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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Weston v HM Inspector of Taxes  EWCA Civ 742 (16 June 2005)
Cite as:  BTC 342, 77 TC 650,  STC 1134,  EWCA Civ 742,  STI 1098
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(MR JUSTICE MOSES)
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE CHADWICK
LORD JUSTICE BUXTON
| MICHAEL CHARLES WESTON
|- and -
|MICHAEL GARNETT (HMIT)
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Launcelot Henderson QC and Mr David Ewart (instructed by The Solicitor for the Inland Revenue, Somerset House, London WC2R 1LB) for the Respondent
Crown Copyright ©
Lord Justice Chadwick:
The underlying facts
The statutory provisions
"A gain which accrues on the disposal by any person of
(a) gilt-edged securities or qualifying corporate bonds, or
(b) any option or contract to acquire or dispose of gilt-edged securities or qualifying corporate bonds,
shall not be a chargeable gain."
" (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 sub-paragraph (5) of paragraph 1 of Schedule 18 to the [Income and Corporation Taxes Act 1988] 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)'.
. . .
(2AA) For the purposes of this section 'corporate bond' also includes any asset which is not included in the definition in subsection (1) above and which is a relevant discounted security for the purposes of Schedule 13 to the Finance Act 1996.
. . .
(7) Subject to subsections (9) and (10) below, for the purposes of this Act a corporate bond
(a) is a 'qualifying corporate bond' if it is issued after 13 March 1984; . . .
. . .
(8A) A corporate bond falling within subsection (2AA) above is a qualifying corporate bond whatever its date of issue.
. . . "
"In sub-paragraph (1)(b) above 'normal commercial loan' means a loan of or including new consideration and
(a) which does not carry any right either to conversion into shares or securities of any other description except
(i) shares to which sub-paragraph (5A) below applies,
(ii) securities to which sub-paragraph (5B) below applies, or
(iii) shares or securities in the company's quoted parent company
or to the acquisition of any additional shares or securities;
(b) . . .
(c) . . . "
I need not set out the text of sub-paragraphs (b) and (c). It is common ground that the requirements in those sub-paragraphs are met in the present case.
The loan notes
"A Noteholder may:
5.1 (i) during the Option Period; or
(ii) . . .
Convert from time to time any unredeemed and previously unconverted Loan Note irrevocably into a new loan note of the same par value issued in accordance with and subject to the terms and conditions of the draft instrument set out in the Second Schedule hereto
5.2 . . . the Noteholder shall exercise the option to convert by giving . . . written notice to the Company . . .
. . .
5.4 Upon receiving the written notice the Company shall forthwith execute a new loan instrument in the terms set out in the Second Schedule hereto
5.5 On the Conversion Date the Noteholder shall surrender the Certificate to the Company whereupon the Loan Note shall be cancelled and the Company shall issue a certificate in respect of the said new loan note in the terms set out in the schedule to the draft instrument in the Second Schedule hereto."
In that context "the Option Period" means the period of four years commencing six months from the date of issue of a Loan Note clause 1.1.
"The Loan Notes shall only be issued at such times and on such terms as are provided for in the instrument relating to loan notes made by the Company on the 30th day of May 1997 [the first loan note instrument] subject always to the terms of this Instrument [the second loan note instrument]."
"5.1 During the Option Period . . . a Noteholder may convert from time to time any unredeemed and previously unconverted Loan Note irrevocably into X £1 ordinary shares in the capital of the Company such shares to be issued as fully paid ranking pari passu with the existing ordinary shares of £1 each in the capital of the Company where X equals the aggregate of the par value of such Loan Note and the Accrued Discount thereon.
. . .
5.4 On the Conversion Date the Noteholder shall surrender the Certificate to the Company whereupon the Loan Note shall be cancelled and the Company shall issue the appropriate number of £1 ordinary shares pursuant to clause 5.1."
The Option Period, in relation to the second loan notes, was the period of six months from the date of issue. "Accrued Discount" means "that proportion of the difference between the Redemption Price [£2 per £1 par value] and the par value of a Loan Note as is equal to the proportion that the period from the date of issue of such Loan Note to the Conversion Date bears to the period from the date of issue to the Redemption Date [nine years]."
The special commissioner's decision
"(10) The Appellant sold his 270,000 £1 preference shares for consideration (net of fees) of £300,111 and 12,861 5 p deferred shares in Woodgate for net consideration of £384,813.
. . .
(12) The Appellant included in his 1997/98 tax return chargeable gains on the disposal of his personal holding of £1 cumulative preference shares and 5p deferred convertible shares in Woodgate, and his share of the gain arising to the Woodgate Shareholders Settlement on the sale of the ordinary shares in Carraldo.
(13) No gain was included in respect of the sale of the Carraldo loan notes by the Woodgate Shareholders Settlement. The Appellant disclosed on his 1997/98 tax return that the loan notes had been disposed of and provided detailed paperwork and an analysis, which concluded that the loan notes were qualifying corporate bonds and hence, by virtue of section 115 of the Taxation of Chargeable Gains Act 1992, any gain accruing on their disposal was not chargeable.
(14) The Respondent Inspector of Taxes opened an enquiry into the taxpayer's return for 1997/98, and contended that the Carraldo loan notes were not qualifying corporate bonds, that a chargeable gain arose on the disposal of those loan notes by the Woodgate Shareholders Settlement, and that 241,376/323,286 of that gain was chargeable on the Appellant by virtue of section 77 of the Taxation of Chargeable Gains Act 1992.
(15) As the parties were unable to agree, on 21 October 2002 the inspector wrote to the Appellant to notify him that he was amending the Appellant's self-assessment for 1997/98 to increase the tax due by £2,647,729.20.
(16) On 31 October 2002 an appeal against the inspector's amendment of the self assessment was lodged on behalf of the Appellant"
"I start by setting out again paragraph 1(5) of Schedule 18 in its modified form:
' normal commercial loan means a loan of or including new consideration and
(a) which does not carry any right either to conversion into shares or securities of any other description except corporate bonds (within the meaning of section 117 of the 1992 Act)
or to the acquisition of any additional shares or securities.'
The question is whether the first loan note carries 'any right' to conversion into something other than corporate bonds, namely whether it carries any right to convert into Carraldo ordinary shares. It seems to me that on the ordinary meaning of language it plainly does. That right is an indirect right, in that in order to obtain Carraldo ordinary shares the noteholder must (a) wait six months, (b) complete a conversion notice, (c) receive the second loan note on cancellation of the first loan note, (d) wait another six months, and (e) complete another conversion notice. Other than effluxion of time and completing the conversion notices the holder of the first notes has an absolute right from the start to convert into the ordinary shares, which is a right granted by the terms of the first loan notes. It is of course the case that the first loan note ceases to exist before the right to convert the second loan note becomes exercisable, but that is not relevant to the question whether the first loan note carries the right to convert. That interpretation corresponds also to the commercial reality that on sale the loan notes had virtually the same value as the ordinary shares into which they were indirectly convertible attributed to them on the sale to the outside purchaser."
The appeal to the High Court
"I rest my decision on the wording of section 117(1). The rights carried by the first loan notes included the rights to convert into the shares of Carraldo, and the process by which those rights could be exercised was mere machinery. Those rights fell within section 117 and preclude the characterisation of those loan notes as normal commercial loans within the meaning of that section. For those reasons, which do no more than echo the reasoning of [the special commissioner] at paragraph 15 of his decision, this appeal is dismissed."
"LOAN TO COMPANY
There was produced to the meeting a draft copy of a loan note instrument proposed to be executed by the company by virtue of which the company may obtain medium term loan funding of up to £285,000 for a period of five years."
That is the resolution to which both the recital in the instrument dated 30 May 1997 (the first loan note instrument) and the recital in the draft instrument set out in the second schedule thereto (the draft second loan note instrument) refer. It is also the resolution which authorises the issue of the second loan notes. That is made clear in clause 5.4 of the first loan note instrument (as substituted by the deed of 10 June 1997) and by clause 2.3 of the draft second loan note instrument. It is the resolution referred to both in the first loan note certificates which were issued and in the draft of the second loan certificates, which appears as a schedule to the draft second loan note certificate. The documentation is consistent and only consistent with a single underlying loan: the loan authorised by the resolution of 30 May 1997.
"The short answer to these submissions seems to me that an analysis of the meaning of the words "any right to conversion into shares" in schedule 18 are of no assistance in the construction of section 117. Section 117 is not in any way concerned with group relief or the identification of an equity holder for that purpose. Section 117 is merely concerned with the meaning of a QCB for the purposes of capital gains tax".
And, after remarking on "the vices of legislation by reference", he went on to say that there was "no basis for seeking the correct construction of the words used to define a normal commercial loan within section 117 by reference to the meaning of those words in the wholly different context of schedule 18 merely because they have been borrowed from that source. . . . The wording in section 117, which is better understood when set out in full, provides its own discrete meaning of a normal commercial loan without the need for any reference back to the original unmodified source of that definition".
Lord Justice Buxton:
Lord Justice Pill:
Note 1 Clauses 5.4 and 5.5 were introduced, in substitution for clause 5.4 in the instrument dated 30 May 1997, by a deed dated 10 June 1997 and made between Carraldo and the trustees of the Woodgate Shareholders Settlement, as noteholders in respect of notes to the value of £194,670. In its original form clause 5.4 was in these terms:
5.4 On the Conversion Date the Noteholder shall surrender the Certificate to the Company whereupon the Loan Note shall be cancelled and the Company shall issue the appropriate number of £1 ordinary shares pursuant to clause 5.1
Note 1 Clauses 5.4 and 5.5 were introduced, in substitution for clause 5.4 in the instrument dated 30 May 1997, by a deed dated 10 June 1997 and made between Carraldo and the trustees of the Woodgate Shareholders Settlement, as noteholders in respect of notes to the value of £194,670. In its original form clause 5.4 was in these terms: 5.4 On the Conversion Date the Noteholder shall surrender the Certificate to the Company whereupon the Loan Note shall be cancelled and the Company shall issue the appropriate number of £1 ordinary shares pursuant to clause 5.1 [Back]