DMWSHNZ Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 03 March 2014 |
| Neutral Citation | [2014] UKUT 98 (TCC) |
| Date | 03 March 2014 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2014] UKUT 0098 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Hon Mrs Justice Rose.
Mr Graham Aaronson QC and Ms Zizhen Yang instructed by Ernst & Young LLP appeared for the Appellant
Mr Michael Gibbon QC instructed by the General Counsel and Solicitor for HM Revenue & Customs appeared for the Respondents
Corporation tax - Disposal of qualifying corporate bonds - Disposal of debts - Taxation of Chargeable Gains Act 1992 ("TCGA 1992"), Taxation of Chargeable Gains Act 1992 section 116 subsec-or-para 10s. 116(10) - Held-over capital gain brought into charge - Joint election under TCGA 1992, Taxation of Chargeable Gains Act 1992 section 171As. 171A - Whether disposal by repayment of the debt underlying the bonds is a disposal "to" a person outside the corporate group - Whether the bonds exist after the repayment of the debt and are disposed of "to" the debtor - Reliance on extra-statutory material for construction of relevant provisions.
The taxpayer's appeal against the decision of the First-tier Tribunal was dismissed. The repayment by the debtor of (QCB) Loan Notes held by the taxpayer (so crystallising previously held-over chargeable gains) did not constitute a disposal of those Loan Notes by the taxpayer "to" the debtor, within the provisions of the Taxation of Chargeable Gains Act 1992, Taxation of Chargeable Gains Act 1992 section 171As. 171A (as they then stood in 2003). Accordingly, the disposal could not be the subject of a joint election under the said Taxation of Chargeable Gains Act 1992 section 171As. 171A.
The taxpayer (D) was a member of a large UK bank group. In September 1998, D sold shares in a New Zealand subsidiary to a third party, the consideration for which comprised 10-year floating-rate Loan Notes issued by the purchaser. The Loan Notes were qualifying corporate bonds (QCBs) for the purposes of corporation tax on chargeable gains. D's "held-over" gain, in respect of the sale of the shares was some £204m.
In 2003, the parent bank was owed some £42m by an investment trust (G). The bank (together with another bank) became joint administrative receivers of G, following which capital losses realised by G would be allowable for the purposes of corporation tax on chargeable gains. As part of a restructuring of G, capital losses of some £92m were realised by another company, GR3; and GR3 and D were brought within the same corporate group (D ceasing to be member of the bank's group in October 2003). In November 2003, D demanded in accordance with the terms of the Loan Notes, and received, repayment of some 43 per cent of the Loan Notes, thereby bringing into charge some £88m of held-over gains.
In December 2003, D and GR3 purported to make a joint election under TCGA, Taxation of Chargeable Gains Act 1992 section 171As.171A, intended to deem the disposal of the Loan Notes as having been made by GR3 and enable GR3 to set its capital losses against the held-over gains brought into charge.
TCGA 1992, Taxation of Chargeable Gains Act 1992 section 171As. 171A (Notional disposals within a group), as it then was, stated (inter alia) as follows:
(1)This section applies where:
(a) two companies (A and B) are members of a group of companies; and
(b) A disposes of an asset to a person who is not a member of the group (C).
The questions before the Upper Tribunal, on appeal by D against the decision of the First-tier Tribunal, were:
(2) When the Loan Notes were repaid by the debtor (being C, for purposes of Taxation of Chargeable Gains Act 1992 section 171As. 171A) to D, was there a disposal of an asset by D "to" C?
(3) If there was no such disposal to C, does that preclude the application of Taxation of Chargeable Gains Act 1992 section 171As. 171A to this transaction?
The judge approached these questions by proceeding through the following three steps:
(2) The disposal of a debt on its being satisfied by the debtor was not a transfer of the debt to the debtor within Taxation of Chargeable Gains Act 1992 section 171As. 171A. It was true that in the related provision of Taxation of Chargeable Gains Act 1992 section 171s. 171 (Transfers within a group: general provisions), Taxation of Chargeable Gains Act 1992 section 171 subsec-or-para 2s. 171(2)(a) stated that for the purposes of Taxation of Chargeable Gains Act 1992 section 171s. 171 the satisfaction of a debt owed by company B to company A was not to be treated as a disposal of that debt by A to B, and that no such corresponding statement was included in Taxation of Chargeable Gains Act 1992 section 171As. 171A. D's argument was therefore that satisfaction of a debt was intended to be covered by Taxation of Chargeable Gains Act 1992 section 171As. 171A. The judge did not accept that argument; and on the contrary, would have expected the draftsman to make clear that disposals of debts by their satisfaction were intended to be included in Taxation of Chargeable Gains Act 1992 section 171A subsec-or-para 1s. 171A(1)(b), if that were the case.
(3) However, the right question to ask was not whether the debt had been disposed of "to" the debtor, but whether the Loan Notes were disposed of "to" the debtor. The judge did not agree with the First-tier Tribunal's conclusion that it is the debt that is the asset for CGT purposes, the relevant statutory provisions focus on the Loan Notes and not the debt. But even then, the Loan Notes cannot outlive the existence of the debt which they represent, not for a moment, and any residual rights of the creditor that might exist following repayment (eg in relation to any prior default) are certainly not transferred to the debtor.
(4) The judge therefore rejected D's submission (by reference inter alia to the "Cancellation" provision in the Loan Note instrument that "all Notes repaid, redeemed or purchased by the Issuer shall be cancelled forthwith thereafter …") that there was a period in time - if only a moment - between the debt being repaid and the Loan Notes being "cancelled" when the Loan Notes continued in existence and were transferred by D to the debtor.
(5) Accordingly, there was nothing transferred by D to the debtor when the Loan Notes were repaid and hence no disposal of either the debt or the Loan Notes "to" the debtor for the purposes of Taxation of Chargeable Gains Act 1992 section 171As. 171A.
(6) The judge lastly dealt with a further submission by D, that the First-Tier Tribunal's construction of Taxation of Chargeable Gains Act 1992 section 171As. 171A was a "hyper-literal" one and not a purposive one; and failed to take account of extra-statutory materials relevant to a proper construction of that provision - including an extract from Hansard, the Budget Notes and Explanatory Notes to the Finance Bill 2000 (which introduced Taxation of Chargeable Gains Act 1992 section 171As. 171A); or the new wording in Taxation of Chargeable Gains Act 1992 section 171As. 171A introduced by Finance Act 2009, which referred to the transfer of gains and losses between group members rather than to the disposal of assets to a person outside the group.
(7) Here, the judge said that the materials did not show that Parliament intended to enable corporate groups to match chargeable gains and losses without having to transfer asset ownership within the group, in respect of all disposals by group companies. The words in Taxation of Chargeable Gains Act 1992 section 171As. 171A were clear in requiring that there be a disposal to a person outside the group. And the recasting of Taxation of Chargeable Gains Act 1992 section 171As. 171A by Finance Act 2009 was substantial, not a few minor amendments to the wording - it was not possible to construe the former version of Taxation of Chargeable Gains Act 1992 section 171As. 171A as covering the same ground as now covered by the post-2009 version. D's submission that a purposive construction of Taxation of Chargeable Gains Act 1992 section 171As. 171A entitles or requires one to ignore the reference in Taxation of Chargeable Gains Act 1992 section 171A subsec-or-para 1s. 171A(1)(b), to disposals "to a person", was accordingly rejected.
(8) D's appeal therefore fell to be dismissed.
One might indeed wonder what, precisely, was in the draftsman's mind with the choice of language - "disposes of an asset to a person" - in the original version of Taxation of Chargeable Gains Act 1992 section 171As. 171A. This seems to have led on to some grappling, by both First-tier and Upper Tribunals, rightly or wrongly, as to what the "asset" in question actually was.
It would seem too that in this case a certain degree of "engineering" went into the prior restructuring arrangements in order to seek to put D and GR3 in a position to match their respective gains and losses, so perhaps little to encourage the judge to apply the legislation other than strictly.
The appeal of the Appellants IS DISMISSED
[1]This is an appeal against the decision of the First-tier Tribunal (Tax) dated 21 December 2012 (Judge Jonathan Cannan and Mrs Caroline de Albuquerque). It arises from HMRC's decision to reject a purported joint election made under Taxation of Chargeable Gains Act 1992 section 171Asection 171A of the Taxation of Chargeable Gains Act 1992 ("TCGA"). The effect of the election would have been to enable a sister company of the Appellant to set off a loss of about £92 million incurred by that sister company against a capital gain of about £88.7 million made by the Appellant. That would have reduced the group's corporation tax liability on the chargeable gains and losses to zero. If HMRC's rejection of the joint election is upheld, the Appellant will have to pay corporation tax on its capital gain of about £29 million.
[2]The facts are not in dispute and were clearly and comprehensively set out in the First-tier Tribunal's decision.
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