Hancock v HMRC (2017)
On the proper interpretation and application of the Taxation of Chargeable Gains Act 1992 s.116, s.127 and s.132, the taxpayers' transaction, which involved the conversion of qualifying corporate bonds (QCBs) and non-QCBs into QCBs, which were then redeemed for cash, did not have the effect of allowing frozen gains on the bonds to escape capital gains tax.
The taxpayers appealed against a decision that the redemption for cash of certain loan notes brought into charge an accrued capital gain.
The taxpayers sold their company in return for loan notes to a value of £9.27 million, with provision for payment of further consideration depending on the subsequent performance of the business. Part of the loan notes (the 08/00 notes) were not qualifying corporate bonds (QCBs) for the purposes of the Taxation of Chargeable Gains Act 1992 s.117 because they provided for repayment in a currency other than sterling (namely US dollars) and at an exchange rate other than that prevailing at redemption. Additional purchase consideration became payable and was satisfied by the issue of further notes (the 03/01 notes). The 03/01 notes were subsequently varied by removing the right to redemption in US dollars, with the effect that the revised notes were QCBs. It was common ground that the effect of the conversion of the 03/01 notes into the revised 03/01 notes was to freeze the gain on those notes and give rise to a charge to capital gains tax on their subsequent disposal. The 08/00 notes and the 03/01 notes were then together exchanged for other loan notes which were QCBs and were redeemed for cash. The taxpayers' case was that s.116 did not apply to the transaction by virtue of s.116(1)(b), because the original securities included a QCB, namely the revised 03/01 notes, and therefore did not bring into charge any frozen gain on the 08/00 loan notes on disposal of the QCBs; s.127 applied and the chargeable gain latent in the 08/00 notes was rolled over into the new notes which were QCBs and on disposal any gain was exempt under s.115.
Section 127 to s.130 did not apply directly to a transaction such as that entered into by the taxpayers, as those sections required shares on the input side and shares or debentures on the output side. The taxpayers' transaction involved QCBs and non-QCBs on the input side and not shares. Section 132(1) provided for the application of s.127 to s.131 "with any necessary adaptations" in relation to the conversion of securities "as they apply in relation to a reorganisation". It was clear from s.132(3)(a) that a "conversion" of securities could be of securities capable of giving rise to a chargeable gain or loss and of non-taxable securities, namely QCBs, which were exempt from CGT under s.115. When applying s.127 to share reorganisations there was no difficulty with allowing aggregation of different classes of holding on the input side because, for tax purposes, all the shares would be treated in the same way. In applying s.127 to conversions of securities, however, it was not clear that it was justified to aggregate securities together, when different classes of security would need different tax treatment. If there were both taxable and exempt securities on the input side it made sense to speak of each asset being involved in its own conversion rather than both assets being involved in one overall conversion. That approach could be justified as a "necessary adaptation" by contrast with the application of s.127 to a reorganisation of shares. If the taxpayers' argument was correct, and transactions which included QCBs and non-QCBs on the input side and QCBs on the output side were excluded from the operation of s.116 by virtue of s.116(1)(b), the chargeable gain which had accrued on the non-QCB would escape CGT altogether. That would be contradictory to the evident purpose of the relevant statutory provisions, Jenks v Dickinson (Inspector of Taxes)  S.T.C. 853 applied. That result would not be possible if the combined effect of s.132 and s.127 was to treat conversions of QCBs and non-QCBs separately because of their different tax status. Section 116(1)(b) did not then block the application of the section to those separate conversions. To allow the deeming provision in s.127 to be applied to a conversion with mixed inputs, as the taxpayers contended, would defeat the policy and purposes of the Act, Marshall (Inspector of Taxes) v Kerr  S.T.C. 360 applied. The statutory fictions introduced by s.127 required restriction in order to avoid that obviously unintended result (see paras 56-77 of judgment).