Cadbury Schweppes Plc and Another v Williams (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE ETHERTON,Mr Justice Etherton |
| Judgment Date | 21 July 2005 |
| Neutral Citation | [2005] EWHC 1610 (Ch) |
| Docket Number | Case No: CH/2004/APP/0872 |
| Court | Chancery Division |
| Date | 21 July 2005 |
[2005] EWHC 1610 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Etherton
Case No: CH/2004/APP/0872
Mr Julian Ghosh (instructed by Cadbury Schweppes Plc) for the Claimants
Ms Ingrid Simler (instructed by HM Revenue & Customs) for the Defendants
Hearing dates: 14,15 June 2005
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This is an appeal by Cadbury Schweppes Plc ("CS plc") and Cadbury Schweppes Overseas Limited ("CSOL") (together "the Appellants") against a decision ("the Decision") of the Special Commissioners (Dr A. N. Brice and Mr Malcolm J. F. Palmer) ("the Commissioners") on 5 November 2004 dismissing an appeal against a notice of determination under the Taxes Management Act 1970 s.41A in relation to CS plc and a notice of assessment to corporation tax dated 21 November 2001 in respect of CSOL for the year ending 31 December 1995.
CS plc and CSOL appealed the notice of determination and the notice of assessment respectively on the ground that the Inland Revenue was incorrect in the extent to which it regarded the receipts from transfers of six loan notes issued on 15 September 1994 by Cadbury Schweppes Finance Limited ("the Notes") as income rather than capital.
The appeal turns on the proper meaning and effect of the tax avoidance provisions in Chapter II of Part XVII of the Income and Corporation Taxes Act 1988 ("TA 1988"), and, in particular, TA 1988 s.717.
The relevant facts
The Commissioners, in a clear and careful decision, set out the relevant facts, which were not in dispute, as follows.
"11. Prior to the transactions the subject of the appeal the Appellants received a prospectus from a merchant bank about what was called an "accrued income scheme". The prospectus stated that the merchant bank had developed a proprietary inter-company loan instrument which had an unusual payment profile. If the First Appellant were to invest £100M in a bond, and then to dispose of it after eleven months, it would realise a capital gain of £5.5M which the First Appellant could shelter by using capital losses within the group. The new structure involved the issue of a bond with an uneven payment profile. The optimum after-tax return would be derived if the bond were sold just before the first interest payment date. The scheme was stated to be designed to defeat the provisions of sections 713 and 714 of the 1988 Act under which, where a security is purchased with accrued interest, and money is paid for that interest, that money is deemed to be income and not capital. The Appellants adopted the principles of the scheme.
12. Accordingly, on 15 September 1994, in consideration of an advance from the First Appellant to an associated company called Cadbury Schweppes Finance Limited (Finance), Finance issued six loan notes to the First Appellant. The nominal value of each note was £25M and each note was redeemable on 15 December 1995. Paragraph 2 of the loan notes provided, in so far as relevant:
"2 Interest
(A) The principal amount of the Note shall carry interest at the fixed rate of 7. 43375 per cent. per annum for the period from (and including) the Issue Date … to (but excluding) the Maturity Date or the date on which it is earlier redeemed in accordance with the terms of paragraph 4 (the "Early Redemption Date") which shall be calculated on the basis of actual days elapsed (but without any compounding) and a year of 365 days and shall be paid as described in paragraph 2(B).
(B) The interest on this Note (calculated in accordance with paragraph 2(A)) shall be paid as follows:
Payment Date
Amount of interest to be paid
(I) On 15 June 1995 …
£152,748.29
(II) On 15 September 1995 …
£1,705,689.21
(iii) On the Maturity Date
£463,336.47
or
On the Early Redemption Date: An amount equal to interest for the period from (and including) the Issue Date to (but excluding) the Early Redemption Date less, if the early Redemption Date falls after the First Interest Payment Date, an amount equal to the interest payable on the First Interest Payment Date and, if the Early Redemption Date falls after the Second Interest Payment Date, an amount equal to the interest payable on the Second Interest Payment Date."
Thus each note provided that interest was payable by irregular amounts on three specified dates. These dates, together with the months which elapsed from the issue date, the amount of payment due, and the equivalent months of interest which the amount of each payment represented, were:
| Date interest payable | Months after issue | Amount of interest | Months of interest |
| 15 June 1995 | nine | £152,748.29 | one |
| 15 September 1995 | twelve | £1,705,689.21 | eleven |
| 15 December 1995 | fifteen | £463,336.47 | three |
Thus it will be seen that no interest at all was payable for nine months after which approximately one month's interest became payable. No further interest was payable until the anniversary of the loan notes (15 September 1995) when approximately all the outstanding interest was payable. When the loan notes were redeemed on 15 December 1995 the remaining three months' interest was payable.
On 30 May 1995 (that is, before the first interest date) the First Appellant assigned the loan notes to the Second Appellant for £157,913,679. On 31 May 1995 the Second Appellant assigned the loan notes to Lloyds Bank for £158,138,679
On 9 July 1998 the Inspector of Taxes wrote to the Appellants saying that it was his view that the loan notes were variable rate securities within section 717 of the 1998 Act. The consequence of the loan notes falling within section 717 was that the accrued amount of interest on the transfer was such amount as the Inspector decided was just and reasonable. The Inspector considered that the just and reasonable amounts to be included as Case VI income for the year ending on 31 December 1995 were:
The First Appellant
257
365 x £11,150,625 = £7,851,261
The Second Appellant
1
365 x £11,150,625 = £30,549.
17. The just and reasonable amounts calculated by the Inspector, of £7,851,261 for the First Appellant and £30,549 for the Second Appellant, made a total of £7,811,810. These sums represented the amount that accrued on a straight line basis on the loan notes in the hands of the respective holders prior to the respective settlement dates."
The Appellants contend that, if the relevant provisions of TA 1988 ss 713 and 717 are properly applied, instead of those figures £862,776.00 will be taxable under Schedule D, Case VI, as income of CS plc, and £3,357.00 as Schedule D, Case VI, income of CSOL, and the balance of the consideration proceeds received by CSOL will be subject to the regime for corporation tax on chargeable gains within the Taxation of Chargeable Gains Act 1992.
The relevant legislation
The relevant legislation falls within TA 1988 Part XVII, which contains provisions dealing with tax avoidance. Sections 710–728 of Chapter II of Part XVII contains what is generally known as the accrued income scheme. The purpose of the legislative scheme is to ensure that, when a person sells a security on which interest has already accrued, a proportion of the purchase consideration fairly attributable to that accrued interest is taxed as income rather than as capital. The legislation, in short, is designed to prevent the conversion of interest income into a capital gain for tax purposes.
The relevant provisions of Chapter II of Part XVII of TA 1988, for the purposes of this appeal, are as follows:
" 710. Meaning of "securities", "transfer" etc. for purposes of sections 711 to 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.
…."
"711. 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; …
….
(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.
…"
"712. Meaning of "settlement day" for purposes of sections 712 to 728
…
(3) Where the consideration for the transfer is money alone, and the transferee agrees to pay the whole of it on or before the next (or first) interest payment day to fall after an agreement for transfer is made, the settlement day is the day on which he agrees to make the payment …
"713. Deemed sums and reliefs
(1) Subject to sections 714 to 728, this section applies whether the securities in question are transferred before, on or after 6 th April 1988 and in this section references to a period are references to the interest period in which the settlement day falls.
(2) If securities are transferred...
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Cadbury Schweppes Plc and Another v Williams (Inspector of Taxes)
...Taxes Act 1988 section 717 subsec-or-para 2s. 717(2)(a). This was an appeal by the taxpayers against a judgment of the High Court ([2005] BTC 436) upholding a decision of the special commissioners ((2004) Sp C 441) that certain loan notes did not carry interest at the same fixed rate throug......