Executors of William Connell
| Jurisdiction | UK Non-devolved |
| Judgment Date | 03 March 2016 |
| Neutral Citation | [2016] UKFTT 154 (TC) |
| Date | 03 March 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge John Brooks
Michael Firth, Counsel, instructed by Slater and Gordon (UK) LLP, appeared for the Appellant
David Yates, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Tax avoidance scheme – Whether loan notes were converted to qualifying corporate bonds by deed of variation – If so, when should they be valued – Effect of Ramsay principle on meaning of market value in Taxation of Chargeable Gains Act 1992 (TCGA 1992), s. 116 – Effect of drafting error – Whether HMRC entitled to issue discovery assessment under Taxes Management Act 1970 (TMA 1970), s. 29 – Appeal dismissed.
The First-tier Tribunal found that the Ramsay principle prevented the artificial manipulation of the value of loan notes from reducing their market value and accordingly the marketed avoidance scheme used by the taxpayer failed. HMRC were entitled to make a discovery assessment because the disclosure in the tax return was insufficient.
The late taxpayer had taken advantage of a tax avoidance scheme that prevented a capital gain from accruing on the redemption of loan notes by converting them (by means of a deed of variation) from non-qualifying corporate bonds (NQCBs) into qualifying corporate bonds (QCBs) at a time when their value had been artificially depressed by an amendment to their terms also made by the deed of variation. HMRC did not accept the efficacy of the scheme and on 30 March 2009 raised a discovery assessment to recover the lost CGT in respect of tax year 2003–04.
The First-tier Tribunal (FTT) first considered the substantive issue of whether a capital gain arose in respect of the loan notes.
1) They did not accept HMRC's argument that because the loan notes had been issued on terms that provided for redemption in a foreign currency the subsequent conversion from NQCB to QCB by the removal of a clause providing for redemption in US dollars was ineffective because there was nevertheless still provision for redemption in a currency other than sterling (TCGA 1992, s. 117(1)(b)). The FTT considered that the deed of variation had excised that clause and therefore it did not remain one of the terms.
2) They also dismissed HMRC's argument that because the date of the event that triggered the conversion to QCBs had been inserted purely to introduce an element of uncertainty to the scheme that might help to avoid the application of the Ramsay principle, the loan notes should instead be valued at the date the deed of variation was executed. They considered that, because the execution of the deed of variation was not a disposal, this would create real practical difficulties in the application of TCGA 1992, s. 116.
3) The FTT did, however, agree with HMRC that because there was no commercial or economic reason why the value of the loan notes should have been artificially manipulated, the application of the Ramsay approach meant that the deed of variation did not reduce their market value.
4) Although the FTT's reasoning at (3) above would render the scheme ineffective, there was also a flaw in the drafting of the loan notes that unintentionally prevented them from being redeemed at the artificially depressed price and would therefore also render the scheme ineffective. The FTT nevertheless proceeded to consider the appellants' argument that, because there had been an obvious error in the drafting, this would be automatically corrected as a matter of contractual interpretation, which they rejected on the grounds that there was no obvious error that would make a nonsense of the terms. They also did not consider there would be grounds for rectification.
The FTT then considered the substantive issue of whether or not HMRC were entitled to make a discovery assessment. The taxpayer's tax return had recorded the proceeds of redemption of the loan notes and the amount of the loss calculated at the time of the conversion that was crystallised by the later redemption and disclosed the existence of the deed of variation (but not the effect this was purported to have on the valuation) and the conversion into QCBs (but did not explicitly state how this was achieved). The appellants argued that the only reasonable conclusion to be drawn from the information was that the late taxpayer had entered into a tax avoidance scheme. However, the FTT did not accept that a hypothetical inspector should be expected to make inferences of fact. They considered that although the white space disclosure should have alerted an inspector to the need to make further enquiries, it was not sufficient to make him aware of an insufficiency of tax, and therefore the appellants were unable to rely on the protection of TMA 1970, s. 29(5).
The marketed tax avoidance scheme in which the taxpayer had participated had also previously been considered (and deemed ineffective) by the First-tier Tribunal in Blumenthal TAX[2012] TC 02174. Note also that it is now likely that advance disclosure of such a scheme would be required under the Disclosure of Tax Avoidance Schemes (DOTAS) rules introduced in Finance Act 2004 (see the CCH Tax Reporter at 192-110ff.).
[1] This appeal concerns a 2004 tax avoidance scheme to reduce the capital gains tax liability on the redemption of loan notes by converting them from non-qualifying corporate bonds (NQCBs) into qualifying corporate bonds (QCBs), at a time when their market value had been artificially depressed, amending their terms by way of a deed of variation.
[2] The late Mr William Connell, having taken advantage of such a scheme, submitted his 2003–04 tax return, on time, on the basis that there was no capital gain. No enquiry was opened by HM Revenue and Customs (HMRC) within the statutory window. However, on 30 March 2009, as the efficacy of the scheme was not accepted, a discovery assessment in the sum of £397,188.80 was issued, under s 29 of the Taxes Management Act 1970 (TMA), on the executors of Mr Connell who had died on 30 May 2008.
[3] This appeal is being pursued by the executors who are represented by Mr Michael Firth. Mr David Yates appears for HMRC.
[4] Two issues arise, first whether a capital gain arose in respect of the Loan Notes in 2003–04 (the substantive issue); and secondly whether HMRC were entitled to make a discovery assessment (the discovery issue). Both issues, and indeed the same tax scheme, were considered by the Tribunal (Judge Brannan and Ms Redston (as she then was)) in Blumenthal TAX[2012] TC 02174. Also, although considered, it has not been necessary to mention every argument advanced on behalf of the parties in reaching my conclusions on these issues.
[5] As in Blumenthal I shall consider the substantive issue first. Not only was this the order adopted by the parties, but as the Tribunal in Blumenthal observed, at [4]:
… the substantive issue most naturally comes first since a full understanding of the substantive issue sheds light on the issues in relation to the discovery issue, viz the appropriate level of disclosure on the Appellant's 2003–2004 tax return.
[6] In 1998 the late Mr William Connell owned shares in Ever 1199 Limited. During the course of 1998–99 these shares were acquired by Telecom Securicor Cellular Radio Limited (which later became O2 (UK) Limited (O2)) for £2,098,293 A O2 loan notes and £381,500 B O2 loan notes and £242,638 cash. This appeal is concerned with only the A O2 loan notes (the Loan Notes) which were issued subject to and with the benefit of certain conditions.
[7] Those conditions to which I was referred included:
1.1 in this Loan Stock (including these conditions) the following expressions have the following meanings:
Quarter Day 25 March, 24 June, 29 September or 25 December in any year
…
3.1 Unless previously repaid pursuant to this Condition 3, the Series A Loan Stock will be repaid on 30 June 2006 together with interest up to (and including) such date (less tax where deduction thereof is required by law).
3.2 A series A stockholder shall be entitled to call for immediate repayment of any of his Series A Loan Stock at par together with accrued interest (less income tax where deduction thereof is required by law) if:
3.2.1 the principal amount of, or any interest on, such Series A Loan Stock shall not have been paid in full within 30 days following the due date; or
3.2.1 a winding up petition is presented and served on the Company and not fully discharged within ten days or an effective resolution is passed for the winding up of the Company (other than a members' voluntary winding up previously approved by an Extraordinary Resolution of the Stockholders).
3.2.3 any encumbrancer shall take possession or a receiver shall be appointed of the undertaking property and assets of the Company or any part thereof, and any such appointment is not discharged within 21 days;
3.2.4 a distress execution or other process shall be levied or enforced upon or against any of the material assets of the Company and shall not be discharged within seven days of being levied or enforced;
3.2.5 the Company is unable to pay its debts within the meaning of s 123(1) Insolvency Act 1986;
3.2.6 a meeting of the Company is convened for the purpose of making or proposing to make or entering into any arrangements of composition with or assignment for the benefit of its creditors; or
3.2.7 the Company ceases or threatens to cease to carry on business, except as part of a solvent reconstruction or amalgamation.
3.3
3.3.1 A Series A Stockholder may require the Company to repay the whole or any part of his Series A Loan Stock (in the latter case only in amounts or integral multiples of £50,000 or remaining balances on any Quarter Day (arising after the date six months after the date hereof) provided that each Series A Loan Stockholder is entitled to one annual repayment...
To continue reading
Request your trial