Nicholas Pike v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rimer,Lord Justice Underhill,Lord Justice Tomlinson |
| Judgment Date | 20 June 2014 |
| Neutral Citation | [2014] EWCA Civ 824 |
| Date | 20 June 2014 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2013/1996 |
[2014] EWCA Civ 824
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
Mr Justice Norris and Judge Roger Berner
Appeal No: FTC/01/2013
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Rimer
Lord Justice Tomlinson
and
Lord Justice Underhill
Case No: A3/2013/1996
Mr Scott Redpath (instructed by SP Consultants Limited) for the Appellant
Mr Michael Gibbon QC (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents
Hearing date: 3 April 2014
This appeal is by Nicholas Pike. Mr Pike appealed to the First-tier Tribunal (Tax Chamber) (Judge Mosedale and Mr R. Thomas, 'the FTT') against a closure notice and amendment by the Revenue to his self-assessment tax return for the year ended 5 April 2000. The amendment denied his claim for relief in respect of a loss of £3,463,563 arising for income tax purposes upon the occasion of a transfer by Mr Pike of what he claimed was a 'relevant discounted security' within the meaning of Schedule 13 to the Finance Act 1996. By a decision released on 4 May 2011, amended on 12 May, the FTT dismissed Mr Pike's appeal.
Mr Pike's appeal against that decision to the Upper Tribunal (Tax and Chancery Chamber) (Norris J and Judge Roger Berner, 'the UT') was dismissed by a decision released on 10 May 2013. The appeal to this court is Mr Pike's appeal against that decision of the UT. It is a second appeal. Mr Pike was represented by Mr Scott Redpath, who also appeared for him in the UT, but not the FTT. The respondents, the Commissioners for Her Majesty's Revenue and Customs ('HMRC'), were represented by Mr Michael Gibbon QC, as in both tribunals below.
The facts
These are not in dispute. Mr Pike was employed by Dell Computer Corporation in various senior posts until he resigned in January 2000. On 28 March 2000, he acquired 'off the shelf' a company he renamed Aim Internet Investments Limited ('the company'). The business of the company was intended to be investment in the internet and technology sectors. Mr Pike held 999 of its 1,000 issued shares, and his wife the other share. He became the sole director.
On 31 March 2000, Mr Pike caused the company to issue £6 million nominal of Loan Stock 2013, all of which he took at par. The stock certificate certified that the stock was constituted by an instrument entered into by the company on the same date and that it was issued with the benefit of, and subject to the provisions contained in, that instrument and the conditions endorsed on the certificate.
The certificate recorded that the company 'shall, subject to the terms of this Loan Stock, pay to the Stockholder on 15 July 2013 ("Repayment Date") the Redemption Proceeds as defined in Condition 2'. The endorsed conditions followed the terms of the conditions provided for by the loan stock instrument, to which no separate reference is required. Condition 2, 'Redemption', is of central importance and its material provisions were as follows:
'2.1 In these Conditions "the Redemption Proceeds" means, in respect of any repayment or redemption of the Principal Amount in full or in part pursuant to the Certificate, a sum being the aggregate of: (i) the Principal Amount to be repaid or redeemed; and (ii) an amount equal to 7.25% per annum of the Principal Amount to be repaid or redeemed, accruing on a daily basis from and including the date of the Certificate up to and including the date of repayment or redemption.
2.2 The Company may on any anniversary … by one month's notice in writing to the Stockholder repay in whole or in part in multiples of £1,000 or any integral amounts of £1,000 or the Principal Amount if less than £1,000 the Redemption Proceeds.
2.3 Where part only of the Redemption Proceeds are repaid by the Company pursuant to Condition 2.2 above the respective amounts of Redemption Proceeds set out in the Schedule to these Conditions shall be correspondingly reduced … and the Company shall issue to the Stockholder a new Loan Stock Certificate for the balance of the Redemption Proceeds not repaid setting out in the schedule thereto the reduced amounts of Redemption Proceeds thereupon so payable thereupon.
2.4 The Redemption Proceeds shall immediately become payable without any demand being made on the happening of any of the following events:
2.4.1 if an order is made or an effective resolution passed for winding up the Company except for the purposes of a reconstruction or amalgamation the terms of which have been previously approved in writing by the Stockholder; or
2.4.2 if the Company ceases to carry on its business or substantially the whole of its business or threatens to cease to carry on the same. …'
On 5 April 2000, five days after the issue of the loan stock, Mr Pike declared the trusts of 'The Nicholas Pike Settlement 2000' in relation to the £6 million loan stock, which he had transferred into the settlement and which constituted its trust fund. The company commenced its business in April 2000.
In his self-assessment tax return for the tax year ended 5 April 2000, Mr Pike claimed in Box 15.11 relief for a loss of £3,463,563 sustained on the disposal of the loan stock to the settlement. His return included the following explanation of that claim:
'[The company] was set up to manage my investments into internet and other high technology businesses. The company has a relatively low level of share capital and is principally financed by the issue of loan stock which is redeemable at a premium. I decided that it would be appropriate to create a trust for the long term security of my family. The loan stock became the trust's original property.
The loan stock is a relevant discounted security and so the relevant rules are contained in Schedule 13 to the Finance Act 1996. As [the company] is "connected" to me, the gain or loss on the transfer of the loan stock is calculated by reference to its market value at the time of the transfer to the trust.
I have therefore calculated the market value of the loan stock at the date of transfer. It is redeemable on 15 July 2013 in an amount of £6,000,000 plus a premium of 7.25% for each year that the loan stock is outstanding. This gives redemption proceeds of £11,780,984. The current value of this covenant to pay the loan stockholder this amount on the repayment date is determined by the interest rate that would be required by an unconnected person. If the return were virtually risk free, a return of 7.25% or so would be reasonable. However, the investment in [the company] loan stock is very risky. The underlying assets may be invested in risky investments with no fixed rate of return. The operating policy of the company could be changed to the detriment of the loan stockholder without even consulting them. A 5% per annum risk premium has been added to the base rate giving 12.25%. Valuing the ultimate proceeds at the rate of 12.25% gives a current market value of £2,536,437. The loan stock cost me £6,000,000 and so I have entered a loss of £3,463,563 in Box 15.11 [of my self-assessment return].'
The reference in that explanation to the 'premium' at which the loan stock was redeemable was to the provision in clause 2.1(ii) of the loan stock conditions. The theory underlying the incurring of the claimed loss is clear. Its claimed legal basis was, as the explanation asserted, that it was a loss sustained 'from the discount of a relevant discounted security'. If it was, in principle the claimed relief was justified. The central question, however, is whether or not the loan stock was a 'relevant discounted security'. That requires a reference to the legislation.
The legislation
The applicable provisions are in Schedule 13 to the Finance Act 1996, headed 'Discounted Securities: Income Tax Provisions'. At the time relevant for the purposes of Mr Pike's claim for relief, Schedule 13 provided materially as follows:
'1.(1) Where a person realises the profit from the discount on a relevant...
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