This appeal raises the question whether a scheme, designed to procure that certain receipts from the sale of securities with accrued interest will be taxable as capital rather than income, succeeds to that end. The respondent Inspector of Taxes says that the scheme is caught by the provisions of s.717 of the Income and Corporation Taxes Act 1988 (“the Taxes Act”). The applicability of that section to this case turns on whether the securities carried interest at a variable rate, as the Inspector claims, or whether they carried interest at a fixed rate which was the same throughout the period from issue to redemption, as the taxpayers say.

The appellant taxpayers are Cadbury Schweppes plc (“CS”) and its subsidiary, Cadbury Schweppes Overseas Ltd (“CSOL”). CS appealed against a notice of determination issued under s.41A Taxes Management Act 1970 by the Inspector on 13^th July 2001 and relating to its accounting period ended 31^st December 1995. CSOL appealed against an assessment dated 21 November 2005 to corporation tax for the same period.

The appeals were heard by the Special Commissioners (Dr Nuala Brice and Mr Malcolm Palmer). They dismissed the appeals on 9 November 2004. The appellants appealed to the High Court. Etherton J on 21 July 2005 dismissed the appeal. The appellants applied to this court for permission to bring a second appeal. Carnwath LJ on the papers granted such permission.

Before I set out the relevant facts it is convenient to refer to the material statutory provisions.

Ss. 710-728 of Chapter II of Part XVII of the Taxes Act relate to what is known as the accrued income scheme.

Ss. 710-712 contain definitions of which the following are relevant:

Ss. 713 and 714 contain the operative provisions of the accrued interest scheme, the material provisions of which are the following:

Subject to sections 714 to 728 ….. in this section references to a period are references to the interest period in which the settlement day falls.

If securities are transferred with accrued interest –

The person shall be treated as receiving on the day the period ends

S. 717 contains the provisions on the true construction of which the primary issue on this appeal turns. The material provisions are the following:

The Special Commissioners made clear findings of fact which were not in dispute. The judge’s judgment is now reported together with the Special Commissioners’ decision ([2006] STC 210) and it is sufficient to give a summary of the facts to make this judgment intelligible.

The appellants adopted the principles of a scheme set out in a prospectus which they received from a merchant bank, Kleinwort Benson. This stated that the bank had developed a proprietary inter-company loan instrument with an uneven payment profile. If CS were to invest a substantial sum in a bond carrying interest at a fixed rate and then to dispose of it after 11 months before the date of the first interest payment which would be in an amount far less than the interest which had accrued, it would realise a capital gain which it could shelter by using capital losses within the group.

On 15 September 1994 Cadbury Schweppes Finance Ltd (an associated company of CS), in consideration of an advance to it from CS, issued six Loan Notes to CS. Each Note had a value of £25 million. The maturity date for each loan was 15 December 1995, but provision was made for early redemption. By clause 2(A) of each Note the principal was to carry interest at the fixed rate of 7.43375 % per annum, without compounding, for the period from, and including, the issue date to, but excluding, the maturity date or the date of earlier redemption. That period was to be calculated on the basis of actual days elapsed and a year of 365 days. Clause 2(B) prescribed how the interest was to be paid, that is to say on 15 June 1995 £152,748.29, on 15 September 1995 £1,705,689.21, on 15 December 1995 £463,336.47, but provision was made (by what has been called “the catch up clause”) for the payment of the interest at the specified rate in the event of early redemption up to the date of redemption, allowing for any interest payment or payments which by then had already been made. The effect of that payment schedule was that, in the absence of early redemption, after nine months only one month’s interest was payable, after three further months eleven months’ interest was payable and at the maturity date the remaining three months’ interest was payable. It is to be noted that the terms of issue of the Notes did not attribute any payment of interest to any particular period within the period from issue to redemption.

By letter dated 24 May 1995 Lloyds Bank offered to purchase the Notes for £26,358,805.76 per Note. The same day CS offered to transfer the Notes to CSOL on 30 May 1995 at a price equal to the net proceeds which CSOL realised on resale and CSOL accepted CS’s offer and the offer to sell to Lloyds Bank. On 30 May 1995 CS assigned the Notes to CSOL for £157,913,679. By a purchase agreement dated 31 May 1995 Lloyds Bank purchased the Notes from CSOL for £158,138,679.

On 9 July 1998 the Inspector wrote to the appellants saying that in his view the Notes were variable rate securities within s.717. He considered that the just and reasonable amounts to be included as Case VI income for the year ended 31 December 1995 were:

The appellants appealed to the Special Commissioners. They argued that the terms of issue of the Notes provided for them to carry interest at the specified fixed rate from issue to redemption whenever it occurred, that assistance could be derived from s.62 Finance Act 1993 in support of their construction of s.717(2)(a) and that on the Inspector’s construction anomalies would arise.

The Special Commissioners identified two issues:

The Special Commissioners in para. 22 of their decision described s.717 as an anti-avoidance provision which prevents the accrued income scheme being circumvented by the use of securities carrying a variable rate of interest and the purpose of the section as being to provide that where variable rate securities are transferred there is an income tax charge on the real commercial value of the interest transferred and not on an artificially deflated value. They noted the agreement of the parties that the assignments of the Notes were transfers of securities with accrued interest and therefore subject to the accrued income scheme, if s.717 did not apply, and that, if it did, the appellants would be taxed not on the accrued proportion of the first interest payment of £152,748.29 for each Note but on a just and reasonable amount as determined by the Inspector. In rejecting the appellants’ arguments they reasoned as follows:

On the second issue the Special Commissioners noted that the appellants reserved their position without advancing a separate argument. They concluded that the Inspector had made a just and reasonable determination.

On the appellants’ appeal to the judge, they disputed each and every stage of the Special Commissioners’ analysis. The appellants gave three examples of securities which, it was submitted, showed that the Inspector’s interpretation produced anomalous results and was unworkable. The judge, in a full and careful judgment, expressed agreement with the Special Commissioners’ analysis, although, unlike them, he thought that the term “carry interest” was neutral. He regarded the obvious and natural meaning of “throughout the period” in s.717(2) to be “that at each stage, or rather in respect of each interest period, throughout the period from issue to redemption and also on redemption the same fixed rate must apply” (para. 36 of the judgment). As he found no ambiguity in s.717(2)(a), it was not permissible, he said, to refer to subsequent legislation as an aid to interpretation (para.41). The anomalies suggested by the appellants, he said, did not lead to the conclusion that s.717(2)(a) should be interpreted in any other way than in accordance with the ordinary and natural meaning of its words. He expressed his conclusion in this way:

On the appellants’ appeal to this court Mr Julian Ghosh appears for them as he did before the Special Commissioners and the judge. He has renewed before us the submissions which he advanced below under five heads: (i) the text of the Notes demonstrates that they come within s.717(2)(a); (ii) the contrary view makes s.717(2)(a) unworkable; (iii) the contrary view embarks on the wrong exercise; (iv) s.62 Finance Act 1993 demonstrates conclusively that the appellants’ construction is correct; (v) the judge was wrong to derive assistance from cases where parties have applied the wrong label to a transaction. He submitted that the Notes by their issue terms were to carry interest at the same fixed rate from issue to any possible date of redemption, that the irregular interest payment profile was entirely irrelevant to the question of the rate of interest carried by the Notes at any given moment of time and that whether the Notes carried a fixed rate was to be tested at the date of issue by reference to any conceivable date of redemption. He criticised the judge for ascertaining the interest carried by the Notes by dividing the principal by the amount of interest actually paid, thereby ignoring the interest still to be paid although carried by the Notes. He pointed out that the judge’s approach differed from that of the Special Commissioners in that in ascertaining the rate carried by the Notes the Special Commissioners had looked only to the interest remaining to be paid and the period until the next payment. He submitted that the Special Commissioners had erred by ignoring the interest paid and the period from issue to payment when they should have been ascertaining the rate for the period from issue to redemption. He also challenged the judge’s use of cases which applied the principle of substance over form where parties to a transaction have given it a wrong label. He again submitted with the aid of the three examples used before the judge that conflating the rate of interest with dates on which and the amounts in which interest is paid makes s.717 unworkable. He contended that the comparison of different interest periods was misconceived. He questioned whether s.717 was directed at a case where there is an uneven payment profile, because tax would be paid on the interest when received as such even if the payment was deferred. He argued that s.717(2)(a) was far from ambiguous but that, if there was doubt, s.62 Finance Act 1963 was a permissible and conclusive aid to its construction. The principle of a case such as Street v Mountford was, he said inapplicable to a case like this where there had been no wrong label applied to the transaction.

Ms Ingrid Simler, appearing before us as she did below for the Inspector, supports the conclusion of the Special Commissioners and the judge and submits that there is no error of law in their approach. However, she acknowledges that the judge has differed from the Special Commissioners in his approach and she supports that of the Special Commissioners. She argues that the uneven payment profile means that the Notes are not properly to be regarded as carrying a fixed rate which is the same throughout the relevant period. She describes the terms “carry interest” and “fixed rate” as practical, commercial concepts which take their meaning from the context in which they are used. She stresses that once an amount of interest is paid the Notes no longer carry that interest and submits that the use of the words “which is the same throughout the period” means that there should be no change from day to day. She relies on a comparison of the rate of interest carried by each Note on 14 June 1995 with the rate carried on 16 June 1995, the former, she says, being 7.4% and the latter being 17.3%. Those figures are the product of treating for the rate at the former date all the interest payable under the Note as attributable to the entire period from issue to redemption whereas for the rate at the latter date the interest paid on 15 June 1995 is ignored and the interest remaining to be paid is attributed only to the remaining six months. She relies on the anti-avoidance purpose of s.717(2)(a) and submits that the use of the term “fixed rate” in the terms of the Notes is insufficient to defeat s.717(2) if the remaining terms are inconsistent with that. She contends that if interest can accrue but the borrower is entitled to keep it without having to pay interest on the unpaid interest, the real rate of interest is not the notional fixed rate. She suggests that, because the borrower retains the economic benefit of accrued but unpaid interest and there is no obligation to pay interest on unpaid interest, it is commercially meaningless to describe the Notes as carrying a fixed interest rate which is the same throughout the period.

This appeal turns on what is in truth a very short point of construction of the statutory language of s.717. I should say a few words on the approach to construction. It is of course right that the court should seek to give effect to the purpose of the provision if it is apparent from the statutory language what that purpose is and I take due note of the fact that Chapter II is in Part XVII relating to tax avoidance. However, I have to say that some of the broader statements of the Special Commissioners and the judge as to the purpose of s.717, in acceptance of the assertions made on behalf of the Inspector and repeated to us (for example, that the purpose of s.717(9) was to charge to tax the real commercial value of the interest transferred as distinct from its artificially deflated value), seem to me, with respect to them, not to be based on anything appearing from the section itself nor on any other admissible material. I do not doubt that the section was aimed against the avoidance of tax, and one can readily see that, where variable rate interest securities cause interest to be received as capital without such interest ever becoming payable in taxable form to the holder of the securities, Parliament might well wish the section to bite. But it is far from obvious that Parliament intended s.717 to apply to securities with an uneven payment profile but having a fixed rate of interest where (by virtue of the catch up clause) all the accrued interest will be paid whatever the date of redemption and will be taxable as income in the hands of the transferee. Such is the breadth of the definitions of securities and transfers that, if the Inspector’s test, thus far upheld, for deciding what is a fixed interest security is not satisfied, many a transfer, whether or not a tax advantage was intended, will be subject to what the judge acknowledged to be the draconian effect of s.717. In the circumstances the court should, in my view, be careful to give the statutory language a fair construction and not be drawn into giving the section an unnaturally wide meaning merely because of the evident intention on the part of the appellants in this case to obtain a tax advantage.

The Special Commissioners implicitly and the judge expressly have treated the period relevant for ascertaining whether the Notes carry a fixed rate throughout as divisible into interest periods terminating with a payment of interest and as requiring that the rate for each such period must be the same as the rate for every other interest period. The draftsman could have provided for such a test. One sees in s.717(4) and (5) references to interest periods, which by definition end with such a payment, and a comparison of the rate for each such period with the yield to maturity. But significantly the draftsman has not so provided in s.717(2). The draftsman could have imposed a condition relating to the time and amount of any payment of interest. Ss. 710(2)(b) and 711(7) show him to be well aware of the difference between the rate of interest and when and in what amounts interest is paid. He could have provided that unless interest, when paid, is of an amount which is equal to the interest which has already accrued up to that time, the securities are to be treated as variable rate securities; “the accrued amount” could simply have been defined as the amount of interest which has accrued, the meaning which Ms Simler suggested that it had. Significantly he has not done so.

The language of s.717(2)(a) does not seem to me to admit of doubt. It is to be noted that the test provided is to be satisfied by reference to the terms of issue so that one looks to those terms to see whether prospectively the securities “are to carry interest” at the specified rate. It is not in dispute that the terms of issue of each Note provide for interest to be paid on the principal at the same fixed rate from issue to any date of redemption. The dispute is as to the effect of the uneven payment profile for the purposes of s.717(2)(a). The judge, in construing s.717(2)(a), was plainly right to regard the word “carry” as neutral as between the appellants’ construction and the Inspector’s. So too is the word “rate”. What is crucial is the period over which the rate is to be ascertained and there can be no doubt that it has to be the period from issue to redemption. That is the only terminal point for the period and the date of issue is the only starting point for the period, no matter that interest is to be paid during the period. Although the draftsman was well aware that there was a possibility of a transfer at any time between issue and redemption and made such a transfer the condition for the operation of subss. (7) to (11) of s.717, nevertheless the redemption date was the only date provided for the termination of the relevant period. In my view, it cannot be maintained that the preposition “throughout” justifies the Inspector’s construction. The appellants fully acknowledge by their construction that the rate must not change at any time in the relevant period. I do not accept Ms Simler’s submission that Mr Ghosh’s construction makes redundant the words of s.717(2)(a), “which is the same throughout the period”. Securities could provide for more than one fixed rate within the period from issue to redemption, but paragraph (a) makes clear that it must be the same rate throughout the period. Nor do I accept that a provision for the payment of an amount of interest not equal to the accrued interest at the date of payment causes the securities not to carry interest at the same fixed rate before and after that payment when their issue terms provide for interest to be paid at the same specified and fixed rate from issue until redemption whenever it occurs. Where the terms of issue provide for several payments of interest but do not attribute any payment to any period within the period from issue to redemption, it is illegitimate to treat that payment both as payable only in respect of the period up till payment and as thereafter to be left out of account when answering the question whether the rate for the period from issue to redemption is the same fixed rate throughout. In my judgment, the judge was plainly wrong in his approach. That would be inconsistent with the terms of the Notes. Similarly, deferred interest is interest carried by the Notes and the terms of their issue do not attribute the deferred interest only to the period since the previous payment of interest. The Special Commissioners’ approach in dividing up the relevant period from issue to redemption once a payment is made and in treating the period after that payment as a separate period to which the future payments are attributable is equally not justified by the terms of the Notes nor supported by the statutory language. I also cannot accept Ms Simler’s bold submission that if interest can accrue but the borrower is entitled to keep it without having to pay interest on the unpaid interest, then the real rate of interest is not the fixed rate, nor can I accept that it is “commercially meaningless” to describe the Notes as carrying the same fixed rate throughout. The question whether securities carry the same fixed rate of interest throughout the period from issue to redemption cannot be answered by consideration of what, if any, economic benefit is obtained by the borrower by reason of the issue terms of the securities.

Further, if the Inspector’s construction were correct, and if s.717(2)(a) requires consideration of the dates and the amounts of interest payable within the period from issue to redemption to see if the rate of interest was the same fixed rate on every day in the period from issue to redemption, or if interest periods within the relevant period had to be taken into account and the rate for each period had to be the same as that for any other interest period, many securities, which provided for them to carry a fixed interest rate but also provided for interest payments to be made at intervals, would fall foul of s.717. Mr Ghosh gave three examples, as he had done before the judge.

The first is a Loan Note issued on 31 January and redeemed on 31 December, which carries a fixed rate of simple interest of 7% payable in equal instalments on the 15^th of each month. Calculating the interest rate from 1 January to 14 June (five payments over 167 days) and from 1 January to 16 June (six payments over 169 days) would produce two different rates. Only daily interest payments could avoid this result.

The second is a security with an issue price of £100 with simple interest at the rate of 10% per annum. In years 1 and 2 the interest payments are deferred. In each of years 3 and 4 £10 interest is paid. In year 5 £30 interest is paid, being interest at 10% for each of the years 1, 2 and 5. On the Inspector’s construction any deferral of interest prevents a security from being a fixed interest security.

The third is a security issued on 31 December with an issue price of £1,000, with simple interest payable at 6 % per annum in equal instalments on the last business day of each month. Because different months have different numbers of days and because weekends and holidays vary the date on which the last business day falls, the periods between payments are irregular. Again that would make the security a variable rate security, if the Inspector were correct.

The judge said that the first and third examples turn upon the selection of the relevant unit of time for calculating the rate of interest. He continued (in para. 52): “that is to say whether the rate of interest is calculated and expressed on a daily basis or, as Ms Simler suggested, and I agree, a sensible reference period (monthly, three monthly etc) appropriate to reflect the actual terms of the security, including the payment dates for interest.” I fear that I have some difficulty in understanding that comment as an answer to examples of securities which did provide for monthly payments of interest. Ms Simler repeated that a sensible unit of time must be selected when determining whether a rate is fixed or not. However, as I understood her, she was not advocating the implication of any different term into the terms of issue of securities but was accepting that securities could provide for periodic payments, such as monthly or three monthly payments. She acknowledged that many of the most common units for measuring out periods between regular payments are themselves irregular, but said that the Inspector in those circumstances would not make comparisons between the number of days in the respective periods to determine whether there was the same fixed rate throughout. As she submits that the satisfaction of the requirements of s.717(2)(a) must be satisfied at any day in the period from issue to redemption, and for example relies on the comparison of the rates on 14 and 16 June 1995, I find it difficult to understand how the calculations of the rate for each period which she claims to be relevant would be performed by the Inspector other than by a computation which necessarily involves making comparisons between the number of days in each period. In any event I do not see how what the judge said or Ms Simler’s argument answers Mr Ghosh’s point that dividing up the relevant period from issue to redemption to take account of the amounts and dates of interest payments renders s.717(2)(a) unworkable. The first and third examples show, to my mind, that what on their face are perfectly ordinary securities with interest payable at a fixed rate at regular intervals would be variable rate securities if the judge’s or the Inspector’s tests had to be applied.

The judge noted that Ms Simler accepted that Mr Ghosh’s second example was a variable rate security on her construction, but he said that it did not render the legislation unworkable. Whether or not it is correct to say that this example shows that the legislation is unworkable if the judge is right, I do find it surprising that any deferral of interest on a security, the terms of which provide for it to carry interest at the same fixed rate, makes the security a variable rate security with the drastic consequences to which I have referred.

Ms Simler said that in any event anomalies cannot govern the applicability of s.717. I accept that the existence of anomalies is not conclusive of a particular construction. However, Mr Ghosh is surely also right to point out that in this case the anomalies only apply to the Inspector’s construction. The court can properly take account of the practical consequences of a particular construction in deciding whether it is correct.

The judge’s use, by way of analogy, of cases such as Street v Mountford seems to me to be designed to do no more than make the point that the parties to the Notes cannot, merely by using the term “fixed rate”, cause the rate of interest to be treated as fixed if for the purposes of s.717(2)(a) it is variable. Had I agreed with the judge on construction, I would have agreed with him on this. But, for the reasons I have given, I think it clear that Mr Ghosh’s construction is correct.

In case I am wrong, I turn to the question whether we can look at s. 62 Finance Act 1993 as an aid to the construction of s.717. It was held by this court in Finch v CIR [1985] Ch 1 that it is only if the earlier statute is ambiguous, in the sense that there are two equally tenable constructions, that a later statute can be so used. Mr Ghosh suggested that the test as to when subsequent legislation could be used as an aid to interpretation of earlier legislation might have been relaxed by reason of the remarks of Lord Millett in CIR v Laird Group plc [2003] 1 WLR 2476 paras. 18 and 30. But Lord Millett was not addressing any point such as was raised by Finch, to which case no reference was made in Laird, and I propose to apply the Finch test. On the footing that, contrary to my opinion, s.717(2)(a) is ambiguous and that the Inspector’s construction is equally tenable, s.62 is indeed helpful. It is one of a group of sections which introduced a change in the manner of taxing interest payable on securities by a non-resident company to an associated UK resident company. Under those provisions interest is treated as taxable as it accrues rather than when it is paid. A qualifying debt not exempted by s.62 is treated for the purposes of the accrued income scheme under Chapter II of Part XVII of the Taxes Act as having been subject to a transfer by or to the resident company. The Special Commissioners were, in my view, plainly wrong in regarding the context of s.717 as different from s.62, as it is clear that the provisions of the Finance Act 1993, of which s.62 was a part, modified the accrued income scheme. The definition of exempted debts in s.62 requires the terms of the debts to satisfy each of several conditions. The first condition in s.62(2) is in language virtually identical to that of s.717(2). However, it is significant that there is an additional condition in s.62(3) not found in s.717(2):

For these reasons, with all respect to the Special Commissioners and the judge, they wrongly construed s.717(2)(a). I would allow this appeal.

When I first read the papers in this case it seemed to me that a promissory note with an uneven interest payment profile was not a fixed rate security. That was the view of the Special Commissioners and the judge and is the view of The Chancellor.

At the end of the argument I was largely persuaded by Mr Ghosh that the notes issued in this case were by their terms securities which carried interest at a fixed rate throughout the period from issue to redemption and so fell within section 717 (2) (a) and that my first impression was wrong because it did not distinguish between the rate of interest and the time or times at which it became payable. That is the view of Sir Peter Gibson which he puts compellingly (together with other reasons) in his judgment.

I now have to make up my mind and decide whether I agree with The Chancellor or Sir Peter Gibson, an unenviable task given their great experience in this area of the law with which I am largely unfamiliar.

The facts, the relevant legislation and the arguments are fully set out in the other two judgments which I gratefully adopt. The issue is one of construction which I approach in the same way as my Lords, that is to say without any particular view of the legislative intention.

That said there are obviously two regimes for the taxation of accrued interest on the transfer of securities and I agree with The Chancellor that the variable interest regime seems to be the more appropriate regime for the taxation of these notes (# 54). The fixed interest regime taxes “the accrued proportion of the interest … for the period” (section 713 (4) (b)). With a fixed interest security one would expect the amount of interest to be the same for the same period at any time from issue to redemption. And yet under these notes there are three “interest periods” (section 711 (2) and (3)) in which the interest will differ markedly depending upon the period in which it accrues. This therefore looks like a variable interest security as I first thought.

But whatever these notes look like, if they fall within section 717 (2) (a) the appellants are entitled to succeed. The language of paragraph 2A of the notes mirrors the language of the statute: interest is carried at a fixed rate from the issue date to maturity (or earlier redemption by the “catch-up” provision). The interest payable set out in paragraph 2B is not attributable to any period and the provision is for specified amounts and says nothing about rates.

But do the notes “carry” interest at the same rate “throughout the period” from issue to redemption? I attach no significance to the word “carry”. It means no more than “bear”. “The period” is obviously the period from issue to redemption. That is only one period, but is the rate the same “throughout that period”? If one only considers the whole period the rate is the same. However paragraph 2B of the note sub-divides that period into three and I therefore think one has to consider whether the rate is the same within each of those periods. The appellants argue that this cannot be done because the amounts of interest payable are not made referable to the period at the end of which they have to be paid. That is so, but like The Chancellor (# 57) I do not think this matters. The rate for each period can easily be calculated and there is no suggestion from the terms of the note itself that the amounts payable are other than for the three specified periods. These notes could be “assigned, negotiated or otherwise transferred” with the consent of the issuer. Any prospective transferee would obviously calculate the value of the notes by reference to the amount and therefore the rate of interest which they still carried at the time of transfer. Any purchaser of these notes after 15 June 1995 would not consider that he had purchased a security carrying a fixed interest rate of 7.43375% per annum.

So I agree with The Chancellor’s conclusion that as matter of construction these notes do not fall within section 717 (2) (a). Also for the reasons given by The Chancellor (#58 - #63) I do not think the appellants’ other arguments justify any different construction of this provision. Nor do I think that this is a case for the application the principle of construction laid down in Finch v IRC.

For these reasons I conclude that the notes in this case fall within the variable interest regime and that this appeal should be dismissed.

The question for our determination is whether the six promissory notes with a face value of £25m each issued by Cadbury Schweppes Finance Ltd to Cadbury Scheppes plc on 15th September 1994 were securities the terms of issue of which in the context of s.717(2) Income and Corporation Tax Act 1988:

The terms of issue which have to be considered are few. The promissory note recorded that for value received the issuer:

Paragraph 2 is in the following terms:

Payments due under the Note were to be made without set-off or counterclaim (paragraph 3). Paragraph 4 provided that the principal amount of the Note together with all interest thereon calculated in accordance with paragraph 2 was immediately due and payable on the occurrence of an event of default, as defined, and a notice from the holder declaring the Note to be immediately due and payable. By paragraph 5 the Note might not be assigned, negotiated or otherwise transferred without the consent in writing of the issuer but subject thereto might be transferred in the form prescribed by paragraph 5(B).

Both the Special Commissioners and, on appeal to the High Court, Etherton J answered the question I have described in paragraph 1 in the negative. Though not for identical reasons each of them considered that the Notes did not carry interest at a fixed rate notwithstanding the provisions of paragraph 2(A) and notwithstanding the ‘catch-up’ provision contained in the second alternative in paragraph 2(B)(III) because the amounts and dates for payment set out in paragraph 2(B) showed otherwise. Mathematically this is so because an interest payment on £25m of £152,748.29 on 15th June 1995 in respect of the previous 9 months is equivalent to a yield per annum of 0.81%, an interest payment of £1,705,689.21 on 15th September 1995 in respect of the previous three months is equivalent to a yield per annum of 27.3% and an interest payment of £463,336.47 on 15th December 1995 likewise in respect of the previous three months is equivalent to a yield per annum of 7.4%. The aggregate interest payable of £2,321,773.97 is indeed a yield per annum of 7.43375% for the full period of 15 months from issue to redemption. The ‘catch-up’ provision ensures that the same outcome is achieved in the event of early redemption.

The relevant legislation, the judgments of the Special Commissioners and of Etherton J and the arguments presented to us have been fully described by Sir Peter Gibson. I gratefully adopt his description but to explain my reasons for the conclusion to which I have come it is necessary to repeat some of what he has already said.

I start by considering the context in which the question arises. Usually liability to tax on interest arises when it is received. The object of the relevant chapter is to prevent the avoidance of tax on interest when received by selling the right to receive it before it is payable. Two regimes are introduced for that purpose. Subject to the various exceptions for which s.715 provides, the regime for securities which fall within s.717(2), to which I shall refer as ‘fixed interest securities’, is that provided by s.713. Under that regime it is necessary to ascertain “the accrued amount” as defined in s.713(4). In the absence of any provision for the transferee to account for interest to the transferor the accrued amount is (s.713(4)(b))

The “interest applicable to the securities for the period” must be ascertained in accordance with provisions to be found in s.711. First it is necessary to identify the “interest payment day”, as defined in s.711(2), because such a day is used to delimit “interest periods” as provided in s.711(3). It is “the day on which interest on the securities is payable”. The provisions of paragraph 1 (see paragraph 2 above) make it clear that the interest payable in the amounts and on the dates prescribed in paragraph 2(B) (See paragraph 3 above) are “interest on the” Notes and “payable” on the specified dates. Thus, if this regime applies to the Notes, 15th June, 15th September and 15th December 1995 are all “interest payment days” and the sums specified in paragraph 2(B) are “interest on” the note. Similarly each of them is the day on which an “interest period” ends. The relevant period, provided that it is not more than one year earlier (see s.711(4)), begins with the date of issue or the previous interest payment day as the case may be. Accordingly if this regime applies there were three interest periods, namely 15th September 1994 to 15th June 1995, 16th June to 15th September 1995 and 16th September to 15th December 1995. In the event of a transfer of the notes immediately before any of those dates the accrued proportion for each interest period would be 100% (see s.713(6)), but, given the different interest rates attributable to each of them, the amount to be attributed to the transferor pursuant to s.713(2), on which he would pay tax, would differ according to the interest period in which the transfer took place.

The second regime is that prescribed by s.717 in respect of securities which do not come within the descriptions contained in s.717(2) or (4). I shall refer to such securities as ‘variable interest rate securities’. In the case of variable interest rate securities s.717(6) prescribes that on any transfer between issue and redemption the accrued amount for the purpose of s.713(2) is to be “such amount (if any) as an inspector decides is just and reasonable”. Thus intermediate interest payment days are immaterial and any variations in the rate occurring between issue and redemption may be taken into account by the Inspector. Another material difference is that in the case of the variable interest rate security regime the provisions of s.713(2)(b) are specifically excluded. Those provisions are directed to permitting a transferee to reduce his liability to tax on interest paid after the transfer by reference to the accrued amount for which the transferor is assessable. It follows that the variable interest rate security regime, but not the fixed interest security regime, is capable of giving rise to double taxation.

In my view the existence of the two regimes and the different way in which they deal with how to apportion the consideration for the transfer of an accrued right to payment of interest in the future provide the context in which to consider the proper construction of s.717(2) because that subsection and s.717(4) determines to which regime any given security, as defined by s.710(2), is subject. Both counsel suggested legislative intentions the various regimes were assumed to be intended to achieve and why the inclusion of these Notes in one or other of them would or would not advance that intention. Neither suggested intention was derived from the legislative provisions themselves or any clear ‘mischief’ to which they might be assumed to be directed. I do not think it is safe to approach the question of construction on the basis of either suggested intention.

By contrast, in my view, the court is entitled and bound to consider which of the two regimes is the more appropriate for ascertaining the accrued amount on which to assess the transferor to tax. I have no doubt that by that standard the variable interest rate regime is the more appropriate in the case of these Notes. Under that regime the Inspector can, and in this case did, assess the accrued amount on the footing that these notes carried interest at the rate of 7.43375% for the period from issue to redemption. By contrast the fixed interest security regime would require the calculation of the accrued amount by reference to the interest payable on the relevant interest payment date. Because different rates in fact apply to the three interest periods the accrued amount for any given period would vary considerably according to the interest period in which the transfer is effected. But the fact that the variable interest rate security regime is more appropriate to these notes is irrelevant if the legislative provisions do not warrant the construction of s.717(2)(a) in a way which achieves it.

Both the Special Commissioners and Etherton J considered that s.717(2)(a) could and should be construed in a manner which does not apply to these Notes. Counsel for the Appellants submits that they were wrong to do so. He relies on five basic propositions which may be summarised as follows:

I turn then to consider the first proposition on which counsel for the Appellants relied. He points out, correctly, that whether or not s.717(2) applies depends on the terms of issue of the relevant security and the rate of interest prescribed by those terms throughout the period from issue to redemption. He submits that not only does paragraph 2(A) prescribe that the rate of interest is “fixed” at 7.43375% per annum but the ‘catch-up’ provision contained in paragraph 2(B)(III) ensures that that is so. He contends, and this I think is the crux of the matter, that the legislation prescribes only one period, namely that from issue to redemption, so that it is not permissible to divide it up in the way both the Special Commissioners and the Judge did so as to deduce differential interest rates from the amounts of interest to be paid on the dates for payment prescribed in paragraph 2(B). He submits that s.717(2)(a) looks to the rate of interest not the amount payable. He contrasts that treatment with the provisions of ss.710(2)(b) and 717(4).

For my part I do not accept these criticisms. First it is necessary to identify from the terms of issue the rate of interest ‘carried’ by the securities in question “throughout the period from issue to redemption”. Paragraph 2(A) states this to be 7.43375% and the ‘catch-up’ provision in paragraph 2(B)(III) ensures that it will be. But then it is necessary to consider whether the rate at which interest is ‘carried’ is the same throughout that period. Paragraphs 1 and 2(B) of the Note specifically attribute to the principal amount of the Note the amounts of interest and times for payment set out in paragraph 2(B). There is nothing to suggest that such payments are ‘on account’ of some larger or different sum or period or otherwise than as stated in paragraphs 1 and 2(B). Thus, in this case, the terms of issue themselves segment or subdivide the period from issue to redemption into three constituent periods. In my view it must be appropriate to consider whether the provisions relating to each of those constituent periods indicate that the rate of interest carried by the securities in each of those periods is the same or different. If paragraph 2(B) had specified the rate of interest to be carried by the notes in the three constituent periods to be 0.8%, 27.3% and 7.4% it would be absurd to ignore those provisions on the grounds that because of the terms of paragraph 2(B)(III) the overall rate is bound to be that specified in paragraph 2(A) as the fixed rate. It is true that paragraph 2(B) specifies amounts not rates of interest but it provides all the information required to calculate what the respective rates are. The fact that such information is conveyed by reference to amounts of interest and times for payment rather than a percentage rate is, in my view, immaterial. The fact is that the rate at which interest is ‘carried’ by these Notes is different in each of the three periods which, according to the terms of issue, make up the period from issue to redemption. I can see nothing in the wording of s.717(2)(a) to justify ignoring what, to me, is obvious. Accordingly I reject the third basic proposition on which counsel for the Appellants relied.

It is true that s.710(2)(b) shows that the draftsman was conscious of the difference between the concepts of amount and percentage rate, but he does so in the context of a definition which provides in terms that such a distinction is immaterial. Similarly s.717(4) draws a distinction between interest periods and the period from issue to redemption. But, in the context of deep discount securities, there is good reason to do so given that the interest rate is likely to vary according to the depth of the discount. Accordingly I do not regard either of these provisions as indicating a different construction to s.717(2)(a).

The second basic proposition on which counsel for the Appellants relied stem from these considerations. In paragraph 26 of his written argument counsel for the Appellants spelled out three instances in which, according to him, anomalies will arise if the period from issue to redemption may be divided or segmented in the manner for which the Revenue contend. It is convenient to set them out in full.

Counsel for the Inspector suggested that the anomalies were overstated because, in some of them at least, the constituent periods were not justified by the terms of the issue. But whether or not that is so, there is no warrant, she contended, for ignoring sub-division or segmentation of the period from issue to redemption and the consequences of such division for which, in each case, the terms of issue expressly provide. With regard to the second suggested anomaly she submitted that if payment of interest is deferred then the rate is neither fixed nor the same throughout the period from issue to redemption.

For my part I do not think that what are put forward as anomalies necessarily are; nor do I think that they can be sufficient to justify a conclusion that notes such as these fall within s.717(2)(a). As far as suggested anomalies (i) and (iii) are concerned the assumed terms of issue indicate that interest was to be paid monthly in arrear but at the same monthly rate. Accordingly the rate is the same notwithstanding the time for payment. Suggested anomaly (ii) does not appear to me to be an anomaly at all because the rates of interest carried by the note in each year from issue to redemption is evidently different.

As I have emphasised before, the purpose of s.717(2) is to determine which alternative regime is to apply to specific securities. In my view it is clear that the variable interest rate security regime is more appropriate to the example given in suggested anomaly (ii) but not to those given in suggested anomaly (i) or (iii). I can see no reason to ignore that purpose of s.717(2) when construing its terms.

Some emphasis was also put on the fact that the variable interest rate security regime is susceptible to double taxation because there is no provision comparable to s.713(2)(b). This is true but does not help in the resolution of the relevant question because the propensity to double taxation exists for all securities which fall within the variable interest rate security regime. It casts no light on the dividing line between those which do as opposed to those which do not.

I turn then to the fourth basic proposition on which counsel for the Appellants relied. The terms of subsequent legislation are only admissible as aids to the construction of earlier legislation if the latter is ambiguous in the sense described by the Oliver LJ in Finch v IRC [1985] 1 Ch.1, 15. Counsel for the Appellants suggested that this proposition may have been overruled by the decision of the House of Lords in Inland Revenue Commissioners v Laird Group plc [2003] 1 WLR 2476 in which, at paragraph 30, Lord Millett relied on a later provision as ‘casting further light’ on the kind of relationship Parliament had in mind when enacting the earlier one. But there was no argument in Laird as to the admissibility of the later legislation as an aid to construction of an earlier provision, Finch was not referred to and it would not be right to regard it or the two House of Lords cases on which Oliver LJ relied, namely Kirkness v John Hudson & Co Ltd [1955] AC 696 and Ormond Investment Company v Betts [1928] AC 143, as having been overruled by what is little more than a narrative reference.

Thus it cannot be appropriate to consider the provisions of s.62 Finance Act 1993 unless and until I conclude that s.717(2)(a) is not only open to two arguable constructions, both of which are equally tenable, but also that there are no sufficient indications in the earlier legislation favouring the one construction over the other. I do not consider that those conditions are satisfied. But, even if they were, the provisions of s.62 Finance Act 1993 do not seem to me to be sufficient to resolve the ambiguity. The additional condition for which it provides is that

In this connection I should also mention that counsel for the Appellants invited us to look at various passages in Hansard recording statements made during the consideration by the standing committee of the House of Commons of the draft of what became Chapter II of Part XVII of Income and Corporation Taxes Act 1988. He frankly admitted that he could not make out a case for doing so in accordance with the principles established in Pepper v Hart [1993] AC 593. In those circumstances we declined to look at them. It is, in my view, important to bear in mind that Pepper v Hart relaxed a rule as to what material might be taken into account in construing a statute. To admit to consideration material which does not come within the rule as so relaxed is to take account of matter which, as a matter of law, is inadmissible as an aid to construction of the statute.

Finally I turn to the fifth basic proposition which I have summarised above. This arises from paragraph 58 of the judgment of Etherton J. In that paragraph he said:

Counsel for the Appellants submitted that it was not a question of mislabelling because paragraph 2(A) set out part of the terms of the issue and so was not a label at all. Further he submitted that due to the catch-up provision in paragraph 2(B) it was not incorrect so as to justify the epithet of mislabelling. I do not think that there is anything in these criticisms. Etherton J referred to “mislabelling” by way of analogy. What he evidently meant was that as paragraph 2(A) only contained part of the terms of issue the description of the rate of interest as “fixed” might have to yield to the overall effect of all the terms. And unless counsel for the Appellants is right in his submissions so it must.

For these reasons I agree in substance with both the Special Commissioners and Etherton J. I would dismiss this appeal.