Cadbury Schweppes Plc and Another v Williams (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Sir Peter Gibson,B,A,The Chancellor,OR |
| Judgment Date | 24 May 2006 |
| Neutral Citation | [2006] EWCA Civ 657 |
| Court | Court of Appeal (Civil Division) |
| Date | 24 May 2006 |
| Docket Number | Case No: C3/2005/1706 |
[2006] EWCA Civ 657
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR JUSTICE ETHERTON
Royal Courts of Justice
Strand, London, WC2A 2LL
The Chancellor of The High Court
Lord Justice Tuckey and
Sir Peter Gibson
Case No: C3/2005/1706
CH/2004/APP/0872
Mr Julian Ghosh and Mr Joseph Goldsmith (instructed by Cadbury Schweppes Legal Department) for the Appellant
Miss Ingrid Simler (instructed by Solicitor to Her Majesty's Revenue and Customs) for the Respondent
Introduction
This appeal raises the question whether a scheme, designed to procure that certain receipts from the sale of securities with accrued interest will be taxable as capital rather than income, succeeds to that end. The respondent Inspector of Taxes says that the scheme is caught by the provisions of s.717 of the Income and Corporation Taxes Act 1988 ("the Taxes Act") . The applicability of that section to this case turns on whether the securities carried interest at a variable rate, as the Inspector claims, or whether they carried interest at a fixed rate which was the same throughout the period from issue to redemption, as the taxpayers say.
The appellant taxpayers are Cadbury Schweppes plc ("CS") and its subsidiary, Cadbury Schweppes Overseas Ltd ("CSOL") . CS appealed against a notice of determination issued under s.41A Taxes Management Act 1970 by the Inspector on 13 th July 2001 and relating to its accounting period ended 31 st December 1995. CSOL appealed against an assessment dated 21 November 2005 to corporation tax for the same period.
The appeals were heard by the Special Commissioners (Dr Nuala Brice and Mr Malcolm Palmer) . They dismissed the appeals on 9 November 2004. The appellants appealed to the High Court. Etherton J on 21 July 2005 dismissed the appeal. The appellants applied to this court for permission to bring a second appeal. Carnwath LJ on the papers granted such permission.
Statutory Provisions
Before I set out the relevant facts it is convenient to refer to the material statutory provisions.
Ss. 710–728 of Chapter II of Part XVII of the Taxes Act relate to what is known as the accrued income scheme.
Ss. 710–712 contain definitions of which the following are relevant:
"710 Meaning of "securities", "transfer" etc for purposes of sections 711–728…
(2) "Securities" ….. includes any loan stock or similar security –
(a) whether of the government of the United Kingdom, any
other government, any public or local authority in the United
Kingdom or elsewhere, or any company or other body; and
(b) whether or not secured, whether or not carrying a right to interest of a fixed amount or at a fixed rate per cent. of the nominal value of the securities, and whether or not in bearer form.
…….
(5) "Transfer", in relation to securities, means transfer by way of sale, exchange, gift or otherwise…..
Meaning of "interest", "transfers with or without accrued interest" etc
…..
(2) An interest payment day, in relation to securities, is a day on which interest on them is payable …..
(3) Subject to subsection (4) below, the following are interest periods in relation to securities –
(a) the period beginning with the day following that on which they
are issued and ending with the first interest payment day to fall;
(b) the period beginning with the day following one interest
payment day and ending with the next to fall."
[Subs (4) governs periods exceeding 12 months.]
"(5) Securities are transferred with accrued interest if they are transferred with the right to receive interest payable on –
(a) the settlement day, if that is an interest payment day; or
(b) the next (or first) interest payment day to fall after the settlement
day, in any other case;
…..
(7) The interest applicable to securities for an interest period is ….. the
interest payable on them on the interest payment day with which the
period ends.
…..
Meaning of "settlement day" for the purposes of sections 711 to 728
…..
(3) Where the consideration for the transfer is money alone, and the transferee agrees to pay for the whole of it on or before the next (or first) interest payment day to fall after the agreement for transfer is made, the settlement day is the day on which he agrees to make the payment….. "
7. Ss. 713 and 714 contain the operative provisions of the accrued interest scheme, the material provisions of which are the following:
"713 Deemed sums and relief
(1) Subject to sections 714 to 728 ….. in this section references to a period are references to the interest period in which the settlement day falls.
(2) If securities are transferred with accrued interest –
(a) the transferor shall be treated as entitled to a sum on them in the period of an amount equal to the accrued amount; and
(b) the transferee shall be treated as entitled to relief on them in the
period of the same amount.
(4) In subsection (2) above "the accrued amount" means –
…..
(b) an amount equal to the accrued proportion of the interest
applicable to the securities for the period.
(6) In this section –
(a) the accrued proportion is –
Bwhere –
A is the number of days in the period up to (and including) the
settlement day, and
B is the number of days in the period."
Treatment of deemed sums and reliefs
(1) Subsection (2) below applies if a person is treated as entitled under
section 713 to a sum on securities of a particular kind in an interest period,
and either –
(a) he is not treated as entitled under that section to relief on
securities of that kind in the period; or
(b) the sum (or total sum) to which he is treated as entitled exceeds
the amount (or total amount) of relief to which he is treated as
entitled under that section on securities of that kind in the period.
(3) The person shall be treated as receiving on the day the period ends
annual profits or gains whose amount is (depending on whether
subsection (1) (a) or (1) (b) above applies) equal to the sum (or total sum)
to which he is treated as entitled or equal to the amount of the excess; and
the profits or gains shall be chargeable to tax under Case VI of Schedule
D for the chargeable period in which they are treated as received."
S. 717 contains the provisions on the true construction of which the primary issue on this appeal turns. The material provisions are the following:
"717 Variable interest rate
(1) This section applies to securities falling within subsection ( 2) or (4) below.
(2) Securities fall within this subsection if their terms of issue provide that throughout the period from issue to redemption (whenever redemption might occur) they are to carry interest at a rate which falls into one, and only one, of the following categories –
(a) a fixed rate which is the same throughout the period;
(b) a rate which bears to a standard published base rate the same
fixed relationship throughout the period;
(c) a rate which bears to a published index of prices the same fixed
relationship throughout the period.
…..
(4) Securities fall within this subsection if they are deep discount
securities and the rate of interest for each (or their only) interest period is
equal to or less than the yield to maturity.
(5) In subsection (4) above "deep discount securities" and "yield to
maturity" have the same meanings as in Schedule 4; and for the purposes
of that subsection the rate of interest for an interest period is, in relation to
securities, the rate of return (expressed as a percentage) attributable to the
interest applicable to them for the interest period.
(6) Subsections (7) to (11) below apply if securities to which this section applies are transferred at any time between the time they are issued and the time they are redeemed.
(7) If the securities are transferred without accrued interest they shall be treated for the purposes of sections 710 to 728 as transferred with accrued interest.
(8) The person entitled to the securities immediately before they are redeemed shall be treated for the purposes of those sections as transferring them with accrued interest on the day they are redeemed.
(9) Where there is a transfer as mentioned in subsection (6) above or by virtue of subsection (8) above, section 713 shall have effect with the omission of subsection (2) (b) and with the substitution for subsections (3) to (6) of the following subsection -
"(3) In subsection (2) above "the accrued amount" means such amount (if any) as an inspector decides is just and reasonable; and the jurisdiction of ….. the Special Commissioners on any appeal shall include jurisdiction to review such decision of the inspector."
It may be helpful to give a brief overview of Chapter II so far as relevant. In the absence of express provisions to the contrary, interest is taxable not as it accrues but on its receipt (see, for example, Parkside Leasing Ltd v Smith [1985] STC 63) . In the absence of the accrued income scheme the transfer of securities with accrued interest by a non-trader would not cause any part of the consideration for the transfer to be treated as income. By ss.713 and 714 such a transfer will cause part of the consideration to be treated as income chargeable to tax under Case VI in the transferor's hands, and, to avoid double taxation on the same part when the transferee receives payment of the accrued interest, the transferee is treated under s.713(2) (b) as entitled to relief on the securities of the same amount. The part of the consideration which is treated as income is not expressed to be the amount of interest which has accrued and is...
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