Cadbury Schweppes Plc & Anor v HM Inspector of Taxes

For the purposes of Income and Corporation Taxes Act 1988 section 717(2)(a), a security carries the same fixed rate throughout the period from issue to redemption only if the same rate applies during each interest period. The court must examine the actual rights and obligations governing interest payments, including their timing and amount. A contractual label describing an interest rate as fixed is not conclusive. Section 717 is an anti-avoidance provision directed at arrangements which could reduce the income treated as accruing on a transfer. Subsequent legislation may assist interpretation only where the earlier legislation is genuinely ambiguous. Mere anomalies do not justify departing from the ordinary meaning of the statutory language.

Cadbury Schweppes Plc and Cadbury Schweppes Overseas Ltd appealed against the Special Commissioners’ dismissal of their appeals concerning notices of determination and corporation tax assessment for 1995. The dispute concerned six loan notes issued by an associated company. The notes stated an annual fixed rate but provided for irregular interest payments, including a substantial payment shortly before the first transfer.

The issue was whether the notes fell within Income and Corporation Taxes Act 1988 section 717(2)(a), so that the accrued income scheme’s just-and-reasonable apportionment applied under section 717(9), or whether the ordinary statutory apportionment under section 713 applied.

1. Appeal dismissed. The loan notes did not fall within Income and Corporation Taxes Act 1988 section 717(2)(a).
2. Section 717(2)(a) requires the same fixed rate to apply at each stage, or in respect of each interest period, throughout the period from issue to redemption. The period is not to be treated as a single indivisible unit tested only by reference to redemption.
3. The expression “carry interest” was neutral. Sections 717(2)(b) and (c) did not support the appellants’ construction. Sections 717(4) and (5) dealt with the distinct case of deep discount securities and did not alter the construction of section 717(2)(a).
4. The purpose of section 717 was to prevent the accrued income scheme being circumvented through securities whose variable interest arrangements could be manipulated by the timing of a transfer. The just-and-reasonable mechanism in section 717(9) was not confined by the assumptions underlying the formula in section 713.
5. The later provisions of Finance Act 1993 section 62 could not assist. Following Finch v IRC [1995] 1 Ch 1, later legislation is relevant only where the earlier provision is open to two equally tenable constructions. Section 717(2)(a) was not ambiguous.
6. The actual rates under the notes were approximately 0.8 per cent for the first period, 27.3 per cent for the second, and 7.4 per cent for the final period. The notes therefore did not provide for one fixed rate throughout the relevant period. The fact that the documents described the rate as fixed did not determine the statutory question.

1. High Court (Chancery Division): dismissed the appeal from the Special Commissioners’ decision dated 5 November 2004, which had dismissed the taxpayers’ appeals concerning the notices of determination and assessment.