DMWSHNZ Ltd v Revenue & Customs Commissioners (2014)
The court had to determine whether a joint election under the Taxation of Chargeable Gains Act 1992 s.171A was valid to enable a company to be deemed as having disposed of loan notes held by its sister company within the same corporate group. The notes, qualifying corporate bonds for the purposes of capital gains tax, had been issued by the purchaser of a shareholding owned by the sister company and related to a loan of the purchase price.
The appellant (D) appealed against a First-tier tribunal's decision ( UKFTT 37 (TC)) upholding the respondent Revenue's rejection of a purported joint election by D and its sister company (G).
D, a member of the Bank of Scotland Group, sold its shares in a wholly owned subsidiary to a company (N). N loaned the purchase price from D and was to pay it off in accordance with the terms of unsecured floating rate loan notes issued by N and held by D. The notes were qualifying corporate bonds for the purposes of capital gains tax. A subsequent restructuring brought D and G together within the same corporate group. N paid the loan notes in 2003 which brought into charge to tax the held-over gain. D and G then made a joint election under the Taxation of Chargeable Gains Act 1992 s.171A to deem the disposal of the loan notes as having been made by G to enable G to set off a capital loss against the capital gain. The Revenue disputed that that was the effect of the election. It was accepted that the debt owed by N was an asset for the purposes of the Act and that its satisfaction constituted a disposal of that asset. The issues were (i) whether, when N repaid the loan notes there was a disposal of an asset by D to N. If not, whether that precluded the application of s.171A to the instant transaction; (ii) was there a transfer of the loan notes from D to N; (iii) could a purposive construction of s.171A be applied.
D claimed that (1) the transaction was a disposal of the debt by D to N for the purposes of s.171A(1)(b) and it was entitled to elect to treat the disposal as having been made by G; (2) alternatively, the transaction was a transfer of the loan notes from D to N which was the transfer of an asset to a person outside the corporate group; (3) alternatively, that s.171A should be interpreted purposively requiring only a disposal of the assets outside the group whether or not the assets were disposed of "to" a person.
(1) The term "disposal" in the Act covered transactions that would not be regarded as disposals in the ordinary use of that word. The disposal of a debt was expressly dealt with in s.251. The absence of a carve out from s.171A in similar terms to that provided tos.171(1) by s.171(2)(a) was not an indication that Parliament intended that satisfaction of a debt should be treated as a disposal of the debt to the debtor by the creditor. D was not assisted by s.171(4) which showed the importance for the operation of s.171 of being able to identify the person to whom the asset had been disposed of in order to bring the transaction within the provision. It was not possible to identify someone to whom the debt was disposed of when the instant debt was satisfied (see paras 14-18, 20-21 of judgment). (2) Section 116 applied to the sale of D's shares because of s.135. The disposal which triggered the bringing into charge of the held-over gain was, under s.116(10), the disposal of the "new asset", which for those purposes was, under s.116(4), the qualifying corporate bond which constituted the "new holding" for the purposes of s.116(1) and s.127 to s.130. Assuming that a distinction could be drawn between the loan notes and the debt, the statutory provisions clearly focused on the former and not the latter. Therefore, the tribunal's conclusion that it was the debt that was the asset for capital gains tax purposes was wrong. The reason why the Revenue brought the gain into charge in 2003 rather than when the shares were originally sold was because the consideration for that sale involved the acquisition by D of qualifying corporate bonds which were disposed of in 2003. The question to ask was whether the loan notes, not the debt, were disposed of "to" N. The disposal in the transaction between N and D was not, or not only, the disposal of the debt by its satisfaction but also the disposal of the separate and distinct loan notes. Even if the qualifying corporate bonds could be regarded as existing separately to the debt they represented during the currency of the loan notes, they ended the moment the debt was repaid. Neither the loan notes' provisions nor the Companies Act 1985 s.194 indicated to the contrary. Therefore, when the loan notes were repaid, there was no disposal by D of the debt or the loan notes to N for the purposes of s.171A (paras 29, 37, 47-50, 59-61). (3) The extra-statutory materials did not require the court to construe s.171A as widely as D wished. The new wording introduced by the Finance Act 2009 s.31 allowed a valid joint election in circumstances such as the instant case. However, Parliament's intention in revising s.171A was to extend its previous ambit not merely to clarify its already wide scope. The re-casting was substantial; it did not permit the court to construe the earlier provision as covering the same broad ground. A purposive construction of s.171A did not entitle or require the court to ignore the reference in s.171A(1)(b) to the disposal being to a person outside the group (paras 64, 67, 69-70).