Nicholas John Harding v Her Majesty's Revenue & Customs, SPC 00608
| Jurisdiction | UK Non-devolved |
| Judge | Charles HELLIER |
| Judgment Date | 15 March 2007 |
| Respondent | Her Majesty's Revenue & Customs |
| Appellant | Nicholas John Harding |
| Reference | SPC 00608 |
| Court | First-tier Tribunal (Tax Chamber) |
SPC00608
Capital Gains Tax - qualifying corporate bonds (QCBs) - shares exchanged for loan notes with foreign currency redemption option - section 135 TCGA applying to exchange - loan notes not QCBs on exchange - forex option lapsing - whether lapse was conversion within s132 TCGA or transaction within s116 TCGA - held no - loan note later redeemed - whether loan notes were QCBs on redemption within s117 TCGA - held no.
NICHOLAS JOHN HARDING Appellant
- and -
Special Commissioner: CHARLES HELLIER
Sitting in public in London on 5 and 6 December 2006
David Southern of Counsel instructed by Deloitte & Touche LLP for the Appellant
Michael Gibbon of Counsel instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2007
DECISION
-
This appeal concerns the proper construction and application of the definition of qualifying corporate bond (QCB) in section 117 TCGA.
-
The Appellant contends that his loan notes were not QCBs when they were issued to him but were QCBs when he disposed of them. He says that this change occurred because a right in the terms of the loan notes to opt to redeem them in a foreign currency lapsed. If he is right then a gain which was rolled over into the loan notes when he acquired them escapes taxation.
-
There was no dispute about the relevant facts. I had before me a bundle of copy documents and heard oral evidence from Mr Harding. One of the crucial documents was made under German law. I had written evidence from Dr Sybille Steiner, a German lawyer, to which I shall refer later.
-
On the basis of this evidence I find the following facts:
-
Between 1983 and 1994 Mr Harding participated in the development of a successful software business. That business was by 1990 carried on through a holding company Quartet PLC and its wholly owned operating company, Frontline Distribution Ltd (among other entities).
-
In 1990 computer 2000 AG, a German company with similar business interests entered into an agreement (the Subscription Agreement) with Quartet, Frontline, Mr Harding, John Weatherhead and Terrance Watson under which it subscribed for new shares in Frontline, acquired some of Quartet’s shares in Frontline, and entered into put and call options in relation to the other shares in Frontline held by Quartet. The agreement was amended in 1990 and in 1992.
-
John Weatherhead and Terrance Watson were colleagues of Mr Harding who had been involved in the development of the business and were shareholders in Quartet.
-
On 22 July 1992 Mr Harding, Mr Weatherhead and Mark Mulford (the ‘three directors’) acquired the shares in Frontline then held by Quartet. Under a deed of adherence the three of them effectively took the place of Quartet under the provisions of the amended Subscription Agreement.
-
As a result of the Subscription Agreement, its 1990 amendment and the Deed of Adherence, the three directors became subject to the right of Corporation 2000 AG to call for, and took the benefit of a right to require, the sale to it of their shares in Frontline. The consideration for the transfer of shares under the option was ordinary shares in Computer 2000 AG, or at its election, loan notes of face value equal to an agreed amount or 50% loan notes, 50% shares. The loan notes were to be in the “agreed forms” i.e. in a form agreed between the parties and signed for the purpose of identification (Clause 1.1 and 1.10 of the Subscription Agreement). No agreed form document dating from the time of the Subscription Agreement was available in the documents before me. But I was told by Mr Harding and accept that a draft loan note was annexed but that it did not provide for a currency conversion option (and was intended to be applicable in relation to other provisions of the agreement which provided for the issue of loan notes in other circumstances).
-
In late 1994 there were discussions with Computer 2000 AG’s lawyers about the form of the loan notes which would be issued on an exercise of the options. Frere Cholmeley Bischoff wrote to those lawyers on 28 November 1994 enclosing a draft loan note which included a new clause 4.7 which contained a right for the holder of the note to opt for redemption in Canadian dollars, US dollars or German deutschmarks.
-
In December 1994 Mr Harding disposed of some of his shares to related parties, and was left with 33,120 shares in Frontline.
-
On 7 December 1994 Arthur Anderson wrote to the Revenue on behalf of Frontline and the shareholders in Frontline for clearance under section 138 TCGA that the provisions of section 137 TCGA should not apply in relation to the exchange of the Frontline shares for loan notes pursuant to the exercise by the shareholders of their options. This letter indicated that the loan notes would be denominated in Sterling but have options for redemption in other currencies at a holder’s election. It expressed the view that the loan notes did not constitute QCBs.
-
Mr Harding and the others exercised their options under the Subscription Agreement to require Computer 2000 AG to acquire the Frontline shares on 13 January 1995, and Computer 2000 AG issued loan notes in payment.
-
At this time Mr Weatherhead was living and working in Canada, and Mr Mulford was living in Holland. After the issue of the loan notes Mr Weatherhead elected pursuant to the terms of the loan notes for redemption in Canadian Dollars and Mr Mulford for redemption in deutschmarks. Mr Harding made no elections.
-
The three directors gave notice to redeem their loan notes on the earliest date permitted under their terms. The redemption date was 1 July 1995. On that date Mr Harding received £1,925,718 from Computer 2000 AG as the redemption proceeds. Mr Weatherhead and Mr Mulford received Canadian dollars and deutschmarks respectively.
-
The Appellant was assessed to capital gains tax for the year ended 5 April 1996 in respect of a gain computed on the basis that the loan notes were not QCBs on redemption.
-
-
The loan notes issued to Mr Harding on 13 January 1995 provided for redemption on the fifth anniversary of their issue or if earlier, and if a redemption notice was given between 1 and 21 January in any year, on the 1 July following the giving of the notice. As noted above, redemption notices were given shortly after issue and the notes therefore became redeemable on 1 July 1995 just under 6 months after their issue.
-
The notes bore interest payable quarterly in arrears at a rate which for present purposes I can call LIBOR. The notes were assignable to a limited class of assignees without consent of the issuer and otherwise with such consent (condition 8). There was a provision preventing repayment if the holder had not repaid a loan from Frontline or been released from repayment (condition 5.10).
-
Condition 13 of the conditions of notes provided that “This Note shall be governed by, and construed in accordance with the laws of Germany”.
-
Condition 4.7 of the conditions of the notes provided the option referred to in paragraph 4(7) above under which the holder could elect, within 10 days after giving a redemption notice, for the note to be redeemed in US dollars, Canadian dollars or German Deutschmarks. Later on in this decision I refer to this clause as the “forex option”. I should set it out in full:
“4.7 The holder may be notice in writing to the company given no more than 10 days after a Redemption Notice given in accordance with Condition 4.1 elect that the Note should be redeemed on the Redemption Date in US dollars, Canadian dollars or German deutschmarks at the Holders option (“the Relevant Currency”) in which event the Company shall, in substitution for the payment...
To continue reading
Request your trial