Blumenthal v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 August 2012 |
| Neutral Citation | [2012] UKFTT 497 (TC) |
| Date | 08 August 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 497 (TC)
Judge Guy Brannan, Anne Redston
Patrick Way and Michael Jones, Counsel, instructed by Deloitte LLP, appeared for the Appellant
Tim Eicke QC and Imran Afzal, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Capital gains tax - tax avoidance scheme - whether appellant's loan notes were converted to qualifying corporate bonds for the purposes of TCGA 1992, Taxation of Chargeable Gains Act 1992 section 116 section 117ss. 116 and 117 - whether steps taken to reduce the market value of loan notes effective for capital gains tax purposes - purposive construction and the application of the Ramsay principle - error in drafting amendments to loan notes - principles of contractual interpretation - whether HMRC entitled to raise a discovery assessment under TMA 1970, Taxes Management Act 1970 section 29s. 29 - whether the officer could reasonably be expected to be aware of the insufficiency - appeal dismissed
The First-tier Tribunal decided that an allowable loss for capital gains tax purposes had not accrued to a taxpayer in respect of the redemption of his loan notes within the relevant tax period. It held that the effect of the deed of variation signed by the taxpayer and the issuer of loan notes was, on the occurrence of the relevant event, to delete the foreign currency redemption option and to substitute an exchange rate calculated on redemption. From that time, the loan notes of the relevant noteholders did not contain a provision for redemption in a currency other than Sterling at a rate of exchange calculated at redemption for the purposes of Taxation of Chargeable Gains Act 1992 ("TCGA 1992"), Taxation of Chargeable Gains Act 1992 section 117 subsec-or-para 1s. 117(1)(b). The Tribunal found that the foreign currency conversion option would not continue to exist in this new class of loan notes after the deed of variation had been implemented. Thus, it did not accept that the loan notes continued to be non-qualifying corporate bonds ("NQCBs") and that the deeds of variation were ineffective to convert them into qualifying corporate bonds (QCBs). The Tribunal also decided that the condition in the Taxes Management Act 1970 ("TMA 1970"), Taxes Management Act 1970 section 29 subsec-or-para 5s. 29(5) had been met; hence, HMRC was entitled to raise a discovery assessment under TMA 1970, Taxes Management Act 1970 section 29 subsec-or-para 1s. 29(1). The taxpayer's white space disclosure in his relevant tax return was insufficient to prevent HMRC's discovery assessment. HMRC's Statement of Practice insisted on sufficient disclosure necessary to disclose an insufficiency, but warned the taxpayers not to bury relevant information in a mass of disclosures.
The taxpayer appealed against HMRC's discovery assessment made under TMA 1970, Taxes Management Act 1970 section 29s. 29 in respect of his self-assessment tax return for the tax year 2003-04.
The taxpayer sold a holding of shares in a company in exchange for shares in the two companies ("CL" and "EL"). He acquired 2,748 shares in EL in the 1998-99 tax year. Later, a mobile phone network operator ("O2") acquired the share capital of EL in exchange for O2's two unsecured series A and B loan stocks ("A loan notes" and "B loan notes", collectively "the loan notes"). This gave the taxpayer £265,960 par value of A loan notes, £62,900 B loan notes, and £7,500 cash. Those loan notes contained an option which allowed O2 to redeem them in US dollars at an exchange rate applying three days before redemption. Those were NQCBs.
In November 2003, a tax planning scheme was devised and offered to the loan noteholders which envisaged the redemption of the loan notes in a tax efficient manner. Thus, the taxpayer and O2 entered into two deeds of variation on 13 February 2004, each relating to the taxpayer's A and B loan notes. Those deeds of variation had provided for a clause to be inserted into the loan notes which would vary the terms of the option to redeem in US dollars if a relevant event occurred. If during the first relevant period (16 February 2004 to 17 March 2004) the relevant event occurred, i.e. the Sterling-US dollar exchange rate moved by one and a half per cent or more, then any redemption in US dollars would have to be at the exchange rate applicable at the time of redemption. The deeds of variation also inserted a clause into the O2 loan notes which was designed to depress their market value for a limited period and to accommodate a requirement of O2. The clause was only applicable during the second relevant period (16 February 2004 to 21 March 2004). The first part of the clause of the B loan notes, Condition 9 applied if, at any time in the second relevant period (16 February 2004 to 21 March 2004), a noteholder was not a relevant noteholder and O2 gave notice that it should apply. The second part of the clause applied if, at any time in the second relevant period, a noteholder was a relevant noteholder. This also allowed O2 to redeem the loan notes at three per cent of par value, but only if more than three of the relevant persons died during the second relevant period.
On 15 February 2004, the taxpayer entered into two deeds of covenant with a charity. The covenants provided that if the taxpayer was to acquire loan notes for less than par, he would pay double the difference to the charity. The purpose of the charitable covenants was to remove the taxpayer from the potential field of purchasers of the loan notes when assessing their market value on conversion from NQCBs to QCBs. The covenants remained in force until the final redemption of all loan notes by O2.
On 27 February 2004, the relevant event occurred when the foreign currency option was amended, thereby turning the loan notes from NQCBs into QCBs at a time when their market value was depressed. On 25 March 2004, the taxpayer redeemed his two respective loan notes which totalled £328, 860. In his 2003-04 tax return, he claimed an allowable loss for capital gains tax ("CGT") purposes, which was provided in a space in the CGT section of the tax return.
On 13 January 2006, HMRC enquired into the taxpayer's 2003-04 tax return in respect of an issue relating to a claim to relief for gifts of shares in various companies to charity. They then reduced the value of the gifts to charity by 12 per cent and closed the enquiry and amended the taxpayer's tax return on 14 July 2006. On 15 December 2009, they raised a discovery assessment pursuant to TMA 1970, Taxes Management Act 1970 section 29s. 29 in the estimated amount of £176,515.82 for the tax year 2003-04. This was on the basis that the taxpayer had not realised an allowable loss on the redemption of his loan notes and that there was an insufficiency in his self-assessment return. The taxpayer appealed against the assessment and sought postponement of the tax due, but HMRC upheld their view that the allowable cost did not accrue to him.
In respect of the substantive issue, HMRC contended that the taxpayer's loan notes continued to be NQCBs after the relevant event occurred. The terms of the loan notes continued to include a provision for redemption in a currency other than Sterling. They also continued to be governed by the original loan note agreement, but subject to the variations made by the deeds of variation. The deeds of variation did not excise the original option from the loan notes, but simply inserted additional clauses into them. Even after the relevant event occurred, it was necessary to read the original and new clauses together to determine the way in which the US dollar redemption option operated.
HMRC submitted that the Ramsay principle (WT Ramsay Ltd v IR CommrsTAX(1981) 54 TC 101 at 187 ("Ramsay")) had the effect that the deeds of variation failed to convert the loan notes from NQCBs to QCBs. The deeds of variation were entered into solely in an attempt to create an artificial loss, and an artificial contingency was used in a misconceived attempt to prevent the Ramsay principle applying. Viewed as a composite whole, those transactions did not fall within the purpose of the statutory provisions. HMRC also argued that by analogy, there was no possibility of loss to the taxpayer. If the relevant event occurred, then the scheme would proceed, and if it did not occur, the alleged conversion would not take place. However, in either event, there would be no economic loss to the taxpayer (save for costs). HMRC submitted that the contingency (i.e. the occurrence of the relevant event) was commercially irrelevant and should be ignored.
The taxpayer argued that the Ramsay principle had no application to the facts of the present appeal. He raised that the three issues to be identified were whether the loan notes were originally NQCBs, whether there was a conversion, and whether pursuant to that conversion the loan notes became QCBs. Whilst he accepted that a question of valuation arose by reference to the time when the conversion took place, the three issues were legal matters not susceptible to Ramsay and, accordingly, demonstrated the limits of Ramsay.
The taxpayer contended that the total amount of £328,860 he redeemed was the effect of the deeds of variation taken together with the deeds of covenant. However, HMRC argued that the effect of the Ramsay principle was that the value of the loan notes for the purposes of the TCGA 1992, Taxation of Chargeable Gains Act 1992 section 116 subsec-or-para 10 section 272ss. 116(10) and 272 was not three per cent of their par value. The purpose of TCGA 1992, Taxation of Chargeable Gains Act 1992 section 116 subsec-or-para 10s. 116(10) was that any unrealised gain or loss genuinely existing at the date of conversion should be frozen. The purpose of TCGA 1992, Taxation of Chargeable Gains Act 1992 section 272s. 272 was to establish the genuine market value of assets, not artificially modified values which...
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