Qualifying bonds
The taxpayer had owned shares in WDF Ltd until June 1997. Five other individuals and the trustees of the SD settlement owned the rest. The taxpayer and the other shareholders transferred their ordinary shares to C Ltd by way of gift. C Ltd was owned partly by the trustees of the WS settlement, of which the taxpayer and other shareholders were the settlors, and partly by the trustees of the SD settlement.
The trustees of the WS settlement subscribed for two £1 ordinary shares in C Ltd when it was incorporated in April 1997. At the end of May 1997, they subscribed for more £1 ordinary shares in C Ltd and, at the same time, the trustees of the SD settlement subscribed for £1 ordinary shares in C Ltd. The trustees of each settlement applied for loan notes issued by C Ltd. The loan notes had to be redeemed at par after five years, but could be exchanged into new loan notes of the same par value. The second loan notes would not carry interest and would have to be redeemed on the ninth anniversary of the date of issue at a price equal to £2 for each £1 par value.
The trustees of the two settlements eventually sold the shares and loan notes issued in C Ltd, and the preference and deferred shares in WDF Ltd, not owned by C Ltd, were also sold. The total consideration was over £17 million and the WS settlement trustees were liable to capital gains tax. The taxpayer claimed holdover relief under TCGA 1992, s 165 in respect of the disposal of the WDF ordinary shares to C Ltd under the gift of June 1997.
The effect of the scheme was to transfer the gains that would otherwise have accrued to the taxpayer and other shareholders on the sale of the ordinary shares in WDF to the gain which was treated as having accrued to them on the disposal by the WS Settlement trustees of the ordinary shares and notes in C Ltd.
The taxpayer said that the loan notes, into which 95% of the gain had passed, were qualifying bonds for the purpose of s 117, in respect of which he was not liable for capital gains tax.
The Special Commissioner dismissed his appeal, saying that the transactions had been carried out with the intention to avoid capital gains on what was previously the gain on the shares in WDF. The loan notes were not qualifying bonds on the basis that the right to convert the first loan notes into the second loan notes carried with it the right to convert the underlying loan into shares. This prevented the debt on the first loan notes from representing a normal commercial loan for the purposes of s 117(1). The High Court upheld the Special Commissioner's decision, so the taxpayer appealed.
The Court of Appeal upheld the previous decisions. The judges said that there was a difference between the security and the debt on the security. In the instant case, the loan note was the security, but the underlying loan secured by the loan note was the debt. The underlying loan had to satisfy the condition in s 117 that it has always represented a normal commercial loan. The question was whether that loan was a normal commercial loan. In this case, the loan was not and never had been a normal commercial loan. It had been made on terms that the debt could be converted into shares in the company, and that loan was the same loan, notwithstanding that the first loan notes had been replaced by the second loan notes.
The taxpayer's appeal was dismissed.
Weston v Garnett, Court of Appeal, 16 June 2005.
Missed deadline
The taxpayer company filed tax returns claiming a first year capital allowance of 100% on the purchase of a printer. After a Revenue enquiry, the allowance was reduced to 40%. The General Commissioners dismissed the taxpayer's appeal. The taxpayer appealed by way of case stated. However, he transmitted the case to the High Court after the 30-day time limit had expired. He applied for an extension to the time limit, but this was rejected.
In the High Court, the judge said that the requirement in regulation 22(4) of the General Commissioners (Jurisdiction and Procedure) Regulations 1994 was absolute, and the court had no power to extend it. Regulation 24 did not apply, since a case stated did not qualify as proceedings.
As to the taxpayer's right to a fair trial, under Article 6(1) of the European Convention on Human Rights, Article 6(1) did not apply to tax disputes, and was in any event there to ensure procedural fairness.
The taxpayer had not complied with the rules for appealing. His appeal was dismissed.
Significant Ltd v Farrel, Chancery Division, 16 June 2005.
Unused relief
A barrister claimed tax relief in respect of retirement annuity payments and personal pension payments. After the introduction of personal pension schemes in June 1988, she sought to have unused relief from earlier years carried forward. The Revenue said that the amounts which she elected to carry back exceeded the maximum allowable for the year, because the maximum unused relief she carried forward from earlier years was not enough to cover the amounts she elected to carry back. She appealed to the General Commissioners who agreed with the Revenue that unused retirement annuity relief carried forward was reduced by personal pension contributions made in the current year. The High Court also agreed with the Revenue, so the taxpayer appealed.
The Court of Appeal held that under TA 1988, s 655(1), unused relief for any one year included both unused retirement annuity relief carried forward and the unused relief in the current year. The unused retirement annuity relief was reduced by the amount of personal pension payments paid by the taxpayer in that year. The balance was the amount of relief which could be carried forward. The aim of the legislation to prevent double relief in respect of retirement annuities and personal pensions was reasonably clear.
The taxpayer's appeal was dismissed.
Lonsdale v Braisby, Court of Appeal, 17 June 2005.
