DMWSHNZ Ltd v Revenue & Customs Commissioners (2015)


In order for the Taxation of Chargeable Gains Act 1992 s.171A to apply to allow the notional transfer of an asset within two companies in the same group before the disposal of that asset to a person who was not a member of the group, it was necessary for the person outside the group to acquire the asset as a result of the disposal. The satisfaction of a debt did not count as a disposal for the purposes of s.171.


vA company (D) appealed against a decision ([2014] UKUT 98 (TCC), [2014] S.T.C. 1440) that it had not made a valid joint election with its sister company (G) under the Taxation of Chargeable Gains Act 1992 s.171A.

D was a member of a banking group and had sold some 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 and there was a held-over gain. The banking group appointed administrative receivers in respect of a debt which it was owed by another company (X) so that X realised a capital loss. A restructuring then took place, with the intention of setting off the losses against some of the held-over gains. G was created as a new subsidiary of X. G bought shares in D so that D and G were part of the same capital gains group. N repaid the loan notes, which brought a held-over gain into charge. D and G made a joint election under s.171A to deem the disposal on repayment of the loan notes to have been made by G rather than D. If that election was effective, the chargeable gain would accrue to G and it could offset the losses which had accrued to G. The issues were (i) whether s.171A(1)(b) required not only that a company which was a member of a group of companies had to dispose of an asset but that the person who was not a member of the group had to acquire it; (ii) if so, whether that condition was satisfied in the instant case.


HELD: (1) The explanatory notes to the Finance Bill 2000 did not suggest that the provisions of s.171A were restricted to sales in the strict sense, but there was nothing to support the suggestion that a disposal to a non-group counterparty without a corresponding acquisition was in contemplation. It was clear that the insistence in the wording of s.171A on a disposal to the person outside the group meant that it only applied where the disposal resulted in a corresponding acquisition by that person. The satisfaction of a debt did not count as a disposal for the purposes of s.171. The payment of a debt to a creditor did not entail the transfer of anything by the creditor to the debtor. In order for s.171A to apply, it was necessary for the person outside the group to acquire the asset which was the subject matter of the disposal (see paras 27-31, 36-40 of judgment). (2) D argued that the loan notes and the underlying debt were separate and distinct assets and that the loan notes were the relevant asset because they continued to exist after the debt had been repaid and the only disposal which triggered the charge in accordance with s.116(10) was the disposal of the qualifying corporate bonds. However, when the debt was repaid, the obligation to repay was discharged and there were no remaining creditor's rights that could be transferred to the issuer. In any event, under s.117(A1) the loan notes would only amount to qualifying corporate bonds if they were an asset "representing a loan relationship". The definition of "loan relationship" in the Finance Act 1996 s.81(1) referred to debtors and creditors in the present tense. At the moment of payment, the loan notes ceased to be qualifying corporate bonds. Moreover, nothing in s.116 expressly disapplied s.251. It was clear from s.251(2) that the satisfaction of a debt on a security was a disposal of the debt, and from s.251(1) that a gain arising on such a disposal was not excluded from being a chargeable gain. Further, s.251 said nothing about any deemed acquisition. According to the sequence of events contemplated by the loan notes, the satisfaction and disposal of the debt took place before the cancellation of the loan notes. If, therefore, the issuer acquired the loan notes, it did so after the disposal of the debt had already taken place. Accordingly, it was irrelevant whether or not the loan notes continued to have an existence of some sort after repayment of the debt (paras 50-57).

Appeal dismissed