Summary

The Taxation of Chargeable Gains Act 1992 s.116(1)(b) applied where, by a single transaction, both qualifying corporate bonds (which fell outside the charge to capital gains tax (CGT) on redemption) and non-qualifying corporate bonds (which fell within the charge to CGT on redemption) were converted into qualifying corporate bonds.

Facts

The Supreme Court considered the true interpretation of the Taxation of Chargeable Gains Act 1992 s.116.

The appellant taxpayers were issued loan notes in connection with the sale of their shares in their company. They sought to show that the redemption of the loan notes fell outside the charge to capital gains tax (CGT) by virtue of the exemption in s.115 for disposals of qualifying corporate bonds (QCBs). QCBs were essentially sterling-only bonds. Following the reorganisation, some of the loan notes issued as consideration were converted into QCBs. The taxpayers structured the disposal of their shares in three stages: stage 1 was the exchange of company shares for notes which, being convertible into foreign currency, were not QCBs; at stage 2 the terms of some of the notes were varied so that they became QCBs; at stage 3, both sets of notes (QCBs and non-QCBs) were converted into one series of secured discounted loan notes (SLNs), which were QCBs. The SLNs were subsequently redeemed for cash. The taxpayers argued that the result of the completion of stages 2 and 3 was that they were not chargeable to CGT. The 1992 Act conferred "rollover relief" on the disposal of securities as part of a reorganisation: it brought securities issued as consideration into charge for CGT purposes but deferred tax until their subsequent realisation. That was less favourable to the taxpayer than the exemption in s.115. The roll-over provisions constituted a carve-out from the exemption in s.115. They extended to certain conversions involving QCBs. The taxpayers sought to fall outside that carve-out, and thus within the exemption in s.115. The Court of Appeal rejected their claim, finding that, although the wording of the carve-out could be read literally in favour of the taxpayers, the result would be contrary to Parliament's intention. The issue was whether s.116 applied where, by a single transaction, both QBCs (which fell outside the charge to CGT on redemption) and non-QCBs (which fell within the charge to CGT on redemption) were converted into QCBs.

Held

It was common ground that, if the conversion at stage 3 involved separate conversions of the QCBs and non-QCBs, the appeal had to fail. The question whether there was a single conversion or two separate conversions was a question of applying the provisions of the Act to the facts. The answer was not mandated in the taxpayers' favour by the fact that they utilised a single transaction. Section 116(1)(b) contemplated the possibility of a single transaction involving a pre-conversion holding of both QCBs and non-QCBs, and that, coupled with the fact that the Court of Appeal's interpretation rendered the words "or include" appearing in s.116(1)(b) otiose, were powerful arguments in support of the taxpayers' construction. However, the taxpayers' interpretation would be inexplicable in terms of the policy expressed in the provisions, which was to enable all relevant reorganisations to benefit from the same rollover relief. In looking at the fiscal policy behind the scheme, the Court of Appeal applied a purposive approach. It did not give any meaning to the words "or include" in s.116(1)(b), but that was appropriate as in s.132(3) it was clearly Parliament's intention that each security converted into a QCB should be viewed as a separate conversion. Moreover, it was not an objection that s.127 contemplated a single asset because Parliament had required s.127 to s.131 to be applied with "necessary adaptations". In those circumstances, the clear words principle was observed in the instant case. There were cases where, when interpreting a statute, the courts had to adopt a strained interpretation in place of one which would be contrary to Parliament's clear intention, Inland Revenue Commissioners v Luke [1963] A.C. 557 considered. That principle could be applied to a tax statute. However, the circumstances in which that principle could be applied were limited, for example, to those where there was not simply inconsistency with evident Parliamentary intention but some clear contradiction with it. Parliament's intention had to be clearly found on the wording of the legislation. Nothing in the instant judgment detracted from that principle, but it was unnecessary to consider its application to the case because the construction of the relevant provisions was clear without resorting to it (see paras 19-24, 26 of judgment).

Appeal dismissed