Another Step Forward: Go On

KEVIN SLEVIN FTII, ATT, TEP explains the latest changes to the meaning of 'security' for taper relief purposes.
THIS SHORT ARTICLE follows a number of earlier articles in Taxation magazine this year on the meaning of 'security' for taper relief purposes [see previous]. Regular readers will not need a summary of the saga up to this point, and most will have seen the Inland Revenue's press release dated 15 November 2001, which announced the intention to introduce new legislation defining 'security' for taper relief purposes. Paragraphs 7 and 8 of the press release state:
'7. To simplify capital gains tax, all debentures that are deemed to be securities under section 251(6) will now also be treated as securities for taper relief. Holders of such instruments will therefore not have to address the question whether the debentures actually are securities when considering the rate of taper relief. Holders will still need to consider whether the debentures meet the other conditions for business assets taper relief.
'8. The legislation will take effect for disposals from 6 April 2001 and for holding periods from 6 April 1998.'
Time for action
I was delighted to read this press release confirming the Treasury's intentions to change the taper relief provisions. It was time for action and the Revenue had acted. 'Problem solved' was my response, a job well done. Therefore, I was disappointed to read a so-called news article a few days later reporting a Revenue climb-down.
The facts are as follow.
 The Revenue officials agreed to look at a problem highlighted to many by the June 2001 edition of the Revenue's Tax Bulletin.
 They discussed the relevant issues as part of the consultation process aimed at simplifying capital gains tax.
 They heard the merits of the arguments against either taking no action or delaying addressing matters publicly until the March 2002 Budget, principally the financial burden on business created by the need to ensure compliance with the meaning of 'debt on security'.
 The officials concerned took the matters to ministers, common sense prevailed, and it was agreed that all debentures deemed to be securities under section 251(6), Taxation of Chargeable Gains Act 1992 would also be deemed to be securities for the purposes of taper relief. The change was announced in response to a written question in the House of Commons.
 It was agreed that the change would come into effect for all disposals of instruments taking place from the beginning of the tax year.
This is certainly not a climb-down from my standpoint. Indeed, it is better described as a positive response helping to lift the burden of red tape on commerce and industry.
Goes on, goes on, goes on!
Earlier, I described the Revenue's actions as a job well done. Alas, I was being economical with the truth. The job is not done yet! Such is the complexity of our tax legislation, that making a simple change such as this needs careful consideration. It would be helpful if the Revenue could release draft legislation before it appears in the Finance Bill, particularly, as I understand it, it is the intention that no-one making disposals prior to 6 April 2002 shall be worse off following the proposed change in legislation.
How could it be that someone could lose out as a result of the proposed tax change? After all, the Chancellor is widening the class of assets that can attract the greater rate of business asset taper relief. Well, if in a given set of circumstances one of the anti-avoidance provisions kicks in, it might apply differently to, say, a debenture that is not a security compared to one that is a security. Paragraph 11 of Schedule A1 can have effect so that the taper relief accrued up to the point which triggers its application is lost, and the taper relief clock starts again. Paragraph 11 only applies to shares, and shares include any securities of the company in question.
Thus, circumstances can be envisaged where an event occurs which, under what will soon become the old rules:
 triggers the operation of paragraph 11 as regards both shares in a company and the securities it has issued;
 but which will not affect the taper relief accruing (in accordance with the non-business asset basis provisions) in relation to other instruments, i.e. debentures which, in the Revenue's view, cannot fall within the definition of 'debt on a security'.
Whereas, under the new rules, not only will all the securities issued by the company be affected, but also section 251(6) debentures deemed to be securities, i.e. not just those described in the first point above.
Confused?
Are you confused? Well, at the risk of sounding patronising, do not worry about it. Simply accept my assurance that the publication of the 15 November 2001 press release by the Revenue is just the start of a process. The full extent of the changes to the statute will not be clear for some months to come. The press release covers 99.8 per cent of the cases likely to arise in practice, and a lot of thought is going into the other 0.2 per cent.
If you are concerned that one of your clients will be worse off under the new rules, please let me or the editor of this magazine know, so that your concerns can be passed on to the Revenue.
Date of application
Some readers may be puzzled about the 'disposal' referred to in the press release; that is, when it refers to disposals taking place on or after 6 April 2001 for the new rules to apply. The disposal referred to is the eventual disposal of the debenture that is deemed to be a security under section 251(6). The share exchange or company reconstruction that produced the debenture can have taken place at any time and, assuming it falls within the relevant provisions, does not give rise to a disposal. Only the subsequent repayment of the loan notes (or assignment thereof) gives rise to a capital gains tax disposal. It is this event that must take place on or after 6 April 2001 for the new rules to apply.
Pre 6 April 2001?
In effect, therefore, the proposed new definition of security applies only to encashment of loan notes taking place after 5 April 2001. On or before this date, the June 2001 edition of Tax Bulletin is still in point, although it is hotly disputed (see John Tallon's article, 'The Meaning of Securities', in Taxation, 16 August 2001 at page 487 et seq). I have also heard a number of other experts with persuasive and indeed impressive arguments as to why the Revenue looks set to lose in the courts.
It is hoped that the number of cases which will fall to be judged on the basis of the Tax Bulletin will be few, and who knows what the Revenue will do when push comes to shove, so to speak.
Talking of push coming to shove, it is now time for the Revenue to accept that paragraph 11 of Schedule A1 was never intended to frustrate commercially-driven company reorganisations carried out under section 110 of the Insolvency Act, especially where the Revenue has given a clearance under section 138, Taxation of Chargeable Gains Act 1992, to the effect that the Board of Inland Revenue accepts that the reorganisation is being carried out for bona fide commercial reasons and is not part of a tax-avoidance scheme. So my message to the Revenue is to keep up the good work by amending paragraph 11. Why not, for example, extend the impact of clearance applications in respect of a section 110 reconstruction so that a transaction can be taken out of paragraph 11 if a clearance is granted under section 138, Taxation of Chargeable Gains Act 1992? Why not permit the applicants to declare that the reorganisation is not being carried out to gain a taper relief advantage? Go on, go on!
Kevin S Slevin is a tax partner with Francis Clark. Contact 01752 301010 or kss@francisclark.co.uk.

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