Dmwshnz Ltd v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 21 December 2012 |
| Neutral Citation | [2013] UKFTT 37 (TC) |
| Date | 21 December 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 037 (TC)
Judge Jonathan Cannan, Mrs Caroline de Albuquerque
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
Capital gains tax - TCGA 1992, Taxation of Chargeable Gains Act 1992 section 171As. 171A - notional transfer within a group - disposal of debt on repayment of loan notes - statutory construction - whether disposal to a person who was not a member of the group - no - appeal dismissed
The First-tier Tribunal decided that a debtor company did not acquire any asset on the disposal of the loan notes by a taxpayer company. The loan notes were not assets for capital gains tax ("CGT") purposes in the hands of the debtor when there was no principal amount outstanding. Under the Taxation of Chargeable Gains Act 1992 ("TCGA 1992"), Taxation of Chargeable Gains Act 1992 section 171As. 171A, the asset should be transferred to and acquired by a third party to qualify for the relief granted by the section. Thus, a joint election made under that provision by the taxpayer and another company within the same capital gains group, to the effect that the disposal on repayment of the loan notes was made by that other company rather than the taxpayer, was not effective.
The taxpayer company appealed against HMRC's decision that a capital gain it held on the repayment of loan notes issued by another company ("NBNZ") was chargeable to corporation tax.
The taxpayer was a member of a group company ("BSG") until October 2003. In September 1998, the taxpayer sold its shares in its wholly owned New Zealand subsidiary company ("CBCL"). The consideration was satisfied by the loan notes which were qualifying corporate bonds for CGT purposes.
In 2003, BSG and another bank were owed by an investment trust ("GIITP"). Together, the two banks appointed joint administrative receivers with the effect that capital losses realised by GIITP would be allowable for CGT. GIITP thereby realised capital losses of £180 million on its investments. A planned restructuring was then put in place, effectively setting off BSG's share of the losses in GIITP against some of the held over gains in the loan notes.
Pursuant to the restructuring, GIITP's investments were divided equally and transferred to two newly created subsidiaries for the benefit of BSG. The shares in the taxpayer were restructured and the resulting "A" shares were purchased by one of the subsidiaries ("GR3"). At that time, the taxpayer and GR3 formed part of the same capital gains group.
In October 2003, the taxpayer served notice on NBNZ requiring repayment of NZ$370 million loan notes. Those loan notes were repaid by NBNZ to the taxpayer, bringing into charge to tax a held over gain of £88,692,527. In December 2003, the taxpayer and GR3 made a joint election pursuant to TCGA 1992, Taxation of Chargeable Gains Act 1992 section 179As. 179A to deem the disposal on repayment of the NZ$370 million loan notes to have been made by GR3 rather than the taxpayer.
The taxpayer contended that NBNZ's repayment of the loan notes was an actual acquisition of the loan notes. Thus, TCGA 1992, Taxation of Chargeable Gains Act 1992 section 171A subsec-or-para 1s. 171A(1)(b) was satisfied on the facts even on the basis of a literal construction of that section. Being debentures, the loan notes remained in existence until they were cancelled. When they were redeemed by NBNZ at the option of the taxpayer, they were in fact repurchased by NBNZ. Conceptually, there was a transfer of title by the taxpayer to NBNZ.
Whether NBNZ acquired any asset on the disposal of the loan notes by the taxpayer so that the latter's joint election with GR3 pursuant to TCGA 1992, Taxation of Chargeable Gains Act 1992 section 171As. 171A was effective.
Held, dismissing the taxpayer's appeal:
There is no definition in TCGA 1992 of the term "disposal". The statute makes clear that the satisfaction of a debt, when it is repaid, is to be treated as the disposal of a debt by the creditor. In the case of a straightforward debt, on a disposal of the debt by the creditor, the debtor does not acquire any asset. The asset is the debt and it is extinguished on repayment.
Here, the Tribunal held that the CGT legislation was concerned with the underlying debts, even when they were in the form of a debenture. It was the debt which was the asset for CGT purposes. On redemption or repayment, there was a disposal of the debt but there was no corresponding acquisition of any asset by NBNZ. The position was not any different where the underlying debt was in the form of a debenture. The loan notes themselves might still be in existence after they had been repaid or redeemed, but before they had been cancelled and whether or not there was a noteholder as defined in the Deed Poll. However, they were not assets for CGT purposes in the hands of NBNZ when there was no principal amount outstanding.
It is notable that TCGA 1992, Taxation of Chargeable Gains Act 1992 section 171 subsec-or-para 2 section 171 subsec-or-para 4ss. 171(2) and (4) deals with two types of transactions in different ways. In TCGA 1992, Taxation of Chargeable Gains Act 1992 section 171 subsec-or-para 2s. 171(2), the satisfaction of a debt is excluded from relief. In TCGA 1992, Taxation of Chargeable Gains Act 1992 section 171 subsec-or-para 4s. 171(4), it is stated that for the purposes of TCGA 1992, Taxation of Chargeable Gains Act 1992 section 171 subsec-or-para 1s. 171(1), the transaction is treated as being a disposal to a particular person. This indicates that Parliament had in mind the significance of what immediately follows the disposal, in particular, the requirement for an acquisition by another company.
Here, the Tribunal held that TCGA 1992, Taxation of Chargeable Gains Act 1992 section 171As. 171A defined the transactions which were to qualify for the relief granted by the section. It did so in terms not just of the disposal of the asset, but also in terms of the immediate consequences which should follow if relief was to be available, i.e. that the asset should be transferred to and acquired by a third party. That was the natural and ordinary meaning of the words used and the context did not require any different meaning. Thus, as the taxpayer did not dispose of an asset to NBNZ, the election purportedly made pursuant to TCGA 1992, Taxation of Chargeable Gains Act 1992 section 171As. 171A was not effective.
1.On 4 May 2011 HMRC notified the appellant that it had completed an enquiry into the appellant's corporation tax self assessment for the year ended 31 December 2003. The conclusion was that a capital gain of £88,692,527 on the repayment of loan notes issued by NBNZ Holdings Limited ("NBNZ") which were held by the appellant was chargeable to corporation tax. We understand that the resulting tax liability is approximately £29 million.
2.The facts upon which HMRC's decision was based are not in dispute. The issue on this appeal is whether the appellant together with another company in the same group made a valid joint election pursuant to Taxation of Chargeable Gains Act 1992 section 171Asection 171A Taxation of Chargeable Gains Act 1992 ("TCGA 1992"). If a valid election was made, the disposal arising on repayment of the loan notes would be deemed to have been made by the other group company. That company had losses to set off which would completely extinguish the chargeable gain.
3.The evidence before us was in the form of an agreed Statement of Facts and Issues together with supporting documentation. We set out below our findings of fact which are relevant to the submissions made by the parties and to our decision.
4.The appellant was until 22 October 2003 a member of the Bank of Scotland Group. Until that time its name was BOS Holdings (New Zealand) Limited.
5.On 9 September 1998 the appellant sold its shares in Countrywide Banking Corporation Limited, its wholly owned New Zealand subsidiary. The consideration was NZ$850,000,000 and was satisfied by 10 Year Unsecured Floating Rate Notes 2008 ("the Loan Notes"). The Loan Notes were qualifying corporate bonds for the purposes of capital gains tax ("CGT"). As such a gain was crystallised on the disposal of the shares but that gain would only be charged to tax on a future triggering disposal of the Loan Notes. In 2002 the held over gain was £203,753,103.
6.In 2003 Bank of Scotland was owed £42,150,000 by an investment trust called Geared Income Investment Trust PLC ("Geared Income"). Lloyds TSB Bank PLC was owed a similar amount. Together the two banks appointed joint administrative receivers. The effect of this was that capital losses realised by Geared Income would be allowable for CGT. Geared Income thereby realised capital losses on its investments of approximately £180 million.
7.A planned re-structuring was then put in place with a view to effectively setting off Bank of Scotland's share of the losses in Geared Income against some of the held over gains in the Loan Notes.
8.Pursuant to the re-structuring certain transactions took place. The following steps are relevant for present purposes and are described with some simplification:
(2) Geared Income's investments were divided equally and transferred to two newly created subsidiaries. One of these subsidiaries was called GIIT Realisations 1 Limited ("GR1") and was for the benefit of Bank of Scotland. At the same time a further subsidiary of Geared Income was set up called GIIT Realisations 3 Limited ("GR3") also for the benefit of Bank of Scotland.
(3) Geared Income then transferred 26% of its shares in GR1 outside the Geared Income capital gains group. The effect of this was to crystallise capital losses in GR1 of approximately £92 million.
(4) The shares in the appellant were re-structured and on 22...
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