Cadbury Schweppes Plc & Anor v HMIT

For the purposes of section 717(2)(a) of the Income and Corporation Taxes Act 1988, whether securities carry a fixed rate throughout the period from issue to redemption depends on all their terms of issue.

Terms specifying unequal interest payments may segment that period into constituent periods. The rates carried in those periods may be calculated from the specified amounts and payment dates. If those rates differ, the securities fall within the variable-interest regime, even if the instrument states an overall fixed annual rate and contains a catch-up provision.

Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd appealed against tax determinations concerning six loan notes issued by an associated company. The notes stated that interest was payable at a fixed annual rate, but provided for markedly unequal payments before redemption and included a catch-up provision.

The Special Commissioners dismissed the appeals on 9 November 2004. Etherton J dismissed the appeal on 21 July 2005; the decision was reported at [2006] STC 210. The central issue was whether the notes satisfied section 717(2)(a) or instead fell within the variable-interest regime, so that the accrued amount was to be determined by the Inspector as just and reasonable.

1. Appeal dismissed. The Chancellor and Lord Justice Tuckey formed the majority. Sir Peter Gibson dissented and would have allowed the appeal.
2. The statutory scheme distinguishes between securities governed by section 713 and securities governed by section 717 of the Income and Corporation Taxes Act 1988. The court could consider the tax-avoidance context, but the statutory language did not justify giving section 717 an unnaturally wide meaning merely because the taxpayers intended to obtain a tax advantage.
3. Under section 717(2)(a), the court must examine the terms of issue to identify the rate carried from issue to redemption. The terms may themselves divide that period into constituent periods by specifying the amounts of interest and the dates for payment. The rate carried in each constituent period must then be considered.
4. The notes specified payments equivalent to rates of about 0.8%, 27.3% and 7.4% for the three periods. The catch-up provision ensured payment of the overall contractual interest, but did not make the rates carried in the constituent periods the same. The notes therefore did not satisfy section 717(2)(a) and fell within the variable-interest regime. Section 717(9) consequently applied, leaving the accrued amount to be determined by the Inspector on a just and reasonable basis.
5. The suggested anomalies did not determine the construction, although practical consequences could properly be considered. Monthly payments at the same monthly rate would not necessarily create a variable rate merely because calendar periods differed. Deferred interest could do so where the rates carried in successive periods differed. The majority also followed the approach in Finch v CIR that later legislation may assist only where the earlier provision is ambiguous in the relevant sense. Section 62 of the Finance Act 1993 did not resolve the issue.
6. Sir Peter Gibson considered that the statutory test concerned one period from issue to redemption and the fixed rate specified in the terms of issue. In his view, the payment profile did not alter that rate, and the appeal should have been allowed.

1. Court of Appeal (Civil Division) — [2006] EWCA Civ 657: by a majority, dismissed the appeal from the High Court.
2. High Court, Chancery Division — Etherton J dismissed the appeal on 21 July 2005; the decision was reported at [2006] STC 210.
3. Special Commissioners — dismissed the taxpayers' appeals on 9 November 2004.