Harding v R & C Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 23 October 2008 |
| Date | 23 October 2008 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Rix, Richards and Lawrence Collins L JJ.
David Southern and Denis Edwards (instructed by Deloitte & Touche LLP) for the appellant.
Michael Furness QC and Ruth Jordan (instructed by the Solicitor for HM Revenue and Customs) for the respondents.
The following cases were referred to in the judgment:
Barclays Mercantile Business Finance Ltd v Mawson (HMIT)TAX [2004] BTC 414
IR Commrs v LukeTAXELR (1963) 40 TC 630; [1963] AC 557
Jenks v Dickinson (HMIT)TAXTAX [1997] BTC 286; (1997) 69 TC 458
Mangin v IR CommrsELR [1971] AC 739
Nokes v Doncaster Amalgamated Collieries LtdELR [1940] AC 1014
R & C Commrs v Bank of Ireland Britain Holdings LtdUNKTAX [2007] EWCA Civ 58; [2008] BTC 126
Taylor Clark International Ltd v Lewis (HMIT)TAXTAX [1997] BTC 200; (1998) 71 TC 226
Weston v Garnett (HMIT)TAX [2005] BTC 342
WT Ramsay Ltd v IR CommrsTAXELR (1982) 54 TC 101; [1982] AC 300
Capital gains tax - Qualifying corporate bonds (QCBs) - Shares exchanged for loan notes with foreign currency redemption option - Foreign currency option not exercised and lapsed - Loan note later redeemed - Whether loan notes became QCBs once foreign currency option lapsed - Taxation of Chargeable Gains Act 1992, Taxation of Chargeable Gains Act 1992 section 116 section 117 section 132 section 135ss. 116, 117, 132, 135.
This was an appeal by the taxpayer against a High Court decision ([2008] BTC 109) that certain loan notes were not qualifying corporate bonds within TCGA 1992, s. 117 and that accordingly the gain on their disposal was chargeable to capital gains tax (CGT).
In January 1995 the taxpayer, a company director, exchanged shares in a UK company for loan notes issued by a German company. A substantial gain in the value of the shares was rolled over into the loan notes. The loan notes included an option for redemption in a currency other than sterling, if the holder elected to exercise the option within ten days after giving a redemption notice. It was accepted that the effect of that condition was that the loan notes were not qualifying corporate bonds, within TCGA 1992, s. 117(1)(b), when they were issued. The taxpayer gave a redemption notice but did not exercise the currency option which lapsed. The Revenue issued a CGT assessment in respect of the gain said to have arisen on redemption. The taxpayer appealed, contending that the loan notes should be treated as qualifying corporate bonds (QCBs) when he disposed of them, so that the gain was not taxable. He argued that that change had occurred because the option to redeem them in a foreign currency had lapsed. If he was right then the gain which was rolled over into the loan notes when he acquired them escaped taxation.
The special commissioner ((2007) Sp C 608) decided that the lapse of the foreign exchange condition did not cause the loan notes to cease to be securities in respect of which a provision was made for redemption in a foreign currency for the purposes of s. 117(1)(b). The essence of the special commissioner's decision was that the test in s. 117(1)(b) had to be conducted by reference to the formal terms of the security rather than by reference to those that were effective or operative at the time of disposal. He supported that conclusion by reference to the distinction between "security" and "debt on a security" in the two conditions in s. 117(1)(a) and (b).
The High Court dismissed the taxpayer's appeal ([2008] BTC 109). He appealed arguing that it was not possible to read into s. 117(1)(b) the same temporal requirements as in s. 117(1)(a) when the two paragraphs differed significantly in wording and were dealing with different types of gain and risk. The test in s. 117(1)(a) had to be satisfied "at all times" during the life of the instrument; condition (b) did not use an equivalent expression and used the present tense alone.
Held, dismissing the appeal:
1. The appeal could be disposed of on a simple ground, which was not dependent on any distinction between "security" and "debt on a security" in the two conditions of s. 117(1), and which did not require any departure from the plain meaning of the words in s. 117(1)(b). The distinction between "debt on a security" and "security" in s. 117(1)(a) and (b) did not determine the present appeal, particularly because s. 117(1)(b) used the expression "in respect of which". (Weston v Garnett (HMIT) [2005] BTC 342 considered.)
2. The key to the interpretation of s. 117(1)(b) was the word "provision". If one were to ask whether, on the date of issue, provision was made "in respect of" the security (meaning for this purpose the agreement represented by the loan notes and the terms embodied in them) there would be no doubt on any possible view that such provision was made. But if the same question were to be asked at the date when the currency conversion right lapsed or when the loan notes were redeemed there would be the same answer, namely that provision was made for conversion, even though the right could no longer be exercised. The word "provision" was a reference to the terms of the agreement, and not simply to subsisting rights. There was no need for s. 117(1)(b) to have the phrase "at all times" because it was looking to the terms of the agreement and not to rights which might have existed under it from time to time. Consequently, there was no contrast here between a literal construction and the purpose of the legislation, nor any need for a special construction to avoid anomalies. There was no anomaly and the taxpayer's argument to the contrary was misconceived.
Lawrence Collins LJ: I Introduction
[1] This is an appeal from a decision of Briggs J ([2008] BTC 109). The judge dismissed an appeal from a decision of the Special Commissioner (Mr Charles Hellier) dated 15 March 2007 ((2007) Sp C 608), whereby he dismissed an appeal by Mr Nicholas Harding ("Mr Harding") from an assessment to capital gains tax for the year ended 5 April 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 1 July 1995.
[2] Mr Harding helped build up a highly successful company in the computing industry, Frontline Distribution Ltd ("Frontline"), in which he was a substantial shareholder.
[3] By a Subscription Agreement of 5 April 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.
[4] 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 1 July 1995.
[5] 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.
[6] On 13 January 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 1 July 1995. He (unlike the other shareholders) did not exercise his currency conversion option, and accordingly it lapsed on 23 January 1995.
[7] Mr Harding received £2,240,000 on redemption.
[8] 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.
[9] The only question is whether the Loan Notes were, or were not, qualifying corporate bonds ("QCBs") at that time, within the meaning of Taxation of Chargeable Gains Act 1992 section 117section 117 of the Taxation of Chargeable Gains Act 1992 ("the 1992 Act"), and related provisions, in the form then in force.
[10] 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".
[11] 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 23 January, with the consequence (for him) that it will never be taxable at all. It was common ground that it...
To continue reading
Request your trial
-
Blumenthal v Revenue and Customs Commissioners
...together to determine the way in which the US Dollar redemption option operated.Harding and Klincke 80.In Harding v R & C CommrsTAX[2008] BTC 772 the Court of Appeal considered Taxation of Chargeable Gains Act 1992 section 117 subsec-or-para 1section 117(1)(b) TCGA. In that case the option ......
-
Vermilion Holdings Ltd
...approach in resolving this kind of anomaly is as follows. The approach in construing a deeming provision [117] In Harding v R & C Commrs [2008] BTC 772, the Court of Appeal summarised at [51] the basic principles of interpretation, which applies equally to construing a deeming provision: Th......
-
Allam
...Mr Gordon refers. Discussion [37] The issue before the Tribunal is essentially one of statutory construction. In Harding v R & C Commrs [2008] BTC 772, the Court of Appeal summarized (at [51]) the basic principles of interpretation as follows: There is no real dispute on the principles of i......
-
Executors of William Connell
...of section 64(4) of the Finance Act 1984. … [23] Section 117(1) TCGA was considered by the Court of Appeal in Harding v R & C Commrs TAX[2008] BTC 772 in which the issue before the court, as in this appeal, was whether NQCBs had been converted into QCBs. In that case an option to redeem l......