Pike

JurisdictionUK Non-devolved
Judgment Date04 May 2011
Neutral Citation[2011] UKFTT 289 (TC)
Date04 May 2011
CourtFirst Tier Tribunal (Tax Chamber)

[2011] UKFTT 289 (TC)

Mrs B Mosedale (Tribunal Judge) (Chairman), Mr R Thomas (Tribunal Member)

Pike

Mr J Brooks, counsel, instructed by Sefton Potter Advisers Ltd, for the Appellant

Mr M Gibbon, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

Income tax - loss relief - relevant discounted security - interest - loan stock paying on redemption sum calculated as 7.25 per cent per annum accruing daily - whether loan stock "relevant discounted security" - whether "interest" including sums not paid periodically - taxpayer's appeal dismissed - Finance Act 1996, Finance Act 1996 schedule 13Sch. 13

The payment of a premium on the redemption of loan stock was interest, and so not a "relevant discounted security", even though it was not paid periodically.

Facts

The taxpayer set up a company whose business would be to invest in internet technology. Three days later, the company created loan stock which was allotted to the taxpayer who paid 6m for it. The loan stock was repayable after 13 years. Assuming it was not redeemed early, the taxpayer was to be repaid 11,780,974 which was calculated as 6m plus 7.25 per cent interest for each year. Nothing would be payable to the taxpayer until the principal amount was redeemed. A few days later, the taxpayer established a trust of which he and his wife were the trustees. Under the terms of the trust, the taxpayer was entitled to the income although there was a power of appointment which could be exercised in favour of a class of beneficiaries including the taxpayer and his family.

Since the taxpayer was connected to the trust, he took the view that the transfer was deemed to be at the open market value of the loan stock which was 2,536,437. His claim was based on para. 8 of Sch. 13 to the Finance Act 1996 which deemed transfers between connected persons to be at open market value. The taxpayer considered that the loan stock was a relevant discounted security ("RDS") and that therefore the provisions of Sch. 13 applied so that he was entitled to loss relief for the year ended 5 April 2000.

The taxpayer appealed against a closure notice and amendment to his self-assessment tax return for the relevant period which denied his claim for relief on a loss of 3,463,563 for income tax purposes arising from the discount on an RDS as defined in Sch. 13.

Issue

Whether the loan stock was a relevant discounted security as defined in Sch. 13 to the Finance Act 1996.

Decision

The First-tier Tribunal (Judge Barbara Mosedale and R Thomas) dismissed the taxpayer's appeal.

To take the benefit of loss relief, the taxpayer had to hold a relevant discounted security and sustain a loss from the discount on it. Schedule 13, para. 2(2) provided that there was a loss from the discount where a person transferred the security and the amount paid by him on the acquisition exceeded the amount payable to him on the transfer. The dispute between the parties was whether the loan stock amounted to a relevant discounted security ("RDS"). If it was not an RDS, then the loss relief provisions on a deemed open market transfer into the trust would not apply and HMRC were correct to deny the taxpayer's claim.

The principal point was whether the loan stock granted to the taxpayer by the company would (or might) on redemption realise a "deep gain", which gave rise to the question whether the amount payable under the loan stock of 7.25 per cent per annum of the principal amount was a payment of interest, in which case, under para. 3(6) it fell to be disregarded in determining what the amount payable on redemption was for the purposes of para. 3(3). In this case if it was disregarded, that would mean the only amount repayable would be the principal sum of 6m which would be equal to and not more than the issue price so no question of a deep gain could arise under the definition in para. 3(3). "Interest" was, in the year of assessment under consideration, defined for the purposes of the Tax Acts, including Sch. 13, in ICTA 1988, s. 832(1) which provided that interest meant both annual or yearly interest and interest other than annual or yearly interest.

The key features of interest were that it had to be calculated by reference to an underlying debt, it had to be payment by time for the use of money borrowed and it had to accrue from day to day. However, the authorities did not require interest to be paid periodically. Interest could be interest even if it was paid in a single lump sum at the end of the loan and a sum described as a premium could be interest although paid only on redemption. Whether something was interest or not could not depend on the label that a person chose to give to it. The natural and ordinary meaning of interest was that it was a sum of money calculated by reference to an underlying debt which was payment by time for the use of the money borrowed and which accrued from day to day, whether or not it was paid periodically: Schulze v Bensted(1916) 7 TC 30, Bennett v Ogston(1930) 15 TC 374, Re Euro Hotel (Belgravia) Ltd(1975) 51 TC 293, Willingale v International Commercial Bank Ltd[1978] AC 834 and Chevron Petroleum (UK) Ltd v BP Petroleum Development Ltd(1986) 57 TC 137 considered.

Further, contrary to the taxpayer's argument, there was no reason not to apply the ordinary meaning of interest to Sch. 13, para. 3(6). Looking at the statutory regimes for deep discount securities (DDS), deep gain securities (DGS), qualifying convertible securities (QCS) and RDS, the general principle of all four regimes was that they would charge to income tax amounts which reflected the time value of money, but only those which were not otherwise charged to income tax as interest. Giving interest in Sch. 13, para. 6 its ordinary meaning did not deprive the RDS legislation of effect. It would apply to bonds issued with the prospect of a deep gain which also bore a reasonable commercial rate of interest. It would apply to all bonds issued at a discount. The legislation would not be redundant even though it would apply to fewer securities. The rules of statutory interpretation did not permit a different meaning to be given for the purposes of the RDS legislation to the effect that in order to be interest it must be paid periodically. It was not relevant to a question of statutory interpretation that HMRC's published view of the law differed. Nor was it relevant that Parliament later perceived there to be a loophole and acted to close it (Sch. 13, para. 9A).

The additional sum payable to the taxpayer on redemption of the loan stock was interest even though it was not payable periodically. The loan stock was therefore not a relevant discounted security and the taxpayer's appeal would be dismissed.

DECISION

1.This was an appeal by Mr Pike against a closure notice and amendment to his self assessment tax return for the period ending 5 April 2000 which denied the claim for relief on a loss of 3,463,563 for income tax purposes arising from the discount on a relevant discounted security ("RDS") as defined in Finance Act 1996 schedule 13Schedule 13Finance Act 1996.

The facts

2.The evidence was contained in an agreed statement of facts and a witness statement by Mr Pike. Mr Pike did not attend the hearing and this it seems was due to a misunderstanding between the parties. Mr Brooks thought that there were no objections to the witness statement whereas on the contrary Mr Gibbon wished to cross examine Mr Pike. In these circumstances it was agreed by the parties, and we directed, that the witness statement was admitted in evidence but HMRC were free to make submissions as to what weight if any the Tribunal should place on it. In the hearing, Mr Gibbon made no such submissions and did not challenge the witness statement and we make the following findings of facts.

3.Mr Pike was employed by Dell Computer Corporation until 2000 in which he had held various senior posts. Having left Dell he decided to incorporate his own company whose business it would be to invest in internet technology. On 28 March 2000 he purchased an off the shelf company and changed its name to Aim Internet Investments Ltd ("AIM"). The company had 1,000 issued shares, 999 of which were owned by Mr Pike and one by his wife.

4.Three days later on 31 March 2000 the company created loan stock. The loan stock was allotted to Mr Pike who paid 6 million for it. Clause 2.1 of the loan stock instrument ("the Instrument") provides:

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.

5.The loan stock was repayable after 13 years. Assuming it was not redeemed early, Mr Pike would be repaid 11,780,974 which was calculated as 6 million plus 7.25% of 6 million per annum for the 13 years outstanding.

6.Nothing would be payable to Mr Pike until the principal amount was redeemed.

7.A few days later on 5 April 2000, Mr Pike established the Nicholas Pike Settlement 2000 ("the Trust") of which he and his wife were the trustees. Under the terms of the Trust, Mr Pike was entitled to the income although there was a power of appointment which could be exercised in favour of a class of beneficiaries including Mr Pike and his family. Mr Pike transferred into the Trust the loan stock issued to him a few days previously. At the time of this transfer the loan stock had an open market value of 2,536,437. In his tax return Mr Pike stated this was calculated on the basis that although the 7.25% return would be commercially acceptable if the return was virtually risk free, the investment in AIM was far from being risk...

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3 cases
  • Pike v Revenue and Customs Commissioners
    • United Kingdom
    • Upper Tribunal (Tax and Chancery Chamber)
    • 10 May 2013
    ...Tax (Trading and Other Income) Act 2005 section 430 subsec-or-para 4s. 430(4)). The First-tier Tribunal found in favour of HMRC (PikeTAX[2011] TC 01151). The Upper Tribunal found that the term "interest" does not have a special meaning: "Interest is a term that has a well-established meanin......
  • Nicholas Pike v The Commissioners for HM Revenue and Customs
    • United Kingdom
    • Court of Appeal (Civil Division)
    • 20 June 2014
    ...schedule 13FA 1996, Sch. 13, para. 3(6); now section 430 subsec-or-para 4ITTOIA 2005, s. 430(4)). The First-tier Tribunal (FTT) (PikeTAX[2011] TC 01151) and the Upper Tribunal (UT) (PikeTAX[2013] BTC 1,881) found in favour of HMRC. The Judge agreed with the UT that for the reasons given in ......
  • George R Bretten QC
    • United Kingdom
    • First Tier Tribunal (Tax Chamber)
    • 14 March 2013
    ...view to the decision in Audley was expressed obiter (by myself and Mr Thomas), without the benefit of argument, in the case of PikeTAX[2011] TC 01151: [91]Mr Pike gave 6m to the company and in return he got a security with a face value of 6m. But he did this knowing that in return he would ......

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