Summary

For the purposes of the Taxation of Chargeable Gains Act 1992 Sch.5B para.1(2)(f), "all the shares comprised in the issue" meant all shares of the same class issued by the company on the same day, and not all of the shares issued on that day for which the investor had subscribed wholly in cash. Where a number of shares of the same class were issued on the same day, some in return for cash, some to convert loan notes and some in satisfaction of a fee due to an investor for providing a guarantee, the purchase of the shares issued in return for cash did not qualify for capital gains tax reinvestment relief under the Enterprise Investment Scheme.

Facts

The appellant company (D) appealed against the respondent Revenue's refusal to authorise D's issue of a certificate stating that the conditions for capital gains tax reinvestment relief under the Enterprise Investment Scheme were satisfied in respect of a purchase of shares by an investor (M). D had issued a number of ordinary shares to M and other investors on the same day. Some of the shares taken by M were issued in return for cash, some in satisfaction of a fee due to M for providing a guarantee and some to convert loan notes held by M into shares. One of the terms of M's offer to purchase the shares for cash was that the existing loan notes should be converted to share capital. The loan notes themselves provided that the holder had the option of converting them into shares at any time, and the allotment of the shares was to be in satisfaction of the debt represented by the loan notes, which would be cancelled. M wished to claim reinvestment relief under the Enterprise Investment Scheme in respect of the shares issued in return for cash. The Revenue took the view that "all the shares comprised in the issue" were not issued to raise money for the purpose of a qualifying business activity within the Taxation of Chargeable Gains Act 1992 Sch.5B para.1(2)(f) since some of the shares issued that day had been issued as consideration for providing the guarantee and some to convert the loan notes. It was not disputed that all of the shares issued in return for cash were issued to raise money for the purpose of a qualifying business activity within the meaning of para.1(2)(f). D argued that (1) "all the shares comprised in the issue" in para.1(2)(f) referred to the shares mentioned in para.1(2)(a) and meant all of the shares for which the investor had subscribed wholly in cash; (2) the shares should not be treated as never having been eligible shares pursuant to para.13(2)(b); there had been no repayment within para.13(2)(b) because the loan notes carried the right to convert into fully paid-up ordinary shares and were converted under those provisions, amounting to a surrender and cancellation; (3) the shares should not be treated as never having been eligible shares pursuant to para.13(2)(c) since there had been no payment to M for giving up his right to a debt on its extinguishment.

Held

(1) The change of wording marked by para.1(2)(e), the need to give some meaning to the words "comprised in the issue" within para.1(2)(f) and the reference to "any" eligible shares in para.19(3)(a) indicated that para.1(2)(f) referred to shares of the same class issued by the company on the same day and not shares issued to an individual investor for cash, which were referred to in para.1(2)(a). The fact that that interpretation might produce anomalous results in certain circumstances did not mean that it amounted to an absurdity, Wakefield v Inspector of Taxes (2005) STC (SCD) 439 Sp Comm applied. Although one could have sympathy with D's broad approach to construction, a textual analysis of para.1(2) and para.19(3)(a) dictated the conclusion that the condition for relief established by para.1(2)(f) was not met in the instant case because some of the shares of the same class issued by D on the same day were not issued to raise money for the purpose of a qualifying business activity, Blackburn v Revenue and Customs Commissioners (2008) EWHC 266 (Ch), (2008) STC 842 applied and Mellham Ltd v Burton (Inspector of Taxes) (2006) UKHL 6, (2006) 1 WLR 2820 distinguished. (2) Although it was unnecessary to decide the issue, the correct analysis of the conversion of the loan notes was not that they were surrendered and cancelled in consideration in money's worth for the shares, but that by converting the loan notes into shares, D repaid, in pursuance of arrangements for or in connection with the acquisition of the shares, the debt it owed to the holders of the loan notes within para.13(2)(b), Mosely v Koffyfontein Mines Ltd (1904) 2 Ch 108 CA considered and Optos Plc v Revenue and Customs Commissioners (2006) STC (SCD) 687 Sp Comm applied. D had also repaid a debt owed to M within para.13(2)(b) in respect of the fee it had agreed to pay M for providing the guarantee, such fee to be satisfied by an issue of shares. (3) If that conclusion was wrong, it would have been held that by issuing the shares for the conversion of the loan notes and for the provision of the guarantee, D had, in effect, made a payment to M for giving up his right to the debts represented by the loan notes and the fee for the guarantee.

Appeal dismissed