Pike v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 10 May 2013 |
| Neutral Citation | [2013] UKUT 225 (TCC) |
| Date | 10 May 2013 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2013] UKUT 225 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Norris J, Judge Roger Berner.
Income tax - Claim for loss on disposal of loan stock - Whether loan stock a "relevant discounted security" - FA 1996, Finance Act 1996 schedule 13 subsec-or-para 3Sch. 13, para. 3 - Whether additional payment on redemption of loan stock was interest - Yes - Appeal dismissed.
The Upper Tribunal upheld the decision of the First-tier Tribunal that the payment of a premium on the redemption of loan stock was interest, and so that the loan stock was not a relevant discounted security.
A company in which the taxpayer was the majority shareholder issued £6m loan stock to the taxpayer at par. The loan stock was repayable after 13 years at which point the taxpayer would be entitled to redemption proceeds of £11,780,974, made up of the principal amount (£6m) and an additional amount equal to 7.25 per cent per annum of the principal amount accruing on a daily basis over the term of the loan stock. A few days after the loan stock was issued, the taxpayer transferred the loan stock into a trust of which he and his wife were the trustees. At that point, the taxpayer believed the open market value of the loan stock to be £2,536,437. The taxpayer considered that the loan stock was a relevant discounted security ("RDS") and so that he was entitled to relief from income tax for the loss of £3,463,563 for the year in which the transfer occurred. HMRC rejected the claim for relief on the basis that the additional amount was an amount payable by way of interest and so that the loan stock was not a RDS (FA 1996, Finance Act 1996 schedule 13 subsec-or-para 3Sch. 13, para. 3(6); now ITTOIA 2005, Income 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 meaning that must, in our judgment, apply for this purpose". It is was possible to identify the following characteristics of an amount payable by way of interest from observations in the decided cases:
·interest is calculated by reference to an underlying debt;
·the payment that is made by reference to that debt is a payment made according to time;
·the sum payable accrues from day to day, or at other periodic intervals;
·whilst interest accrues from day to day, or at other fixed intervals, it does not have to be paid at any intervals;
·what the return is called is not determinative of its nature; and
·the mere fact that the payment by way of interest may be aggregated with a payment of a different nature does not "denature" the payment that is interest.
Having considered the above characteristics, the Upper Tribunal found it useful to contrast interest with other forms of return, observing that there is a distinction to be drawn between a risk-based return (being a reward for speculation or compensation for risking capital) and a purely time-based return.
It was clear to the Upper Tribunal that the additional payment was interest. The additional payment bore all of the characteristics of a payment of interest; it was paid by reference to an underlying debt and it was calculated daily, at a stipulated rate and by reference to the time elapsed rather than the risks assumed by the taxpayer. It did not matter that the terms of the loan notes did not expressly provide for interest to be paid, that the additional payment was described as a premium or that the additional payment was to be paid only when the loan itself was repaid. The Upper Tribunal upheld the decision of the First-tier Tribunal, finding in favour of HMRC that the additional payment was interest and so that the loan stock was not a RDS.
This decision provides a useful summary of case law on the meaning on "interest". A return which has the characteristics of a payment of interest, in that it is calculated on a time-basis by reference to an underlying debt, will be interest regardless of the label attached to it.
For commentary on the meaning of "interest", see the CCH British Tax Reporter at 327-050. Commentary on the meaning of "deeply discounted security" can be found at 337-050.
[1]In his self assessment tax return for the year ended 5 April 2000 Nicholas Pike claimed relief against his income in the sum of £3,463,563, deriving from a loss incurred on relevant discounted securities. That claim arose in this way.
[2]On 28 March 2000 Mr Pike (who had recently retired as a Senior Executive of the Dell Computer Corporation) acquired an "off the shelf" company which he renamed Aim Internet Investments Limited ("the Company"). He took 999 shares in the Company and his wife took the remaining share. He became its sole director.
[3]Three days later (on 31 March 2000) Mr Pike caused the Company to issue £6,000,000 nominal of Loan Stock 2013, all of which he took at par.
[4]The Loan Stock Certificate issued to Mr Pike provided that:
The Company shall, subject to the terms of this Loan Stock, pay to the Stockholder on the 15 July 2013 ("Repayment Date") the Redemption Proceeds as defined in Condition 2.
[5]Condition 2 was headed "Redemption" and was in these terms:
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2.1in 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 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.
The remaining provisions of Condition 2 provided for partial and for early redemption.
[6]Five days later (on 5 April 2000) Mr Pike declared the trusts of The Nicholas Pike Settlement 2000 in relation to the £6,000,000 Loan Stock (which constituted the trust fund of that settlement).
[7]In his self assessment return Mr Pike noted that because the Company was connected to him the gain or loss on the transfer of the Loan Stock into The Nicholas Pike Settlement 2000 was calculated by reference to its market value at the time of the transfer to the trust. He added this explanation:
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...
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