Harding v HM Revenue & Customs

A security does not become a qualifying corporate bond merely because a currency-conversion option has lapsed before disposal. The statutory condition in section 117(1)(b) of the Taxation of Chargeable Gains Act 1992 must be construed so that a relevant currency-conversion or foreign-currency redemption provision remains disqualifying after lapse.

That construction prevents a non-qualifying corporate bond from changing status without a transaction and avoids accrued or rolled-over gains falling wholly outside the capital gains tax regime. The court preferred this purposive construction because the literal alternative produced a glaring anomaly inconsistent with the statutory scheme and had no countervailing justification.

Mr Harding appealed from the decision of the Special Commissioner, who had dismissed his appeal against a capital gains tax assessment for 1995–96. The assessment concerned a gain arising on the redemption of loan notes for £1,925,718 on 1 July 1995.

The loan notes were issued in exchange for shares. Their terms allowed the holder, after a redemption notice, to require redemption in United States dollars, Canadian dollars or German deutschmarks. Mr Harding did not exercise the option, which consequently lapsed before redemption.

The central issue was whether, on redemption, the loan notes satisfied the condition in section 117(1)(b) of the Taxation of Chargeable Gains Act 1992, requiring a security to be expressed in sterling with no provision for conversion into, or redemption in, another currency.

1. The appeal was dismissed. The loan notes were not qualifying corporate bonds when issued or when redeemed because their terms included a relevant provision for conversion into, or redemption in, a currency other than sterling.

2. The court rejected the submission that the word “security” in section 117(1) referred only to the documentary instrument. It referred to the underlying chose in action or asset evidenced by the document. W T Ramsay Ltd v IRC and Weston v Garnett did not require the contrary conclusion.

3. The (a) condition in section 117(1), requiring the debt to have represented a normal commercial loan “at all times”, showed that terms which take a loan outside that category remain relevant even if they have lapsed. Although the (b) condition used the present tense and contained no express “at all times” wording, that difference did not indicate a deliberate intention to permit non-transactional changes of status.

4. The literal construction advanced by Mr Harding would allow a non-qualifying corporate bond to become a qualifying corporate bond merely through the lapse of a currency option. That would cause rolled-over gains, and potentially gains accruing during the life of the security, to disappear from taxation altogether. It would also create an avoidance opportunity inconsistent with the statutory distinction between qualifying and non-qualifying corporate bonds.

5. Applying purposive principles of construction, the court held that a lapsed currency-conversion provision remains within the words “in respect of which no provision is made”. This construction avoided the glaring anomaly, conformed the (b) condition with the rest of section 117, and created no counter-mischief. The later amendments made by the Finance Act 1997 did not justify a different construction of the earlier legislation.

1. High Court (Chancery Division) — The appeal from the Special Commissioner’s decision promulgated on 15 March 2007 was dismissed.