Hancock and another v Commissioners for HM’s Revenue and Customs

JurisdictionEngland & Wales
JudgeLady Arden,Lord Reed,Lord Sumption,Lord Carnwath,Lord Briggs
Judgment Date22 May 2019
Neutral Citation[2019] UKSC 24
CourtSupreme Court
Date22 May 2019

[2019] UKSC 24

Easter Term

Supreme Court

On appeal from: [2017] EWCA Civ 198

before

Lord Reed, Deputy President

Lord Sumption

Lord Carnwath

Lord Briggs

Lady Arden

Hancock and another
(Appellants)
and
Commissioners for Her Majesty's Revenue and Customs
(Respondent)

Appellants

Michael Sherry

Ximena Montes Manzano

(Instructed by Michael Sherry)

Respondent

Michael Gibbon QC

Elizabeth Wilson

(Instructed by HMRC Solicitors Office)

Heard on 6 December 2018

Lady Arden

( with whom Lord Reed, Lord Sumption, Lord Carnwath and Lord Briggs agree)

Issues on this appeal
1

By this appeal Mr and Mrs Hancock seek to show that the redemption of the loan notes, issued to them in connection with the sale of their shares in their company, Blubeckers Ltd, fell outside the charge to capital gains tax (“CGT”) by virtue of the exemption in section 115 of the Taxation of Chargeable Gains Act 1992 (“ TCGA”) for disposals of “qualifying corporate bonds” (“QCBs”). QCBs are essentially sterling-only bonds (see TCGA, section 117). The noteworthy feature for present purposes of the redemption process was that, following the reorganisation, some of the loan notes issued as consideration were converted into QCBs. TCGA confers “rollover relief” on the disposal of securities as part of a reorganisation, ie it brings securities issued as consideration into charge for CGT purposes but defers the tax until their subsequent realisation. This is less favourable to the taxpayer than the exemption in TCGA, section 115. The roll-over provisions constitute a carve-out from the exemption in TCGA, section 115. They extend to certain conversions involving QCBs. The appellants seek to fall outside that carve-out (and thus within the exemption in TCGA, section 115). The Court of Appeal (Lewison, Kitchin and Floyd LJJ) rejected the appellants' claim: [2017] 1 WLR 4717. They considered that, although the wording of the carve-out could be read literally in favour of the taxpayers, that result would be contrary to Parliament's intention. Therefore, the appellants' claim for relief failed. Instead, they were entitled to rollover relief deferring tax to redemption.

The legislative and factual framework in more detail
2

For CGT purposes, there must be a relevant disposal of a relevant asset by persons chargeable to tax resulting in a gain which is chargeable for capital gains tax purposes. In this case, the appellants undoubtedly made a gain when they exchanged their shares in Blubeckers Ltd for redeemable loan notes (with a provision for an earn-out under which further loan notes would, as in the event happened, be issued, dependent on the performance of the business). This transaction was a reorganisation under TCGA, section 126. Rollover relief was available under TCGA, section 127.

3

The appellants structured the disposal of their Blubeckers shares in three stages. Stage 1 was the exchange of Blubeckers shares for Lionheart notes, which, being convertible into foreign currency, were not QCBs. At Stage 2, the terms of some of those notes were varied so that they became QCBs. At Stage 3, both sets of notes (QCBs and non-QCBs) were, together and without distinction, converted into one series of secured discounted loan notes (“SLNs”), which were QCBs. The SLNs were subsequently redeemed for cash. It is said to be the result of the completion of Stages 2 and 3 that the appellants are not chargeable to CGT. The exact nominal amount of loan notes converted into QCBs does not matter in that, on the appellants' argument, it was sufficient if the QCB element of the conversion was the smallest denomination (say £1).

4

Rollover relief is available for reorganisations resulting in the issue of securities such as shares. TCGA, section 132, as amended by section 88(2) of the Finance Act 1997, by extending that relief to a conversion of securities, following a reorganisation, in or out of a QCB, equates the relief for such a conversion with that available for a reorganisation of share capital:

“132(1) Sections 127 to 131 shall apply with any necessary adaptations in relation to the conversion of securities as they apply in relation to a reorganisation (that is to say, a reorganisation or reduction of a company's share capital).

(3) For the purposes of this section and section 133 —

(a) ‘conversion of securities’ includes any of the following, whether effected by a transaction or occurring in consequence of the operation of the terms of any security or of any debenture which is not a security, that is to say —

(i) a conversion of securities of a company into shares in the company, and

( ia) a conversion of a security which is not a qualifying corporate bond into a security of the same company which is such a bond, and

(ib) a conversion of a qualifying corporate bond into a security which is a security of the same company but is not such a bond, and

(ii) a conversion at the option of the holder of the securities converted as an alternative to the redemption of those securities for cash, and

(iii) any exchange of securities effected in pursuance of any enactment (including an enactment passed after this Act) which provides for the compulsory acquisition of any shares or securities and the issue of securities or other securities instead,

(b) ‘security’ includes any loan stock or similar security whether of the Government of the United Kingdom or of any other government, or of any public or local authority in the United Kingdom or elsewhere, or of any company, and whether secured or unsecured.”

5

The purpose of TCGA, sections 127 to 131, referred to in the opening line of section 132, is to provide that there is no disposal of shares at the time of the reorganisation, and for further matters, such as the allocation of the consideration between different classes of security, part disposals, unpaid calls and indexation. The key points to note in these provisions, which it is not necessary to set out, are (1) that a conversion as defined is to receive the same relief as a reorganisation, ie rollover relief, even if it involves QCBs whose disposal is otherwise outside the charge to CGT; and (2) that emphasis is given to the aggregation of the securities into a single asset: section 127 provides that both the original holding, “taken as a single asset”, which the holder disposes of under the reorganisation, and the consideration securities, also “taken as a single asset”, are treated as “the same asset” with the same acquisition date as the original holding. We are not concerned with sections 133 or 134.

6

To ensure that the conversion of, or into, QCBs on a reorganisation is within the charge to CGT on the same basis as the issue of other securities on a reorganisation, ie on the basis that the holder is entitled to rollover relief, section 116(1) provides that the disposal will result in rollover relief where sections 127 to 130 would apply, and (these are the critical words which this court must construe):

“(b) [Limb A] either the original shares would consist of or include a qualifying corporate bond and the new holding would not, or [Limb B] the original shares would not and the new holding would consist of or include such a bond;” (words in square brackets added)

7

Floyd LJ, giving the first judgment in the Court of Appeal, called the first possible scenario in section 116(1)(b), Limb A, and the alternative scenario, Limb B. I will do the same. The effect of section 116(1)(b) is that, where the new holding following conversion includes QCBs, Limb A cannot apply. The question here is whether Limb B applies: the appellants contend that Limb B also cannot apply because the (aggregate) original holding prior to conversion included QCBs.

The reasoning of the Upper Tribunal and the Court of Appeal
8

The Upper Tribunal, allowing an appeal from the First-tier Tribunal, held that the conversion of securities at the third stage comprised separate transactions in relation to each share converted. As the First-tier Tribunal had pointed out, the relief under section 116 for QCBs had been intended to promote the market in sterling bonds and so the interpretation favoured by the appellants would go well beyond that objective. The Upper Tribunal also noted that in TCGA, section 132 Parliament had defined “conversion” in relation to transactions involving QCBs separately in relation to each security (see para 4 above). The Upper Tribunal also rejected HMRC's argument based on WT Ramsay Ltd v Inland Revenue Comrs [1982] AC 300, but we are not concerned with that as HMRC has not appealed against that ruling.

9

The appellants appealed to the Court of Appeal. They repeated their argument that Stage 3...

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