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England and Wales High Court (Chancery Division) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Harding v HM Revenue & Customs [2008] EWHC 99 (Ch) (30 January 2008) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2008/99.html Cite as: [2008] STI 221, [2008] STC 1965, [2008] EWHC 99 (Ch), [2008] BTC 109 |
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CHANCERY DIVISION
Strand, London, WC2A 2LL |
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B e f o r e :
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NICHOLAS JOHN HARDING |
Appellant |
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- and - |
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THE COMMISSIONERS OF HER MAJESTY'S REVENUE AND CUSTOMS |
Respondents |
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Mr Michael Gibbon (instructed by Solicitor for HMRC, Somerset House, East Wing, London WC2R 1LB) for the Respondents
Hearing date: 18th January & 21st January 2008
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Crown Copyright ©
Mr Justice Briggs :
"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 sub-paragraph (5) of paragraph 1 of Schedule 18 to the Taxes Act if for paragraph (a)(i) to (iii) of that sub-paragraph there were substituted the words "corporate bonds (within the meaning of section 117 of the 1992 Act)""
HISTORY AND PURPOSE
"Part 1 of Schedule 13 to this Act shall have effect for the purpose of-
(a) providing, in relation to qualifying corporate bonds, an exemption from capital gains tax and corporation tax on chargeable gains similar to that provided in relation to gilt-edged securities by Part 4 of the Capital Gains Tax Act 1979…"
"The exemption from capital gains tax of 'corporate bonds' was introduced in order to stimulate the British bond market. That accounts for requirement in section 117(1) of the 1992 Act, otherwise difficult to explain (or justify), that to gain exemption bonds must be denominated in sterling and not be convertible into any other currency.
Care was accordingly taken to ensure that the exemption only extended to bonds that were genuinely traded in that market; and more generally to ensure that the exemption could not be used as a vehicle for avoidance. That is achieved in section 117(1) by limiting qualifying bonds to those that support normal commercial loans. The adopted sub-paragraphs of 1(5) of Sch 18 to the 1988 Act, themselves intended to prevent the misuse of group relief, are principally directed at excluding any loan that gives the loan creditor an actual or potential interest in the debtor company or its performance. That is to ensure that the creditor's participation in the bond market is as an ordinary investor in that market, and not for any other or wider motive."
SECTION 117 IN ITS 1995 CONTEXT
CHANGE OF STATUS
THE DEFINITION OF QCB
"(b) "security" includes any loan stock or similar security whether of the Government of the United Kingdom or of any other government, or of any public or local authority in the United Kingdom or elsewhere, or of any company and whether secured or unsecured."
"The statutory language makes a distinction between the 'security' and the 'debt on the security'. 'Security' is defined by section 132(3)(b) TCGA 1992: it includes 'any loan stock or similar security … of any company, and whether secured or unsecured'. In the present context it is the loan note which is the security; but it is the underlying loan, which the loan note secures, which is the debt; and it is the underlying loan which must satisfy the condition that it 'represents and has at all times represented a normal commercial loan'."
"The proper construction is that the test in (b) must be conducted by reference to the formal terms of the security rather than by reference to those that are effective or operative at the time of disposal."
He relied also upon the requirement established in Taylor Clark International Limited v Lewis [1997] STC 499, that the "debt on a security" qualifies for present purposes only if has a "structure of permanence".
"I think that the words "the debt on a security" refer to an obligation to pay or repay embodied in a share or stock certificate issued by a government, local authority or company, which is evidence of the ownership of the share or stock and so of the right to receive payment."
"Although I think that, in this case, the manner in which loan 2 was constituted, viz by written offer, orally accepted together with evidence of the acceptance by statutory declaration, was enough to satisfy strict interpretation of 'security', I am not convinced that a debt, to qualify as a debt on a security, must necessarily be constituted or evidenced by a document. The existence of a document may be an indicative factor, but absence of one is not fatal. I would agree with the observations of my noble and learned friend Lord Fraser in relation, in particular, to the Cleveleys Investment Trust case."
At page 187, Lord Fraser said this about the passage in Lord Migdale's judgment in the Cleveleys case which I have already quoted:
"Lord Migdale's view was accepted by all the learned judges of the First Division in Aberdeen Construction Group Limited v. Inland Revenue Commissioners [1977] STC 302, but when the Aberdeen case reached this House, the existence of a certificate was not treated as the distinguishing feature of the debt on a security."
"… a normal commercial loan is a loan without bells and whistles: a plain vanilla loan;".
Later, at paragraph 72, he cites Mr Southern's submission (which is not contentious) that:
"Sub-paragraph (a) excludes from QCB treatment securities which have an equity like return or an equity like component in their return."
As is apparent from Weston v. Garnett, the existence of an option to convert into ordinary shares is a typical example of a bell or a whistle the existence which is fatal to that requirement.
"(a) "Conversion of securities" includes [any of the following, whether effected by a transaction or occurring in consequence of the operation of the terms of any security or of any debenture which is not a security, that is to say]
(i) …
[(ia) a conversion of a security which is not a qualifying corporate bond into a security of the same company which is such a bond, …]."
The second amendment was to insert into section 116(2) the following phrase:
"References to a transaction include references to any conversion of securities (whether or not affected by a transaction) within the meaning of section 132 …".
"If a security held by an individual has an option to convert into a non-sterling currency it will not be a QCB. If, however, the option lapses after a given time, the security may become a QCB. It has been argued that in such cases, there would be no chargeable claim on the disposal of the security, nor would there be any disposal when the conversion right lapses. (my underlining)
To ensure that tax is not lost in these circumstances, provisions will be introduced so that the change of status of the security from a non-QCB to QCB (and also a QCB into a non-QCB) is treated as a conversion of securities. This will ensure that the liability on any existing gain is preserved. Any capital gain resulting from the treatment of the change in status as a conversion of the security may still be deferred by the taxpayer, where existing rules allow for this, until the security is disposed of."
"Whatever the difficulties the court has to do its best to make sense of the statute, and that means not only making grammatical sense of the text but also finding a rational scheme in the legislation. That is not to say that the court should start off with preconceptions about what it expects to find, or that it should shrink from saying so in the rare case where a tax statute has 'plainly missed fire' (the expression used by Lord Macmillan in Ayrshire Employers Mutual Insurance Association Ltd v. IRC 1946 SC (HL) 1 at 9, 27 TC 331 at 347). But as Viscount Simon LC said in Nokes v. Doncaster Amalgamated Collieries Ltd [1940] AC 1014 at 1022 (which was not a tax case, but has often been cited in tax cases)-
'… if the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation, we should avoid a construction which would reduce the legislation to futility and should rather accept the bolder construction based on the view that Parliament would legislate only for the purpose of bringing about an effective result.'
These authorities were not cited, but they are well known."
"Thirdly, the object of the construction of a statute being to ascertain the will of the legislature it may be presumed that neither injustice nor absurdity was intended. If therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted."
"To apply the words literally is to defeat the obvious intention of the legislation and to produce a wholly unreasonable result. To achieve the obvious intention and produce a reasonable result we must do some violence to the words. This is not a new problem, though our standard of drafting is such that it rarely emerges. The general principle is well settled. It is only where the words are absolutely incapable of a construction which will accord with the apparent intention of the provision and will avoid a wholly unreasonable result, that the words of the enactment must prevail."
Later in the same speech, he added, at page 579:
"If it is right that, in order to avoid imputing to Parliament an intention to produce an unreasonable result, we are entitled, and indeed bound, to discard the ordinary meaning of any provision and adopt some other possible meaning which will avoid that result, then what I am looking for in examining the obscure provision at the end of [the relevant section] is not its ordinary meaning (if it has one) but some possible meaning which will produce a reasonable result. I think that the interpretation that I have given is a possible interpretation and does produce a reasonable result, and therefore I adopt it."
"The taxpayer's construction does produce an undoubted anomaly which is contradictory to the evident purpose of the relevant statutory provisions viewed as a whole, viz that capital gains made on qualifying corporate bonds should be exempt from tax, whereas capital gains made on shares should be subject to tax. In these circumstances, principle, common sense and authority show that the court is 'entitled, and indeed bound, to … adopt some other possible meaning' if it exists."
Later he said:
"… the signposts in this case point firmly to the conclusion that the one thing the legislature did not intend was that capital gains – particularly those which had already accrued on shares- should be exempt from tax."
"Where a particular construction produces an anomaly which only arises in a rather unusual set of facts, its force as an aid to construction, is, in my judgment, somewhat weakened. If, in construing a statute, the court's object is 'to ascertain the will of the legislature', it is a little easier to accept a construction which gives rise to an undisputed anomaly only in the context of a somewhat unusual set of facts, whose existence simply may not have occurred to the legislature, than where such an anomaly is comparatively self-evident or of more general application …"
CONCLUSION