Harding v Revenue & Customs

A security is not a qualifying corporate bond merely because a foreign-currency conversion right has lapsed. Under the Taxation of Chargeable Gains Act 1992, section 117(1)(b), “provision” refers to the terms of the agreement embodied in the security, not only to rights that remain exercisable. A lapsed provision therefore continues to prevent QCB status. The court applied the ordinary meaning of the provision and found no need for an anomaly-avoiding construction. Later amendments dealing expressly with non-transactional changes of status did not determine the meaning of the earlier law.

Mr Nicholas Harding exchanged shares in Frontline Distribution Ltd for loan notes issued by Computer 2000 AG. The notes contained an option for redemption in foreign currencies. Mr Harding’s option lapsed before the notes were redeemed in sterling, and HMRC assessed capital gains tax on the gain.

The Special Commissioner dismissed his appeal. Briggs J dismissed a further appeal, reported at [2008] STC 1865. The Court of Appeal considered whether the notes became qualifying corporate bonds when the currency option lapsed, with the consequence that the gain escaped both the roll-over and frozen-gain regimes.

Appeal dismissed unanimously. Lawrence Collins LJ gave the judgment, with Richards and Rix LJJ agreeing.

1. The court confirmed the ordinary principles of statutory construction. A provision should be construed purposively in its statutory context. If literal construction would produce injustice or absurdity, an available interpretation avoiding that result may be adopted. That approach cannot justify departing from the statutory language where no legitimate construction avoids the supposed anomaly.
2. The decisive issue was the meaning of “provision” in section 117(1)(b) of the Taxation of Chargeable Gains Act 1992. The word referred to the terms of the agreement represented by the security, including its currency-conversion terms. It was not confined to rights which remained exercisable at the relevant date. The Loan Notes therefore continued to contain provision for redemption in a currency other than sterling after Mr Harding’s option had lapsed. They were not QCBs when issued or when redeemed.
3. The distinction between “debt on a security” and “security”, discussed in W T Ramsay Limited v. IRC [1982] AC 300 and Weston v. Garnett [2005] STC 1134, did not require a different result. The wording of paragraph (b), particularly “in respect of which”, made the contractual terms decisive.
4. The 1997 amendments, which addressed changes of status occurring without a transaction, did not assist in construing the legislation applicable in 1995. Their precautionary character did not establish that Mr Harding’s construction was previously correct. The gain was therefore not lost from charge to tax, and the appeal was dismissed.

• Court of Appeal (Civil Division) dismissed Mr Harding’s appeal. [2008] EWCA Civ 1164.
• High Court, Chancery Division, Briggs J dismissed the appeal from the Special Commissioner. [2008] STC 1865.
• Special Commissioner dismissed Mr Harding’s appeal against the capital gains tax assessment on 15 March 2007.