Jenks v Dickinson (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 08 May 1997 |
| Date | 08 May 1997 |
| Court | Chancery Division |
Chancery Division.
Neuberger J.
Christopher McCall QC (instructed by K Richards & Co) for the taxpayer.
Michael Furness (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Luke v IR Commrs ELR[1963] AC 557
Mangin v IR Commrs ELR[1971] 1 AC 739
Marshall (HMIT) v Kerr TAXTAXTAX(1994) 67 TC 56; [1993] BTC 194 (CA); [1994] BTC 258 (HL)
O'Rourke (HMIT) v Binks TAX[1992] BTC 460
Capital gains tax - Disposal - Qualifying corporate bonds - Definition amended for disposals after 13 March 1989 - Whether amendment to apply only to disposals of corporate bonds qualifying after that date or whether amendment applied to disposals after that date of stock previously exchanged for qualifying corporate bonds - Capital Gains Tax Act 1979, s. 78 (Taxation of Chargeable Gains Act 1992 section 127Taxation of Chargeable Gains Act 1992, s. 127);Finance Act 1984 section 64 schedule 13Finance Act 1984, s. 64 and Sch. 13; Finance Act 1989 section 139 subsec-or-para (1)Finance Act 1989, s. 139(1) (seeTaxation of Chargeable Gains Act 1992 section 116 section 117Taxation of Chargeable Gains Act 1992, ss. 116, 117).
This was an appeal by the taxpayer against a decision of a special commissioner ((1996) Sp C 68) that the retrospective provision in theFinance Act 1989 section 139 subsec-or-para (1)Finance Act 1989, s. 139 (1) was to be construed in such a way as to give effect to the intended purpose of exempting from capital gains tax only disposals of qualifying corporate bonds, but not disposals of shares.
In 1974 the taxpayer acquired 840,000 £1 ordinary shares in Paterson Jenks Ltd. In 1984 that company was taken over by another company ("McCormick") and the taxpayer exchanged his shares in Paterson Jenks for a holding of £1,993,750 seven per cent unsecured loan stock 1989/94 in McCormick ("the loan notes"). In 1987 McCormick converted the loan notes into non-voting common stock of its parent company.
During the tax years 1991-92 and 1992-93 the taxpayer sold a number of holdings of the non-voting stock. The question was the extent of the taxpayer's liability to CGT on disposal of the non-voting stock.
By the Finance Act 1984Finance Act 1984, "qualifying corporate bonds" were to be exempt if they were quoted on a recognised stock exchange. The exemption was extended by Finance Act 1989 section 139s. 139 to remove that condition. A retrospective element was introduced by Finance Act 1989 section 139 subsec-or-para (1)s. 139(1), which provided that in relation to disposals on or after 14 March 1989, those provisions should be regarded as always having had effect.
In this case, both the acquisition of the loan notes and the conversion of the loan notes to non-voting common stock of McCormick fell within the Taxation of Chargeable Gains Act 1992 section 127Capital Gains Tax Act 1979, s. 78, providing that on a company reorganisation, no disposal should be regarded as having taken place.
The Finance Act 1984 schedule 13 subsec-or-para 9Finance Act 1984, Sch. 13, para. 9 effectively disapplied theTaxation of Chargeable Gains Act 1992 section 127Capital Gains Tax Act 1979, s. 78 so that, where the "old asset" underTaxation of Chargeable Gains Act 1992 section 127s. 78was a qualifying corporate bond, the relevant transaction should be treated as disposal of the old asset and acquisition of the new asset, and by Finance Act 1984 schedule 13 subsec-or-para 10Sch. 13, para. 10, the converse, where the new asset was a qualifying corporate bond, the transaction should be treated as a disposal at market value. The difficulty arose where both of those situations existed in a transaction where the asset was deemed to be a qualifying corporate bond as a result of the retrospective part of Finance Act 1989 section 139 subsec-or-para (1)s. 139(1).
When the loan notes were issued in 1984, they were not within the definition of "corporate bonds" because they were not quoted securities, but the taxpayer argued that by virtue of the retrospective deeming provision in Finance Act 1989 section 139s. 139, the loan notes were to be treated as having always been within the definition of "corporate bonds".
The taxpayer contended that the proper application of the legislation to the disposal of the non-voting stock after 14 March 1989 was as follows. It was a disposal to which Finance Act 1989 section 139 subsec-or-para (1)s. 139(1) applied because of the first prospective part of the subsection and, by the provisions of,Finance Act 1984 section 64 schedule 13s. 64 and Sch. 13 of the 1984 Act should be treated as always having applied because of the second retrospective part of Finance Act 1989 section 139 subsec-or-para (1)s. 139(1). The result was that any capital gain which actually accrued between 31 March 1982 (the rebasing date) and 25 June 1984 (when the 1984 Act came into effect) would not be treated as a chargeable gain and would not be chargeable to tax.
The taxpayer accepted that this was an anomaly because the whole rationale for the provisions of Finance Act 1984 schedule 13Sch. 13 of the 1984 Act was to ensure that where in the context of a reorganisation there was as exchange of shares for qualifying corporate bonds (or vice versa), or a number of such exchanges, any gain accruing on the shares was to be a chargeable gain and any gain on the bonds was not. But it was an anomaly which could only be cured by legislation.
The special commissioner held that the anomaly could be avoided, and effect given to the intention of the legislatio n, by taking the word "disposals" in Finance Act 1989 section 139 subsec-or-para (1)s. 139(1) to be limited to disposals of qualifying corporate bonds. The commissioner considered that the rules of construction of statutes permitted the words of Finance Act 1989 section 139 subsec-or-para (1)s. 139(1) to be adapted to give effect to the intention of the legislation.
Before the High Court the Revenue advanced an alternative construction of Finance Act 1989 section 139 subsec-or-para (1)s. 139(1) to that accepted by the special commissioner, concentrating on the second retrospective part of it. The amendments introduced by the first part of the provision only applied to disposals taking place on or after 14 March 1989. That requirement should qualify the operation of the second, retrospective, part so that the second part would not operate where its consequence would be hypothetically to create a disposal before 14 March 1989.
If the amendments were then applied, the gain on the original shares would be calculated as at the 1984 exchange (but the resulting tax would not be payable until a disposal occurred) as Finance Act 1984 schedule 13 subsec-or-para 10para. 10 of Sch. 13 to the 1984 Act would retrospectively be deemed to apply to the 1984 exchange. The 1987 exchange could not be retrospectively treated as a disposal so the "roll-over" provisions of Taxation of Chargeable Gains Act 1992 section 127s. 78 of the 1979 Act would continue to be treated as applicable to it.
On the disposal of the non-voting stock, any gain made on the original shares as at the 1984 exchange would be treated as a chargeable gain which chrystalised on the ultimate disposal. The chargeable gain on the non-voting stock would be assessed on the assumption that the cost of acquiring the non-voting stock was equivalent to the cost of acquiring the loan notes in accordance withTaxation of Chargeable Gains Act 1992 section 127 s. 78 of the 1979 Act.
Held, dismissing the taxpayer's appeal:
1. The Revenue's second construction would not retrospectively exempt from tax the gains effectively accrued on the shares and would avoid the anomaly resulting from the taxpayer's construction. Nor would the Revenue's second construction retrospectively exempt from tax gains effectively accrued on the corporate bonds exchanged in a reorganisation before 14 March 1989 when they were not qualifying corporate bonds. On that basis, the Revenue's second construction was correct.
2. The taxpayer's construction produced a result contrary to the purpose of the legislation which was intended to preserve the principle that capital gains on were to be charged to tax while exempting gains on qualifying corporate bonds. It was intended by Finance Act 1989 section 139s. 139 to expand the category of qualifying corporate bonds, and to make transitional provisions. It was not intended to alter the substantive effect of Finance Act 1984 section 64 schedule 13s. 64 and Sch. 13 of the 1984 Act. The Revenue's second construction involved implying a natural limitation on the scope of a deeming provision that would correspond with the obvious intention of the legislature.
By originating motion pursuant to the Taxes Management Act 1970 section 56ATaxes Management Act 1970, s. 56A (as substituted by SI 1994/1813SI/1994/1813 with effect from 1 September 1994), the taxpayer appealed to the High Court against the following decision of a deputy special commissioner (Dr AN Brice), released on 13 June 1996.
Mr Maurice David Cameron Jenks ("the taxpayer") appeals against three assessments to capital gains tax for the years 1986-87, 1991-92 and 1992-93. The assessment for 1986-87 assessed tax of £478,110 payable in respect of chargeable gains of £1,600,000; the assessment for 1991-92 assessed tax of £41,710 payable in respect of chargeable gains of £109,775; and the assessment for 1992-93 assessed tax of £2,480 payable in respect of estimated chargeable gains of £12,000.
The parties requested me to determine an issue of principle which arose from these assessments and then to adjourn the hearing so that the figures could be agreed. That issue of principle was one of statutory construction, namely whether the word "disposals" in Finance Act 1989 section 139 subsec-or-para (1)s. 139(1) of theFinance Act 1989 (the 1989 Act) meant...
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