Revenue and Customs Commissioners v Trigg (a partner of Tonnan LLP)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 April 2016 |
| Neutral Citation | [2016] UKUT 165 (TCC) |
| Date | 12 April 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Mrs Justice Asplin, Judge Roger Berner
Akash Nawbatt, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Appellants
Malcolm Gammie QC, instructed by Herbert Smith Freehills LLP, appeared for the Respondent
Capital gains tax – Qualifying corporate bonds (QCBs) – Whether provisions in bond instruments for redenomination of sterling bonds to euros (or another currency) on adoption by the UK of the euro (or other currency) as its lawful currency prevented the bonds from being QCBs – Taxation of Chargeable Gains Act 1992 (“TCGA 1992”), s. 117(1)(b) and s. 117(2)(b).
The Upper Tribunal found that the exception in TCGA 1992, s. 117(2)(b) for redemption in a currency other than sterling at the exchange rate then prevailing did not extend to conversions and therefore the bonds were not QCBs.
The appellant had disposed of a number of bonds that he argued were QCBs, but which contained one or other of two clauses (Schedules A or B). Schedule A became operative on a change of currency and in effect converted the sterling amount to whichever currency was adopted. Schedule B allowed the issuer to redenominate the bonds into euros if the UK became a participating member state of the EU. The FTT had rejected the appellant's argument that, because sterling meant whatever was the UK's lawful unit of currency, the euro was not a “currency other than sterling”, but accepted that, on a purposive construction of the legislation, the QCB exemption was intended to extend to bonds that could be converted into another currency as long as there was no possibility of an exchange gain or loss arising.
The Upper Tribunal agreed with the FTT that “sterling” meant pounds sterling. Their reasoning was that Parliament could, if it had intended otherwise, have drafted the legislation accordingly. However, turning to the second argument that because TCGA 1992, s. 117(2)(b) provides an exception from the requirement in s. 117(1)(b) that a QCB should be denominated in sterling (by disregarding provisions enabling redemption in a currency other than sterling provided the exchange rate at redemption is used), they did not agree that this enabled s. 117(2)(b) to be purposively construed to apply to conversions as well as redemptions. They considered that Parliament could not have intended s. 117(2)(b) to include conversions because of its choice of different language in s. 117(1)(b) and s. 117(2)(b), which could not be ignored whatever principle of construction was applied. They also examined the meaning of “conversion” which, on the authority of Klincke v R & C Commrs TAX[2010] BTC 1,644, includes any change in the character, nature, form or function of the security. If, on adoption of the euro, the bonds would automatically be immediately redenominated in sterling, the provisions of Schedules A and B would not be a conversion because they would not effect such a change. They considered that EU law (from which the UK currently has a derogation) would not necessarily lead to immediate redenomination and therefore each of Schedules A and B were provisions for conversion. Finally, although EU Regulations provide that, from the date of adoption of the euro, the euro unit and the national currency of the member state are to be “units of the same currency”, it was not certain that this would be the case if the UK adopted the euro (or any other currency) and therefore each Schedule must be regarded as a provision for conversion into a “currency other than sterling”. Consequently the bonds were not QCBs.
It is interesting to note (and was a point recognised by the Upper Tribunal) that if the bonds had not contained Schedules A and B but were necessarily converted to euros if the UK adopted the euro as its currency, the bonds would have been exempt QCBs (because they did not contain a provision for conversion into a currency other than sterling).
[1] This is an appeal by the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) from the decision of the First-tier Tribunal (Judge Barbara Mosedale) (the “FTT”) released on 20 October 2014 (the “FTT Decision”). The FTT Decision was made pursuant to a joint reference to the FTT under section 28ZA of the Taxes Management Act 1970 by HMRC and Mr Nicholas Trigg, a partner in Tonnant LLP (“Mr Trigg”). A number of references were lodged in the FTT by other partners in Tonnant LLP. Pursuant to rule 18 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, Mr Trigg's appeal became the lead appeal before the FTT.
[2] The issue with which the joint reference was concerned is a short one. It is whether certain corporate bonds (the “Bonds”) purchased by Mr Trigg qualify under an exemption from capital gains tax for “qualifying corporate bonds” (“QCBs”). The terms of the joint reference (the “Reference”) were:
Does the inclusion in the Bonds (at the time of their issue) of a clause in the form set out in Schedule A or B to this Joint Reference prevent the Bonds from being qualifying corporate bonds by virtue of section 117(1)(b) of the Taxation of Chargeable Gains Act 1992?
[3] The exemption from CGT for QCBs is contained in s 115 of the Taxation of Chargeable Gains Act 1992 (“TCGA”). Although simple debts fall outside the scope of CGT (s 251 TCGA), as a general matter debts on a security, such as the Bonds, are chargeable assets unless the exemption in s 115 applies. That exemption depends upon the securities coming within the definition of a “qualifying corporate bond” in s 117 TCGA which materially provides as follows:
(A1) … for purposes other than those of corporation tax references to a qualifying corporate bond shall be construed in accordance with the following provisions of this section.
(1) For the purposes of this section, a “corporate bond” is a security, as defined in section 132(3)(b)–
a) the debt on which represents and has at all times represented a normal commercial loan; and
b) which is expressed in sterling and in respect of which no provision is made for conversion into, or redemption in, a currency other than sterling,
and in paragraph (a) above “normal commercial loan” has the meaning which would be given by section 162 CTA 2010 if for paragraphs (a) to (c) of subsection (2) of that section there were substituted the words “corporate bonds (within the meaning of section 117 of TCGA 1992)”
(2) For the purposes of subsection (1)(b) above–
a) a security shall not be regarded as expressed in sterling if the amount of sterling falls to be determined by reference to the value at any time of any other currency or asset; and
b) a provision for redemption in a currency other than sterling but at the rate of exchange prevailing at redemption shall be disregarded.
…
[4] The Reference raises a question of statutory construction. There was no dispute as to the underlying facts, which were briefly stated by the FTT at [4]–[6] of the FTT Decision. Put very shortly, the Reference concerned six Bonds which had been purchased by Tonnant LLP on the secondary market and later realised in whole or in part. All the Bonds were issued, denominated and redeemable in sterling. Interest was payable in sterling. In the offering circular or prospectus for each of the Bonds, the references to “sterling” were to the lawful currency for the time being of the UK.
[5] The offering circular or prospectus for each of the Bonds contained a section setting out extensive risk factors, among which was a factor referring, in varying terms, to the euro becoming the lawful currency of the UK prior to repayment of the Bonds.
[6] The dispute before the FTT, and before this tribunal, concerned the effect of two types of clause contained in the conditions on which the Bonds were issued. One type was that set out in Schedule A to the Reference; the other was contained in Schedule B. Each of the Bonds contained one type of clause, but not both. The full terms of the clauses at Schedule A and Schedule B are set out in the Appendix to this decision. For present purposes we gratefully adopt the summary of the two types of clauses which Judge Mosedale provided at paragraphs [8]–[13] of the FTT Decision:
[8] In summary, Schedule A made no specific reference to the euro (other than in its heading). It became operative:
If at any time there is a change in the currency of the United Kingdom such that the Bank of England recognises a different currency or currency unit or more than one currency or currency unit as the lawful currency of the United Kingdom …
[9] When it became operative, its effect was:
… references in, and obligations arising under, the Notes … will be converted into, and/or any amount becoming payable under the Notes … will be paid in, the currency or currency unit of the United Kingdom …
[10] It provided a rate at which conversion [would] occur:
Any such conversion will be made at the official rate of exchange recognised for that purpose by the Bank of England.
[11] Further provisions permitted the terms of the Bonds to be amended by the issuer to put all parties in the same position as if no change in currency had occurred and such changes could be retrospective.
[12] This clause was in different terms. It came into effect “after the date (if any) on which the United Kingdom becomes a Participating Member State”. A participating member state was defined as any member state of the European Union which has adopted the euro as its lawful currency in accordance with the Treaty establishing the European Union.
[13] Once the UK had adopted the euro as its lawful currency, this enabled the issuer of the bond (on 30 days notice) to designate a “Redenomination Date” as long as that date fell on a Note payment date. The effect of the issuer giving such notice was...
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