JUDGMENT
Hancock and another (Appellants) v
Commissioners for Her Majesty’s Revenue and
Customs (Respondent)
before
Lord Reed, Deputy President
Lord Sumption
Lord Carnwath
Lord Briggs
Lady Arden
JUDGMENT GIVEN ON
22 May 2019
Heard on 6 December 2018
Appellants Respondent
Michael Sherry Michael Gibbon QC
Ximena Montes Manzano Elizabeth Wilson
(Instructed by Michael
Sherry
)
(Instructed by HMRC
Solicitors Office
)
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LADY ARDEN: (with whom Lord Reed, Lord Sumption, Lord Carnwath
and Lord Briggs agree)
Issues on this appeal
1. By this appeal Mr and Mrs Hancock seek to show that the redemption of the
loan notes, issued to them in connection with the sale of their shares in their
company, Blubeckers Ltd, fell outside the charge to capital gains tax (“CGT”) by
virtue of the exemption in section 115 of the Taxation of Chargeable Gains Act 1992
(“TCGA”) for disposals of “qualifying corporate bonds” (“QCBs”). QCBs are
essentially sterling-only bonds (see TCGA, section 117). The noteworthy feature for
present purposes of the redemption process was that, following the reorganisation,
some of the loan notes issued as consideration were converted into QCBs. TCGA
confers “rollover relief” on the disposal of securities as part of a reorganisation, ie
it brings securities issued as consideration into charge for CGT purposes but defers
the tax until their subsequent realisation. This is less favourable to the taxpayer than
the exemption in TCGA, section 115. The roll-over provisions constitute a carveout from the exemption in TCGA, section 115. They extend to certain conversions
involving QCBs. The appellants seek to fall outside that carve-out (and thus within
the exemption in TCGA, section 115). The Court of Appeal (Lewison, Kitchin and
Floyd LJJ) rejected the appellants’ claim: [2017] 1 WLR 4717. They considered
that, although the wording of the carve-out could be read literally in favour of the
taxpayers, that result would be contrary to Parliament’s intention. Therefore, the
appellants’ claim for relief failed. Instead, they were entitled to rollover relief
deferring tax to redemption.
The legislative and factual framework in more detail
2. For CGT purposes, there must be a relevant disposal of a relevant asset by
persons chargeable to tax resulting in a gain which is chargeable for capital gains
tax purposes. In this case, the appellants undoubtedly made a gain when they
exchanged their shares in Blubeckers Ltd for redeemable loan notes (with a
provision for an earn-out under which further loan notes would, as in the event
happened, be issued, dependent on the performance of the business). This
transaction was a reorganisation under TCGA, section 126. Rollover relief was
available under TCGA, section 127.
3. The appellants structured the disposal of their Blubeckers shares in three
stages. Stage 1 was the exchange of Blubeckers shares for Lionheart notes, which,
being convertible into foreign currency, were not QCBs. At Stage 2, the terms of
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some of those notes were varied so that they became QCBs. At Stage 3, both sets of
notes (QCBs and non-QCBs) were, together and without distinction, converted into
one series of secured discounted loan notes (“SLNs”), which were QCBs. The SLNs
were subsequently redeemed for cash. It is said to be the result of the completion of
Stages 2 and 3 that the appellants are not chargeable to CGT. The exact nominal
amount of loan notes converted into QCBs does not matter in that, on the appellants’
argument, it was sufficient if the QCB element of the conversion was the smallest
denomination (say £1).
4. Rollover relief is available for reorganisations resulting in the issue of
securities such as shares. TCGA, section 132, as amended by section 88(2) of the
Finance Act 1997, by extending that relief to a conversion of securities, following a
reorganisation, in or out of a QCB, equates the relief for such a conversion with that
available for a reorganisation of share capital:
“132(1) Sections 127 to 131 shall apply with any necessary
adaptations in relation to the conversion of securities as they
apply in relation to a reorganisation (that is to say, a
reorganisation or reduction of a company’s share capital).
…
(3) For the purposes of this section and section 133 –
(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) a conversion of securities of a company
into shares in the company, and
(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, and
(ib) a conversion of a qualifying
corporate bond into a security which is a
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security of the same company but is not
such a bond, and
(ii) a conversion at the option of the holder of
the securities converted as an alternative to the
redemption of those securities for cash, and
(iii) any exchange of securities effected in
pursuance of any enactment (including an
enactment passed after this Act) which provides
for the compulsory acquisition of any shares or
securities and the issue of securities or other
securities instead,
(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.”
5. The purpose of TCGA, sections 127 to 131, referred to in the opening line of
section 132, is to provide that there is no disposal of shares at the time of the
reorganisation, and for further matters, such as the allocation of the consideration
between different classes of security, part disposals, unpaid calls and indexation.
The key points to note in these provisions, which it is not necessary to set out, are
(1) that a conversion as defined is to receive the same relief as a reorganisation, ie
rollover relief, even if it involves QCBs whose disposal is otherwise outside the
charge to CGT; and (2) that emphasis is given to the aggregation of the securities
into a single asset: section 127 provides that both the original holding, “taken as a
single asset”, which the holder disposes of under the reorganisation, and the
consideration securities, also “taken as a single asset”, are treated as “the same asset”
with the same acquisition date as the original holding. We are not concerned with
sections 133 or 134.
6. To ensure that the conversion of, or into, QCBs on a reorganisation is within
the charge to CGT on the same basis as the issue of other securities on a
reorganisation, ie on the basis that the holder is entitled to rollover relief, section
116(1) provides that the disposal will result in rollover relief where sections 127 to
130 would apply, and (these are the critical words which this court must construe):
“(b) [Limb A] either the original shares would consist of or
include a qualifying corporate bond and the new holding would
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not, or [Limb B] the original shares would not and the new
holding would consist of or include such a bond;” (words in
square brackets added)
7. Floyd LJ, giving the first judgment in the Court of Appeal, called the first
possible scenario in section 116(1)(b), Limb A, and the alternative scenario, Limb
B. I will do the same. The effect of section 116(1)(b) is that, where the new holding
following conversion includes QCBs, Limb A cannot apply. The question here is
whether Limb B applies: the appellants contend that Limb B also cannot apply
because the (aggregate) original holding prior to conversion included QCBs.
The reasoning of the Upper Tribunal and the Court of Appeal
8. The Upper Tribunal, allowing an appeal from the First-tier Tribunal, held that
the conversion of securities at the third stage comprised separate transactions in
relation to each share converted. As the First-tier Tribunal had pointed out, the relief
under section 116 for QCBs had been intended to promote the market in sterling
bonds and so the interpretation favoured by the appellants would go well beyond
that objective. The Upper Tribunal also noted that in TCGA, section 132 Parliament
had defined “conversion” in relation to transactions involving QCBs separately in
relation to each security (see para 4 above). The Upper Tribunal also rejected
HMRC’s argument based on WT Ramsay Ltd v Inland Revenue Comrs [1982] AC
300, but we are not concerned with that as HMRC has not appealed against that
ruling.
9. The appellants appealed to the Court of Appeal. They repeated their argument
that Stage 3 constituted a single conversion of the loan notes (including QCBs) into
QCBs, and so neither limb of TCGA, section 116(1)(b) applied. HMRC responded
that Stage 3 was not one transaction but two: the first transaction (the conversion of
the non-QCBs into QCBs) fell within Limb A and the second (the conversion of the
QCBs into SLNs, which were also QCBs) was outside section 116(1)(b), but (as
appears from para 12 of Floyd LJ’s judgment) the appellants accepted that the
variation of the terms of these loan notes at Stage 2 was a conversion which carried
rollover relief so that, when those bonds were redeemed, a charge to CGT on the
held-over gain on these bonds was triggered.
10. Seeking guidance as to the correct approach on statutory interpretation Floyd
LJ (at para 45 of his judgment) cited, among other authorities, a passage from the
judgment of Neuberger J in Jenks v Dickinson [1997] STC 853, concerning QCBs
and the predecessor of TCGA. That case raised the issue whether a provision which
extended the meaning of QCBs with retrospective effect relieved the taxpayer of an
intervening accrued tax charge on the sale of shares into which the securities which
had retrospectively become QCBs had been converted. Neuberger J held that it did
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not. In the passage cited by Floyd LJ, Neuberger J held that the taxpayer’s
construction was:
“contradictory to the evident purpose of the relevant statutory
provisions, viewed as a whole, viz that capital gains made on
[QCBs] should be exempt from tax, whereas capital gains made
on shares should be subject to tax. In the circumstances,
principle, common sense, and authority show that the court is
‘entitled, and indeed bound, to … adopt some other possible
meaning’ if it exists (to quote Lord Reid: see [Luke v Inland
Revenue Comrs] [1963] AC 557, 579).”
11. Floyd LJ pointed out that section 132 did not give as an example of a (single)
conversion a conversion of different classes of bonds (para 65). The process of
applying sections 127 to 131 as required by the opening words of section 132
allowed for “necessary adaptations” (para 63), and so there could be aggregation of
securities for the purposes of some conversions but not others.
12. The effect of the appellants’ argument would be that the non-QCBs would
escape the charge to CGT. This was contradictory to the evident purpose of the
statutory scheme. The conversion of the two classes of loan notes could and should
therefore be treated separately (para 68). The words “or include” (providing the
option of a single conversion) did not mean that there could be such a conversion
(para 69). The statutory fiction in section 127 had to be restricted to avoid an
unintended result (para 70). The additional words “or include” were an “isolated
drafting anomaly”: the appellants’ argument would produce an even greater
anomaly (para 71). The wording of section 116(3) and (4) which use the word
“constitute” was consistent with the conclusion that “mixed” conversions were not
within section 116(1)(b) (para 73).
13. Lewison LJ agreed. He gave additional reasons. He placed greater weight on
the purposive approach holding that “necessary” adaptations could include
adaptations necessary to give effect to the policy of the statutory scheme (para 82).
He too applied Jenks (para 84) and Luke v Inland Revenue Comrs (para 88). This
enabled him to disregard the words “or include” in section 116 in the circumstances
of this case.
14. Kitchin LJ agreed with both judgments.
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Submissions on this appeal
15. Mr Michael Sherry, for the appellants, repeats the arguments on
interpretation that were considered by the Court of Appeal in their judgment. He
compares section 116 with section 135, which I have not mentioned above as it deals
with another form of reorganisation to which Parliament has also directed that
sections 127 to 131 should apply with necessary adaptations, so that the fact that it
may favour the single asset approach would not be determinative in relation to
section 116. A new factor on which he relies is the absence of any statutory provision
for apportioning consideration where, as here, the QCBs and non-QCBs have been
converted together without any allocation of the price. But that is a matter of
mechanics and no doubt the allocation could be established by evidence.
16. Mr Sherry emphasises the principle against taxation without clear words
(“the clear words principle”), which can be found in the speech of Lord Wilberforce
in Ramsay [1982] AC 300, 323:
“A subject is only to be taxed upon clear words, not upon
‘intendment’ or upon the ‘equity’ of an Act. Any taxing Act of
Parliament is to be construed in accordance with this principle.
What are ‘clear words’ is to be ascertained upon normal
principles: these do not confine the courts to literal
interpretation. There may, indeed should, be considered the
context and scheme of the relevant Act as a whole, and its
purpose may, indeed should, be regarded: see Inland Revenue
Comrs v Wesleyan and General Assurance Society (1946) 30
TC 11, 16 per Lord Greene MR and: Mangin v Inland Revenue
Comr [1971] AC 739, 746 per Lord Donovan. The relevant Act
in these cases is the Finance Act 1965, the purpose of which is
to impose a tax on gains less allowable losses, arising from
disposals.”
17. So, submits Mr Sherry, it goes too far to treat the transaction in issue as two
conversions. There was here a single conversion and that was the legal nature of
what has happened. But the answer to his reliance on the passage set out above from
the speech of Lord Wilberforce in Ramsay is that the clear words principle is not
infringed if, fairly and properly construed, no doubt remains as to the meaning of
section 116(1)(b). Moreover, there is no question of re-characterising the parties’
transaction. It is simply a matter of deciding what is a conversion for the purposes
of the statutory scheme.
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18. Mr Michael Gibbon QC, for HMRC, submits that the Court of Appeal’s
interpretation is principled and uses a conventional approach. The statutory scheme
as so construed is fair to taxpayers generally and coherent.
Discussion
19. It is common ground that, if the conversion at Stage 3 involved separate
conversions of the QCBs and the non-QCBs, the appeal must fail. The question
whether there was a single conversion or two separate conversions must be a
question of applying the provisions of TCGA to the facts. The answer is not
mandated in the appellants’ favour by the fact that they utilised a single transaction.
20. Plainly, section 116(1)(b) contemplates the possibility of a single transaction
which involves a pre-conversion holding of both QCBs and non-QCBs, and this,
coupled with the fact that the Court of Appeal’s interpretation renders the words “or
include” appearing in section 116(1)(b) otiose are powerful arguments in support of
the appellants’ construction.
21. However, the appellants’ interpretation result would be inexplicable in terms
of the policy expressed in these provisions, which is to enable all relevant
reorganisations to benefit from the same rollover relief. Taxpayers could avoid those
provisions with extreme ease if the appellants are right. There would be nothing to
prevent them from using the occasion of a minimal conversion (say £1 nominal
QCB) following a reorganisation and obtaining relief from CGT which was plainly
contrary to and inconsistent with that which was intended to apply to a conversion
connected to a reorganisation.
22. In reality, by looking to the fiscal policy behind the scheme, both Floyd and
Lewison LJJ applied a purposive approach. I need not say more about the purposive
approach in general, save that Lewison LJ seemed to draw a distinction between the
policy of TCGA in its entirety and that part of the Act which deals with corporate
reorganisations (para 82). This is not easy to follow as the policy of the Act does not
materially add to the policy of the relevant sections for present purposes.
23. Floyd and Lewison LJJ did not give any meaning to the words “or include”
in section 116(1)(b), but as I see it this was appropriate because in section 132(3),
as the Upper Tribunal pointed out, it is clear that the intention of Parliament was that
each security converted into a QCB should be viewed as a separate conversion
(which amounts to the same thing as regarding the conversion in this case as
consisting of two conversions, one of QCBs and one of non-QCBs). Moreover, it is
not an objection that section 127 contemplates a single asset (see para 5 above),
because Parliament has required sections 127 to 131 to be applied with “necessary
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adaptations”. In those circumstances the clear words principle is observed in the
present case.
24. Floyd and Lewison LJJ also relied on the principle in Luke v Inland Revenue
Comrs [1963] AC 557. This enables the court, when interpreting a statute, to adopt
(my words) a strained interpretation in place of one which would be contrary to the
clear intention of Parliament. This principle in Luke can apply even to a tax statute.
The clear words principle relied on by Mr Sherry does not, as Lord Wilberforce
pointed out, confine the courts to a literal interpretation. However, the circumstances
in which the principle in Luke can be applied must be limited, for example, to those
where there is not simply some inconsistency with evident Parliamentary intention
but some clear contradiction with it. Moreover, the intention of Parliament must be
clearly found on the wording of the legislation.
25. The particular issue in Luke illustrates the nature of this principle: on the
ordinary meaning of the Income Tax Act 1952, section 161, enacted to prevent tax
avoidance by employers meeting expenses for their employees, a director became
liable to be taxed as part of his remuneration on the cost of repairs executed by his
employer on a house which he had leased from his employer at a fair rent when the
repairs were those for which the landlord would normally be responsible (and had
agreed to be responsible). This was clearly an unreasonable result, and the intention
to produce such a result could not be imputed to Parliament. The House by a
majority of 3:2 held that the expenditure was within an exemption for expenditure
by a company on additions to its own assets, although this provision had to be read
in a somewhat broad-brush way to produce that result. At p 578, Lord Reid called it
“any port in a storm”. The principle was used in that case to prevent the unreasonable
imposition of a tax charge. In this case it is invoked in like circumstances in favour
of HMRC to prevent the imputation to Parliament of an intention to produce an
irrational result. It has not been argued that it can only apply in favour of the taxpayer
and in Jenks (above, para 10) Neuberger J applied it to the disbenefit of the taxpayer.
26. Nothing in this judgment detracts from the principle in Luke but in my
judgment, it is unnecessary to consider its application in this case because, as
explained in para 23 above, the construction of the relevant provisions is clear
without resort to it.
27. In summary, using Lewison LJ’s mixed but vivid metaphor ([2017] 1 WLR
4717, para 89), on the true interpretation of TCGA section 116(1)(b), the potential
gain within the non-QCBs was frozen on conversion and did not disappear in a puff
of smoke.
28. I would dismiss this appeal.
