Harding v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lawrence Collins,Lord Justice Richards,Lord Justice Rix |
| Judgment Date | 23 October 2008 |
| Neutral Citation | [2008] EWCA Civ 1164 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2008/0392 |
| Date | 23 October 2008 |
[2008] EWCA Civ 1164
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR JUSTICE BRIGGS
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Rix
Lord Justice Richards and
Lord Justice Lawrence Collins
Case No: A3/2008/0392
CH/2007/APP/0269
Mr David Southern and Mr Denis Edwards (instructed by Deloitte & Touche LLP) for the Appellant
Mr Michael Furness QC and Ms Ruth Jordan (instructed by The Solicitor for HM Revenue and Customs) for the Respondents
Hearing date: October 10, 2008
I Introduction
This is an appeal from a decision of Briggs J [2008] STC 1865. The judge dismissed an appeal from a decision of the Special Commissioner (Mr Charles Hellier) dated March 15, 2007, whereby he dismissed an appeal by Mr Nicholas Harding (“Mr Harding”) from an assessment to capital gains tax for the year ended April 5, 1996 in respect of a gain which the Commissioners for Inland Revenue (“the Revenue”) decided had arisen on his redemption of certain loan notes (“the Loan Notes”) on July 1, 1995.
Mr Harding helped build up a highly successful company in the computing industry, Frontline Distribution Ltd (“Frontline”), in which he was a substantial shareholder.
By a Subscription Agreement of April 5, 1990, a German company, Computer 2000 AG agreed to provide capital to Frontline for new A and C ordinary shares. The Subscription Agreement also contained call options whereby Computer 2000 AG could buy, and put options whereby the holders could sell, all the B ordinary shares in Frontline. As from December 1994 Mr Harding held 33,120 B ordinary shares in Frontline. Two other shareholders held the bulk of the remaining B shares.
The Loan Notes were to be denominated in sterling but contained an option for the holder of each Loan Note exercisable during the ten day period following the giving of a Redemption Notice, to have the Loan Note redeemed in US dollars, Canadian dollars or German deutschmarks, at a defined exchange rate, close but not identical to the exchange rate prevailing at redemption. The earliest redemption date was July 1, 1995.
The currency conversion provision was Condition 4.7, which provided:
“The Holder may by notice in writing to the Company given no more than 10 days after a Redemption Notice given in accordance with Condition 4.2 elect that the Note should be redeemed on the Redemption Date in US dollars, Canadian dollars or German deutschmarks at the Holder's option … In the event that the Holders fail to notify the Company in accordance with the provisions of this Condition 4.7, that payment should be made in a currency other than Sterling, this Condition 4.7 shall lapse and cease to have any effect.”
On January 13, 1995 the options to sell the Frontline shares to Computer 2000 AG were exercised, and Mr Harding was issued the Loan Notes by Computer 2000 AG in exchange for his Frontline shares. On the same day he gave notice to redeem the Loan Notes on July 1, 1995. He (unlike the other shareholders) did not exercise his currency conversion option, and accordingly it lapsed on January 23, 1995.
Mr Harding received £2,240,000 on redemption.
Upon issue to Mr Harding, the Loan Notes had rolled-over into them a very substantial capital gain which had accrued by reason of the large increase in the value of the shares for which the Loan Notes were exchanged. If he is liable for capital gains tax it has been agreed that the chargeable gain was £1,920,000, on which the tax payable would be £765,600.
II QCBs and capital gains tax
The only question is whether the Loan Notes were, or were not, qualifying corporate bonds (“QCBs”) at that time, within the meaning of section 117 of the Taxation of Chargeable Gains Act 1992 (“the 1992 Act”), and related provisions, in the form then in force.
The question of construction which is raised by this appeal is whether a security in which a currency conversion option has lapsed, becomes (as Mr Harding contends) for the purposes of section 117(1), at the moment of lapse, “a security … in respect of which no provision is made for conversion into, or redemption in, a currency other than sterling.”
If Mr Harding's case on construction is correct, then the rolled-over gain simply disappeared from tax altogether when his currency conversion option lapsed on January 23, with the consequence (for him) that it will never be taxable at all. It was common ground that it could not have been intended that the language of section 117(1)(b) should have the effect that a rolled-over gain should disappear altogether from tax, and that if he was right on the point of construction, Mr Harding would obtain a windfall benefit as the unintended result of a drafting anomaly. If the Revenue's case on construction is correct (as the Special Commissioner and the judge decided), then that rolled-over gain, together with any additional gain between the issue and redemption of the Loan Notes, became chargeable to tax on July 1, 1995.
Capital gains tax is charged on disposals of chargeable assets: 1992 Act, section 1(1). Debts are property for the purposes of the Act (section 21(1)(a)), and “Debts on a security” are chargeable assets: section 251(1). But qualifying corporate bonds (“QCBs”) are exempt assets by virtue of section 115(1), which provides: “A gain which accrues on the disposal by any person of (a) …qualifying corporate bonds … shall not be a chargeable gain.”
So far as material section 117(1) of the 1992 Act provides as follows:
“(1) For the purposes of this section a 'corporate bond' is a security as defined in section 132(3)(b) –
(a) the debt on which represents and has at all times represented a normal commercial loan; and
(b) which is expressed in sterling and in respect of which no provision is made for conversion into, or redemption in, a currency other than sterling
and in paragraph (a) above 'normal commercial loan' has the meaning which would be given by sub-paragraph (5) of paragraph 1 of Schedule 18 to the Taxes Act if for paragraph (a)(i) to (iii) of that sub-paragraph there were substituted the words 'corporate bonds (within the meaning of section 117 of the 1992 Act)'.
(2) For the purposes of subsection (1) (b) above –
(a) a security shall not be regarded as expressed in sterling if the amount of sterling falls to be determined by reference to the value at any time of any other currency or asset; and
(b) a provision for redemption in a currency other than sterling but at the rate of exchange prevailing at redemption shall be disregarded.
…”
Section 117 provides that if an asset is to qualify as a QCB it must be a “security” as defined in section 132(3)(b), which provides as follows:
“(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.”
It must also represent and at all times have represented “a normal commercial loan” within the meaning of the Income and Corporation Taxes Act 1988 (“the Taxes Act”), Sched. 18, para 1(5), which provides, broadly, that a “normal commercial loan” is a loan which does not carry any right to conversion into shares or securities.
Consequently a person who acquires, either by original issue or by purchase, a QCB is exempt from chargeable gains on it, and is not entitled to credit for losses incurred, in each case between his acquisition and his disposal of it, whether by redemption, sale or gift. By contrast, the holder of a security which is not a QCB (“a non-QCB”) is not so exempt.
The identification of QCBs as a class of asset qualifying for special capital gains tax treatment was originally enacted by the Finance Act 1984, section 64 and Schedule 13, Part I. Section 64(1) provided as follows:
“Part 1 of Schedule 13 to this Act shall have effect for the purpose of-
(a) providing, in relation to qualifying corporate bonds, an exemption from capital gains tax and corporation tax on chargeable gains similar to that provided in relation to gilt-edged securities by Part 4 of the Capital Gains Tax Act 1979…”
At that time there was a narrower definition of a QCB than was in force by 1995, in that the relevant security had to be quoted on a recognised stock exchange in the United Kingdom, or dealt with on the Unlisted Securities Market, or was issued by a body which at that time had some other quoted share, stock or security. The exemption from capital gains tax of “corporate bonds” was introduced in order to stimulate the British bond market, and the conditions (especially the condition relating to “normal commercial loan”) were designed to ensure that the exemption only extended to bonds that were genuinely traded in that market; and more generally to ensure that the exemption could not be used as a vehicle for avoidance: Weston v. Garnett [2005] STC 1134, at [41]-[42], per Buxton LJ.
As the judge pointed out, by 1995 the requirement that, to qualify as a QCB, a security had to be listed, or issued by a company with other listed shares or securities, had been removed. It follows that the original purpose, identified by Buxton LJ, of stimulating the British bond market, and limiting the special treatment by way of exception to bonds genuinely traded in that market had been outgrown.
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