards, acquired securities that were redeemed pursuant to their terms of issue in a manner that caused them to incur substantial losses. They contend that the securities were RDS. If they are right in this, they can set the loss against other income because a loss incurred on a RDS is deductible for income tax purposes. The Special Commissioner (Dr John F Avery Jones CBE) held that these securities did not qualify as RDS. Peter Smith J dismissed an appeal against the decision of the Special Commissioner.
BACKGROUND AND FACTS AS FOUND BY THE SPECIAL COMMISSIONER
Each of the appellants was a party to a tax scheme designed to create an artificial loss to offset against taxable income. A comprehensive description of the scheme may be found in the decision of the Special Commissioner. For present purposes, it suffices to give the following outline of the background.
Mr Astall and Mr Edwards set up trusts to which they lent money in return for a security. Mr Edwards endowed his trust with the sum of £7,000 and subscribed the sum of £5,278,276 in consideration of the issue to him of £6,228,366 zero coupon loan note notes. Mr Astall endowed his trust with the sum of £2,700 and the trustees issued to him £2,489,851 zero coupon loan notes for £2,117,428. Under the terms of issue, there were two occasions when the securities could potentially be redeemed for a deep gain for the purposes of paragraph 3(3) of schedule 13 (set out in para. 11 of this judgment). Those occasions were (1) on notice given within two months of the date of issue for a premium of 100.1/118 of the principal amount of the notes (condition 3.2/3), amounting in Mr Edward's case to £5,278 and in Mr Astall's case to £2,638; and (2) on the final redemption date (condition 3.1). This was normally fifteen years after the date of issue. However, the terms of issue also provided that the holder could, subject to a further condition (“the market change condition”), transfer the security to a third party (condition 3.9). The third party either could redeem the security at approximately 5% of the issue price (or its then market value) or redeem the securities after 65 years (which then became the final redemption date).
After the securities were issued, a purchaser (the same purchaser in each case) was identified, namely SG Hambros Bank & Trust Ltd (“Hambros”). The market change condition occurred. Hambros agreed to purchase the security for just under 5 per cent of the nominal amount of the notes, leaving the appellants with a substantial loss, and proceeded to redeem the securities under condition 3.9. The market change condition had been added in an attempt to prevent the scheme from being considered to be a pre-ordained series of transactions. It stood a 15% chance of not being fulfilled. As a further step in this attempt, no steps were taken to identify a purchaser until after the securities were issued.
The position of Mr Astall differed from that of Mr Edwards in that (for reasons which it is unnecessary for me to explain) there was uncertainty about whether he would have sufficient income to make use of the loss and the Special Commissioner concluded that he could not say that there was no genuine uncertainty about whether he would exercise the right of early redemption.
OUTLINE OF THE STATUTORY PROVISIONS RELATING TO RDS
Paragraph 1 of schedule 13 to the 1996 Act provides that where a person makes a profit from the discount on a RDS, the profit is subject to income tax. It defines the circumstances in which a profit is treated as made from the discount. It provides:
“1—(1) Where a person realises the profit from the discount on a relevant discounted security, he shall be charged to income tax on that profit under Case III of Schedule D or, where the profit arises from a security out of the United Kingdom, under Case IV of that Schedule.
(2) For the purposes of this Schedule a person realises the profit from the discount on a relevant discounted security where—
(a) he transfers such a security or becomes entitled, as the person holding the security, to any payment on its redemption; and
(b) the amount payable on the transfer or redemption exceeds the amount paid by that person in respect of his acquisition of the security.
(3) For the purposes of this Schedule the profit shall be taken—
(a) to be equal to the amount of the excess reduced by the amount of any relevant costs; and
(b) to arise, for the purposes of income tax, in the year of assessment in which the transfer or redemption takes place.
(4) In this paragraph “relevant costs”, in relation to a security that is transferred or redeemed, are all the following costs—
(a) the costs incurred in connection with the acquisition of the security by the person making the transfer or, as the case may be, the person entitled to a payment on the redemption; and
(b) the costs incurred by that person, in connection with the transfer or redemption of the security;
and for the purposes of this Schedule costs falling within paragraph (a) above shall not be regarded as amounts paid in respect of the acquisition of a security.”
Paragraph 2 of schedule 13 to the 1996 Act authorises the utilisation of losses from the discount on RDS against other income, and defines when a loss is taken to be made:
“2—(1) Subject to the following provisions of this Schedule, where—
(a) a person sustains a loss in any year of assessment from the discount on a relevant discounted security, and
(b) makes a claim for the purposes of this paragraph before the end of twelve months from the 31st January next following that year of assessment,
that person shall be entitled to relief from income tax on an amount of the claimant's income for that year equal to the amount of the loss.
(2) For the purposes of this Schedule a person sustains a loss from the discount on a relevant discounted security where—
(a) he transfers such a security or becomes entitled, as the person holding the security, to any payment on its redemption; and
(b) the amount paid by that person in respect of his acquisition of the security exceeds the amount payable on the transfer or redemption.
(3) For the purposes of this Schedule the loss shall be taken—
(a) to be equal to the amount of the excess increased by the amount of any relevant costs; and
(b) to be sustained for the purposes of this Schedule in the year of assessment in which the transfer or redemption takes place.
(4) Sub-paragraph (4) of paragraph 1 above applies for the purposes of this paragraph as it applies for the purposes of that paragraph.”
Paragraph 3 of schedule 13 to the 1996 Act deals with the meaning of RDS. Under paragraph 3, the defining features of RDS are their terms for redemption. Those terms must satisfy the requirements of paragraph 3(1) of schedule 13, which, in the form in which it was in force at the relevant date, provided as follows:
“3—(1) Subject to the following provisions of this paragraph and paragraph 14(1) below, in this Schedule “relevant discounted security” means any security which (whenever issued) is such that, taking the security as at the time of its issue, the amount payable on redemption—
(a) on maturity, or
(b) in the case of a security of which there may be a redemption before maturity, on at least one of the occasions on which it may be redeemed,
is or would be an amount involving a deep gain, or might be an amount which would involve a deep gain.”
Sub-paragraphs (1A) to (1D) of paragraph 3 then restrict the occasions that qualify under paragraph 3(1):
“(1A) The occasions that are to be taken into account for the purpose of determining whether a security is a relevant discounted security by virtue of sub-paragraph (1)(b) above shall not include any of the following occasions on which it may be redeemed, that is to say—
(a) any occasion not falling within sub-paragraph (1C) below on which there may be a redemption otherwise than at the option of the person who holds the security;
(b) in a case where a redemption may occur as a result of the exercise of an option that is exercisable—
(i) only on the occurrence of an event adversely affecting the holder, or
(ii) only on the occurrence of a default by any person,
any occasion on which that option is unlikely (judged as at the time of the security's issue) to be exercisable;
but nothing in this sub-paragraph shall require an occasion on which a security may be redeemed to be disregarded by reason only that it is or may be an occasion that coincides with an occasion...
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