Hancock and another v. Commissioners for Her Majesty’s Revenue and Customs - (22 May 2019)

Intention of Parliament must be clearly found on wording of legislation

Direct Taxation

By present 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).

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, that is 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. The Court of Appeal (Lewison, Kitchin and Floyd LJJ) rejected the Appellants’ claim. 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 issue before the Supreme Court is whether Section 116 of the TCGA applies where by a single transaction, both non-QCBs (which are within the charge to capital gains tax on redemption) and QCBs (which fall outside the charge to capital gains tax on redemption) are converted into QCBs.

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. The words “or include” (providing the option of a single conversion) did not mean that there could be such a conversion. The statutory fiction in section 127 had to be restricted to avoid an unintended result.

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.

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.

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.

In reality, by looking to the fiscal policy behind the scheme, both Floyd and Lewison LJJ applied a purposive approach. Present Court concluded, using Lewison LJ’s mixed but vivid metaphor, 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. Appeal dismissed.

Tags : CHARGE CAPITAL GAINS EXEMPTION