Barnes v HM Revenue and Customs

A statutory stock-lending definition may apply to the matched transfer and retransfer of borrowed securities even where the arrangement also requires additional securities. The statutory requirement is assessed purposively and realistically, taking practical circumstances and the parties’ definite intention into account. It need not be confined to the literal wording of the contract. Where Taxation of Chargeable Gains Act 1992, section 263B applies, accrued-interest relief under the Income and Corporation Taxes Act 1988 is disapplied. On the alternative assumption that accrued-interest relief is available, the accrued-interest allowance reduces the interest payment for tax purposes, so the taxpayer is not chargeable to income tax on it and cannot claim manufactured-interest relief in addition.

The taxpayer participated in a marketed tax-avoidance scheme involving the transfer and retransfer of government securities, receipt of an interest coupon and payment of an equivalent manufactured-interest amount. The First-tier Tribunal held that accrued-interest relief was available but manufactured-interest relief was not. The Upper Tribunal held that the transaction was a stock-lending arrangement, so accrued-interest relief was unavailable, and upheld the refusal of manufactured-interest relief.

The Court of Appeal heard a second appeal concerning whether the transaction fell within section 263B of the Taxation of Chargeable Gains Act 1992, whether the two reliefs could be claimed cumulatively, and whether the taxpayer had any substantive entitlement to the securities or coupon. The third issue was not necessary to determine the appeal.

1. The appeal was dismissed. The scheme failed on the stock-lending issue, and also on the alternative manufactured-interest issue according to the majority reasoning.
2. Stock-lending arrangement. Section 263B(1) of the Taxation of Chargeable Gains Act 1992 applies to so much of a larger arrangement as provides for the transfer of securities and their retransfer. Sections 263B(5) and (6) extend the provision to securities of the same description. The transfer of additional Margin Gilts did not prevent the matched transfer and retransfer of the Borrowed Gilts from falling within the section.
3. Meaning of requirement. The requirement to return the securities is assessed purposively and by viewing the transaction realistically. The court relied on the findings that there was no realistic or practical possibility of returning anything other than the same securities and that this was the definite intention of all parties. Vos LJ preferred not to analyse the matter solely through strict contractual construction. Lloyd LJ agreed with the result, stating that the requirement had to be legally binding, while leaving any distinct contractual analysis open. McFarlane LJ agreed with Vos LJ’s reasons.
4. Consequences. Because the arrangement fell within section 263B, section 727(2) of the Income and Corporation Taxes Act 1988 disapplied sections 713 and 714, so accrued-interest relief was unavailable. Manufactured-interest relief was available if accrued-interest relief was unavailable, but the scheme nevertheless failed because both reliefs could not be obtained.
5. Alternative issue. Vos LJ held, with McFarlane LJ’s agreement, that “chargeable to income tax” in paragraph 3(2A) of Schedule 23A to the Income and Corporation Taxes Act 1988 had to be construed in its immediate statutory context. Section 714(5) reduced the interest payment on which the taxpayer was chargeable by the accrued-interest allowance. On that hypothesis, the taxpayer was not chargeable on the relevant periodical payment and could not obtain manufactured-interest relief. Lloyd LJ considered the reasoning persuasive but preferred to leave the point open for a case in which it affected the outcome.
6. Unresolved issue. The court declined to decide whether the substantive legal effect of the scheme meant that the taxpayer had no entitlement to the borrowed securities or the coupon, because that issue was immaterial to the disposition.

• Court of Appeal (Civil Division): dismissed the second appeal.
• Upper Tribunal (Tax and Chancery Chamber), FTC/22/2011: held that the scheme was ineffective, including because the transaction was a stock-lending arrangement and manufactured-interest relief was unavailable.
• First-tier Tribunal: held that accrued-interest relief was available but manufactured-interest relief was not.