DMWSHNZ Ltd v HM Revenue and Customs

For a statutory election deeming an intra-group transfer before an external disposal to be effective, the external disposal must involve a corresponding acquisition by the non-group person. The phrase “disposal to” is not satisfied by a transaction which merely extinguishes an asset or discharges a debt. Statutory interpretation requires a purposive construction of the enacted text applied to the transaction viewed realistically. Extra-statutory material cannot extend the statutory language, and the fact that a different transaction might have achieved the intended tax result does not alter the consequences of the transaction actually undertaken.

The appellant held qualifying corporate bonds representing a debt owed by a non-group company. It required repayment of part of the debt, bringing a held-over gain into charge. The appellant and a sister company then jointly elected under section 171A of the Taxation of Chargeable Gains Act 1992 to treat the disposal as having been made by the sister company, so that the gain could be matched against intra-group losses.

The First-tier Tribunal and the Upper Tribunal, at [2014] UKUT 98 (TCC), held that the election was ineffective. The appeal concerned whether section 171A(1)(b) required the non-group person to acquire the asset and, if so, whether repayment of the loan notes satisfied that requirement.

The Court of Appeal unanimously dismissed the appeal. Lewison LJ gave the judgment, with Moore-Bick LJ and Sir Timothy Lloyd agreeing.

1. Construction of section 171A. The court applied the purposive approach described in Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51, asking what transaction answered the statutory description and whether the actual transaction did so when viewed realistically. Section 171A(1)(b), read with the repeated references in section 171A(2) and (4) to “the disposal to C”, requires A’s disposal to result in C acquiring the asset in question.
2. Debt repayment. Repayment of the debt discharged the debtor’s obligation. It did not transfer creditor’s rights or the loan notes to the debtor. Under section 251(2) of the Taxation of Chargeable Gains Act 1992, satisfaction of the debt was treated as a disposal of the debt by the creditor, but section 251 provided no deemed acquisition. Any later cancellation of the notes was immaterial to the earlier disposal.
3. Loan notes and qualifying corporate bonds. Although Weston v Garnett [2005] EWCA Civ 742 distinguished a security from the underlying debt, the loan notes ceased to be qualifying corporate bonds on repayment because the issuer no longer stood as debtor and the holder no longer stood as creditor. Any residual obligation to cancel the notes was administrative and did not constitute a transferred asset.
4. Explanatory Notes may be consulted as an aid to statutory interpretation, but the enacted text remains decisive. Budget Notes were inadmissible and, in any event, did not support the appellant’s interpretation. The possibility that the desired result could have been obtained by an actual intra-group transfer did not affect the fiscal consequences of the transaction undertaken.

The election under section 171A was invalid and the gain could not be set off against the sister company’s losses.

• Court of Appeal (Civil Division): Appeal from the Upper Tribunal dismissed. Judgment of Lewison LJ, agreed by Moore-Bick LJ and Sir Timothy Lloyd.
• Upper Tribunal (Tax and Chancery Chamber): Mr Justice Rose held that the joint election under section 171A was ineffective: [2014] UKUT 98 (TCC).
• First-tier Tribunal: The tribunal reached the same conclusion: [2013] UKFTT 37 (TC); [2013] SFTD 648.