Trigg v HM Revenue & Customs

This is an appeal from a decision of the Upper Tribunal (Tax and Chancery Chamber) (Asplin J and Judge Roger Berner) released on 12 April 2016 ([2016] UKUT 0165 (TCC)) by which they allowed the appeal of Her Majesty’s Revenue and Customs (“HMRC”) from the decision of the First-tier Tribunal (Judge Barbara Mosedale) that the taxpayer, Mr Nicholas Trigg, was entitled to the benefit of the exemption from capital gains tax (“CGT”) contained in s.115 of the Taxation of Chargeable Gains Act 1992 (“TCGA”).

Mr Trigg’s case was the lead case among nine joint references to the First-tier Tribunal made under s.28ZA of the Taxes Management Act 1970 by HMRC and various partners in Tonnant LLP (an investment partnership) who had purchased sterling denominated bonds on the secondary market at what was perceived to be an undervalue with a view to their retention until maturity or eventual disposal at a profit. The bonds in question were all disposed of and the gains were treated in the tax returns of their respective holders as exempt from CGT on the ground that they were qualifying corporate bonds (“QCBs”) within the meaning of s.117 TCGA.

There are no material differences in the background facts as between the various joint references and the issue is the same in each case. It is common ground that Mr Trigg’s appeal will be determinative of all the joint references.

It is convenient to begin with the legislation. CGT is charged on gains accruing on the disposal of assets: see TCGA s.1(1). Section 21(1) provides that all forms of property are assets for the purposes of TCGA including:

Sterling as the currency in which gains are computed and tax is paid has never been an asset for CGT purposes. Increases or depreciations in the real value of the currency are not therefore chargeable gains or allowable losses. But debts are assets even if due and payable in sterling although they give rise to no chargeable gain unless they constitute a debt on a security as defined in TCGA s.132 or are acquired by a person other than the original creditor: see s.251(1). A debt on a security includes security in the form of loan stock issued by the UK government, a public or local authority or a company. But there have been successive exceptions from tax granted in respect of gilts and other securities which have been consolidated in TCGA s.115. This provides:

QCBs are defined in s.117 as follows:

The bonds purchased and subsequently disposed of by Mr Trigg and the other partners in his firm were all, as I have said, issued, denominated and redeemable in sterling. But, as issued, they identified a number of risk factors associated with their purchase including the possibility that the UK might replace sterling with the euro prior to the redemption date of the bonds. To deal with the risk of monetary union during this period, the bonds contained specific provisions which would operate in that event to convert the currency of the bonds into the new unit of currency and to facilitate repayment in that currency. Otherwise the bonds contained no terms enabling them to be converted into or repaid in a different currency from sterling.

The First-tier Tribunal identified two types of clause (described as Schedule A and Schedule B) one or other of which was contained in all of the bonds under consideration. They are set out in full in the appendix to the First-tier Tribunal decision but the following summary of their provisions is sufficient for the purposes of this appeal.

Schedule A states (in condition 6(g)) that:

The relevant provisions of Schedule B are more extensive. Once the UK becomes a Participating Member State (meaning when it “has adopted the euro as its lawful currency in accordance with the Treaty”) the issuer of the bond may on giving at least 30 days’ prior notice to the noteholders “designate a Note Payment Date as the Redenomination Date”. The clause continues:

The effect of Redenomination is that:

all payments in respect of the Notes (other than, unless the Redenomination Date is on or after such date as Sterling ceases to be a sub-division of the euro, payments of interest in respect of periods commencing before the Redenomination Date) will be made solely in euro by cheque drawn on, or by credit or transfer to a euro account (or any other account to which euro may be credited or transferred) maintained by the payee with a bank in the principal financial centre of any Participating Member State.”

It can be seen that both types of clause have the following common features. The conversion provisions come into operation no earlier than and only in the event that the UK changes its currency from sterling to the euro; they convert the currency of the bond at the official rate of exchange established under the treaty and any subsidiary regulations; and they provide for the automatic redenomination of the bonds in the new currency. Schedule B contains more detailed provisions invalidating the existing obligations expressed in sterling and providing for the issue of new notes denominated in the euro. But the substance of the change is the same in both cases.

The issue on this appeal is whether the bonds satisfy the conditions set out in TCGA s.117(1)(b) as read in conjunction with s.117(2). This centres on whether the provisions of Schedule A and Schedule B are provisions “for conversion into, or redemption in a currency other than sterling” and (where applicable) are not saved from being such provisions by s.117(2)(b). So far as the effect of Schedules A and B is to make the bonds redeemable in euros or another new currency following a change in the currency of the UK, it is common ground that this falls to be disregarded under s.117(2)(b) because of the application under both Schedules of the official rate of exchange. But HMRC contend that the absence of any reference in s.117(2)(b) to the conversion of the bonds into euros is significant. The availability of the exemption therefore depends entirely, they say, on whether the provisions of Schedules A and B are provisions for the conversion of the bonds into a currency other than sterling within the meaning of s.117(1)(b).

Mr Gammie QC, on behalf of the taxpayer, says that we must adopt a purposive construction of the provisions of s.117 informed by the reasons for granting the exemption and the type of gains which were intended to be excluded from the relief. It is apparent, he says, from the provisions of s.117 themselves that the exemption from CGT was limited to sterling denominated bonds which either have no facility for being converted into or redeemed in another currency or, if able to be redeemed in such a currency, use an exchange rate as at redemption which therefore precludes the possibility of forex gains.

He stresses that the provisions of Schedules A and B achieve no more than would have occurred had they not been included in the bonds. A change from sterling to the euro would be implemented in accordance with the directives and regulations governing the introduction of the euro which would lead to the automatic redenomination of the bonds and other sterling-based securities at a fixed exchange rate. The restricted circumstances and terms upon which the conversion of the bonds can take place under the Schedule A and Schedule B conditions mirror this process and importantly exclude the possibility of forex gains based on a switch between existing currencies with fluctuating rates of exchange.

The exemption from CGT in respect of gains arising from the disposal of QCBs was introduced by s.64 of the Finance Act 1984 as one of the measures designed to stimulate the British bond market. Gains from sterling denominated gilts had been previously exempted from charge by s.41 of the Finance Act 1969. The terms of the exemption for QCBs, as already explained, excluded bonds which contained internal provisions enabling the currency of the bond to be changed from sterling to another available currency with the potential for gains based on fluctuating rates of exchange between the two currencies or other variable measures of value. This explains the provisions of s.117(2) which both exclude bonds whose sterling value is determined by reference to the value of another currency or an asset such as a share index and include bonds where the provision for redemption in another currency is tied to the rate of exchange prevailing at the date of redemption. But the exemption does not exclude profits on a disposal generated by external factors such as the creditworthiness of the issuer or the value attached to this type of investment during a downturn in the equities market. These are features of the sterling bond market which occur regardless of the fixed currency of the bond and which investors like the taxpayers in this case are free to exploit.

The inclusion of the reference to TCGA s.132(3)(b) in the definition of a QCB in s.117(1) was the result of legislative changes that were designed to deal with tax schemes which sought to exploit the exemption for sterling bonds by rolling over gains from the disposal of shares into securities containing an option to convert the bond into another currency. They were not therefore QCBs which it was necessary for them not to be in order to obtain the rollover relief. Those securities then became QCBs by the removal of the option to convert with a view to avoiding a chargeable gain on their subsequent disposal. In Harding v HMRC [2009] 79 TC 885 a scheme of this kind was held to be ineffective because the question whether the bonds contained a provision for conversion into another currency fell to be answered by reference to the terms upon which the bond was issued rather than the terms which remained operative as at the date on which the bonds were subsequently disposed of. But there is nothing in the reasoning of the Court of Appeal which assists much either way on the issues of construction we have to decide.

Mr Gammie’s principal submission is that the common feature of both Schedule A and Schedule B is that they operate only after there has been a change from sterling to the euro as the lawful currency of the UK. The provisions only become effective once the necessary legislative changes have occurred and do no more than to reflect and give effect to those changes. They are not therefore clauses by which “provision is made for conversion” of the bonds “into … a currency other than sterling” within the meaning of s.117(1)(b). They simply operate to deal with the administrative consequences of the legislative change which precedes their operation. They are not the type of “provision” which s.117 is aimed at because the time when they operate does not allow for a gain or loss in relation to the conversion which takes place.

As an example of the purposive approach to statutory construction, Mr Gammie relies on the decision of the Supreme Court in UBS AG v HMRC [2016] UKSC 13 where the question was whether UBS could take advantage of a special regime under Part 7 of the Income Tax (Earnings and Pensions) Act 2003 (the “2003 Act”) for employment related securities in order to pay cash bonuses to its employees free of income tax. Under the scheme set up by UBS (which had no purpose other than to avoid tax in this way) companies were set up and shares allocated to specified employees in lieu of bonuses on terms which replicated the features of “restricted security” under the 2003 Act. Once the exemptions from the tax had occurred the employees would redeem the shares for cash. The Supreme Court held that the provisions had no application to the UBS scheme even if the shares which the employees obtained under the scheme had all of the characteristics of “restricted security” on the literal interpretation of ss. 423 and 425 of the 2003 Act. Lord Reed said:

The context in UBS was a tax avoidance scheme to which the familiar Ramsay (WT Ramsay Limited v Inland Revenue Commissioners [1981] UKHL 1) principles apply. Since the decision of the House of Lords in Barclays Mercantile Business Finance Ltd v Mawson [2005] 1 AC 684 the courts have based their consideration of whether a particular scheme is or is not effective to obtain its intended tax effect on the construction of the relevant legislation rather than on the more structural approach outlined in some of the earlier cases like Furniss v Dawson [1984] AC 474. In Barclays Mercantile at [32] Lord Nicholls of Birkenhead summarised the effect of the claim in Ramsay in these terms:

As with any construction-based approach, there will be cases where the legislation has to be given its natural linguistic or literal meaning even though it comes to be considered in the context of a tax avoidance scheme. In MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311 a pension scheme which was owed some £40m of interest by its investment subsidiary lent the company that sum to enable it to discharge the liability and so obtain the right to set off the relevant tax losses against its future profits. This made the subsidiary a valuable asset and it was sold for £2m. The company’s claim for loss relief was rejected by HMRC on the ground that the interest payments were not “charges on income” within the meaning of s.338(1) Income and Corporation Taxes Act 1988. Charges on income were defined by s.338(2) as “payments of any description mentioned in subsection (3) below”. Under subsection (3) “payments” include “(a) any yearly interest”. The House of Lords held that there had been a payment within the meaning of s.338(2). Lord Nicholls of Birkenhead said:

The situation in MacNiven differed from that in UBS in that the loan enabled the company to discharge real liabilities which had arisen from real commercial transactions. The only objection to the relief claimed was that the payments had been funded by the creditor. But the House of Lords said that the scheme was irrelevant because there was no policy reason for excluding the payments on a purposive basis. At [79] Lord Hope said:

These decisions including that in UBS owe much to the particular context of a tax avoidance scheme. Although UBS has to be treated as an illustration of a purposive construction of the legislation under consideration in that case, the considerations which were held to inform the construction of the statutory provisions are peculiar to the consideration of a tax avoidance scheme and can be traced right back to the speech of Lord Wilberforce in Ramsay itself. The general presumption or approach is that the legislation is intended to deal with real (in the sense of ordinary) commercial transactions and not those put together solely for the purpose of obtaining the relevant fiscal advantage. Using that as a yardstick, it is much easier to construe the legislation in general terms as being inapplicable to scheme-based transactions. But in a different context the ability to take such a broad brush approach will depend on the policy which is identified as the driver behind the legislation.

We are not concerned in this case with questions of tax avoidance. The purpose of what has become TCGA s.117 was, it is common ground, to encourage investment in British sterling-based securities such as gilts and loan stock. That exemption was granted on the terms which are now set out in s.117 which it is clear exclude bonds which can be converted into or redeemed in a currency other than sterling save to the extent that they are saved by s.117(2)(b). Mr Gammie says that the inclusion of the bonds in this case notwithstanding the provisions in Schedules A and B can be achieved in any one of three ways. One can read “provision” in s.117(1)(b) as only applying to provisions for conversion into or redemption in a foreign currency which is co-existent with sterling and gives rise to the possibility of forex and similar gains; one can read the reference to “a currency other than sterling” as restricted to a foreign currency other than sterling or whatever replaces sterling as the national currency from time to time; or one can read “sterling” as meaning sterling or whatever replaces it as the unit of national currency. At one level these arguments can be regarded as no more than different ways of construing s.117 so as to give effect to what Mr Gammie submits was the intended scope of the exemption. But any exercise in construction must begin with the words used and one is therefore immediately drawn into a consideration (similar to that in the tax scheme cases) of whether particular components of s.117 should be given their literal or some kind of qualified meaning. I propose therefore to deal with his three arguments separately and then to consider how they impact on his primary submission that by including Schedules A and B the bonds have not made “provision … for conversion” of the kind contemplated by s.117(1)(b).

Both the First-tier Tribunal and the Upper Tribunal rejected the possibility of reading “sterling” in the phrase “other than sterling” as meaning sterling or whatever replaces it as the lawful currency of the UK (including the euro). At [43] of its decision the Upper Tribunal said:-

I agree with this. To give the word “sterling” a wider meaning which extends to any replacement currency has a number of difficulties. The word “sterling” has been used elsewhere in the TCGA (notably s.21(1)(b)) to designate the type of currency which is not treated as an asset for CGT purposes. “Sterling” is not given an extended definition in the Act and, if it were to be, its application to s.117 would have to be qualified. As Mr Nawbatt QC pointed out, the exemption for sterling bonds was created to boost the British bond market. It was not intended to cover previously issued euro denominated bonds even in the event that the euro replaces sterling as the unit of national currency. In relation to such bonds, the phrase “expressed in sterling” in s.117(1)(b) should be taken to mean what is says. Consistently with the known purpose of the exemption, Parliament is unlikely to have intended to accommodate a possible change to the euro within the references to “sterling” in what is now TCGA s.117. Insofar as monetary union existed as a future possibility in the mind of the legislator, it would have been seen as a change which would inevitably require the introduction of amending legislation in conformity with the relevant directives including amendments to provisions like s.117. It is not therefore possible to give the references to “sterling” the extended ab initio meaning for which the taxpayers contend.

As part of its own decision on what was meant by “a currency other than sterling”, the First-tier Tribunal construed s.117(2)(b) as extending to the conversion of the bond into another currency where the rate of exchange on conversion was identical to the rate of exchange prevailing at redemption. At [101] it said:

This construction of s.117(2)(b) was rejected by the Upper Tribunal and has not really re-surfaced as part of the taxpayer’s appeal. Mr Gammie has relied on s.117(2)(b) not as the means of extending the exemption to the bonds in question but as providing confirmation in its own terms of the type of provisions which s.117(1)(b) was intended to exclude. As the Upper Tribunal reasoned, the effect of s.117(2)(b) is to treat redemption of a sterling bond in a different currency as equivalent to redemption in sterling where the rate of exchange is the one prevailing at redemption. This limited disregard is effective on its own terms without the need to give it an extended meaning. It operates in relation to a bond which would otherwise be excluded under s.117(1)(b) because it made provision for its redemption in a currency other than sterling. But the fact that s.117(1)(b) covers not only provisions for redemption in a different currency but also for conversion into another currency can hardly have been ignored by the draftsman of s.117 and the disparity between s.117(1)(b) and s.117(2)(b) must be regarded as deliberate. The explanation is, I suggest, the one already offered in relation to the meaning of “sterling”. So far as the provisions of s.117(1) need to accommodate the effects of monetary union, that would be achieved by amending legislation.

Mr Gammie does not, as I have said, seek to rely in terms on the First-tier Tribunal’s construction of s.117(2)(b). He submits that we should treat those provisions as confirmation of the intention of the legislature to exclude bonds with provisions for conversion into and redemption in another currency only where that gives rise to the possibility of forex and other gains. In terms of the application of s.117, s.117(2)(b) should not be read as providing an exception to s.117(1)(b). There is in substance a single question which is whether the bonds are QCBs within the meaning of s.117(1). But in order to answer that question one looks to s.117(2) as in effect providing a definition of what Parliament intended to include within s.117(1).

I agree with Mr Gammie that s.117(2)(b) does provide further specific guidance as to what the words “redemption in a currency other than sterling” was intended to cover. But the existence of s.117(2)(b) is also to my mind confirmation by the legislature that, but for s.117(2)(b), the provisions of s.117(1)(b) should be treated as bearing their ordinary meaning. It is against this background that one turns to consider the next statutory question which is whether Schedules A and B make provision for the conversion of the bonds into a currency other than sterling.

It is clear that this phrase must bear the same meaning wherever it appears in s.117 and that if “sterling” means, as it does, sterling and not whatever happens to be the national unit of currency from time to time then the euro is a currency other than sterling even if it comes to replace sterling as part of monetary union. The only question which remains is whether, for the reasons outlined earlier, Schedules A and B should not be treated as the kind of “provision” for conversion into a different currency which s.117(1)(b) was intended to refer to.

Mr Nawbatt’s response to the argument that the words “provision … for conversion” should be given a purposive construction of the kind employed by the Supreme Court in UBS is that this pre-supposes that Parliament intended to anticipate the possibility of monetary union in choosing the language of the exemption. For essentially the same reasons as govern the construction of the word “sterling”, he submits that this is unrealistic. HMRC accept that if the operation of Schedules A and B is triggered by a change from sterling to the euro (or another new currency) as the sole unit of national currency which has already taken place and as a result of which sterling has ceased to exist then they would not make provision of the kind contemplated by s.117(1)(b). On that hypothesis by the time the Schedules operate the substantive change or conversion would have taken place and the Schedules would not be (and never would have been) capable of converting the bonds into a currency other than sterling. But this concession is based on giving the provisions of s.117(1)(b) what might be described as their ordinary meaning and not by resort to any kind of purposive construction of the kind adopted in UBS.

I agree with the Upper Tribunal (see [57] of its decision) that the definition of a QCB in s.117 is a statutory construct identified entirely by the terms used to define it. In the context of s.117 as a whole and having regard to the circumstances in which the exemption was introduced, there is nothing which requires the section to be given any kind of special or qualified meaning. So far as the provisions of s.117(1)(b) are to be given an extended meaning, that is expressly provided for by s.117(2). The only real question therefore is whether the Upper Tribunal was right to find that Schedules A and B were capable of operating as provisions for the conversion of the bonds into a currency other than sterling having regard to the way in which the relevant EU directives would operate in the event of the UK adopting the euro as its national currency.

Both Schedule A and Schedule B operate, as already emphasised, once there has been a change in the currency of the UK. Schedule A refers generally to any change in the national currency although it is clear from the heading that the provisions are intended to operate primarily in relation to the redenomination of the bonds in euro. The reference in condition (i) is to “a change in the currency of the United Kingdom such that the Bank of England recognises a different currency or currency unit or more than one currency or currency unit as the lawful currency of the United Kingdom”. Schedule B is expressly framed by reference to the adoption of the euro and the notice procedure described earlier is triggered once the UK has “adopted the euro as its lawful currency in accordance with the Treaty”. The Treaty is defined as “the Treaty establishing the European Union as amended by the Treaty on European Union and the Treaty of Amsterdam”.

The UK has a derogation from the adoption of the euro which it would have to give up in order for monetary union to take place. Whilst it subsists the UK is not bound by Council Regulation (EC) No. 974/98 which provides for the staged introduction of the euro in relation to each “participating member state”. Articles 2 and 3 state:

The Regulation also provided for a transitional period from 1 January 1999 until 31 December 2001 to allow for the introduction of euro banknotes and coins and to phase out use of notes and coins denominated in the pre-existing currencies of the participating member states. But both recital (8) and Article 6 make it clear that during the transitional period the existing national currencies will be defined as sub-divisions of the euro at the fixed conversion rates prescribed under the regulations. Therefore, although the old currencies remained in circulation during that period, they did not do so in their own right but only as units or sub-divisions of the euro.

This and other regulations were amended by Council Regulation (EC) No. 2169/2005 which allowed new participating member states to opt between a transitional period of up to three years or no transitional period at all and which substituted a new Article 2 that stated:

Otherwise Regulation 2169/2005 makes no substantive changes. This would be the regulation which (as things stand) would govern the terms upon which the UK would adopt the euro.

The Upper Tribunal took the view that on the basis of the EU Regulations currently in force the adoption of the euro could not lead to an immediate redenomination of the bonds because of the transitional period and that although under Regulation 974/98 the euro became the currency of the participating member states from the date of its adoption, there was no guarantee that the UK would necessarily adopt the single currency on the same basis. I have some difficulty with this. The fact that the UK currently has a derogation from the Treaty and the Regulations with the result that it is not compelled to adopt the euro as its unit of currency is nothing to the point. The events which would trigger the operation of Schedules A and B necessarily assume that the UK has waived that derogation and has proceeded to adopt monetary union in accordance with the Treaty. Since Regulation 974/98 as amended by Regulation 2169/2005 is what the Treaty prescribes as the terms for adoption of the euro, they provide the relevant background and context against which the contract falls to be construed and the provisions of s.117 applied. On one view it is not permissible to look beyond the terms of Schedules A and B themselves which refer in terms to the recognition or adoption of the euro or another new currency as the lawful currency of the UK. In both cases that refers, in my view, to a completed process and the precise legislative machinery adopted to bring the new currency into effect does not matter. But, if and so far as one is entitled to look at the legislative machinery which would operate in relation to the euro, that inquiry can go no further than the provisions of the Regulations currently in effect. It is not, in my view, permissible to substitute for the provisions of Article 2 as introduced by Regulation 2169/2005 some alternative and very different type of regime which is entirely speculative. The Schedules must be construed as referring to the Regulations as they then stood.

For these reasons, whilst accepting HMRC’s general approach to the construction of s.117, I consider that the bonds are QCBs notwithstanding the inclusion in them of the Schedule A or Schedule B provisions. I would therefore allow the appeal.

I agree.

I agree also.