HMRC v Hancock – Court of Appeal decision - KPMG United Kingdom
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HMRC v Hancock – Court of Appeal decision

HMRC v Hancock – Court of Appeal decision

Court of Appeal upholds a decision in favour of HMRC in this case concerning chargeable gains on transactions involving QCBs.


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The Court of Appeal (CA) has dismissed the taxpayer’s appeal in this tax case involving qualifying corporate bonds (QCBs). The case involved loan notes which had arisen on a sale of shares. One tranche of loan notes had been structured as a non-QCB and another as a QCB. There was a large held over chargeable gain associated with the QCB and chargeable gains had been rolled into the non-QCB so that it had a low base cost. Both loan notes were converted into a different single QCB loan note. That loan note was subsequently encashed.

The taxpayer claimed that there was a single transaction (being the conversion of both loan notes into a single QCB loan note) and the original holding included both a QCB and a non-QCB. S116 TCGA 1992 applies “…where a transaction occurs of such a description that …. and either the original shares would consist of or include a qualifying corporate bond and the new holding would not, or the original shares would not and the new holding would consist of or include such a bond” (s116(1)(b)). The taxpayer claimed that this test was not met as the original holding included a QCB, with the result that s116 did not apply to the conversion. As such they claimed the chargeable gain that would have otherwise arisen on the disposal of the non-QCB was washed out and was not taxed.

The CA considered that the drafting of s116(1) was anomalous and inconsistent with the evident intention of Parliament and the overall scheme of the legislation relating to reorganisations. In particular, the CA considered that s132 TCGA 1992, which deals with the conversion of securities, treated the taxpayer’s arrangements as two separate conversions of loan notes. This provided legislative support for treating the arrangements as two transactions for the purposes of s116. Accordingly and following Luke v Inland Revenue Commissioners [1963] AC 557 the CA concluded that the phrase “or include” in s116(1)(b) could be disregarded. Consequently s116 was met and the accrued gains on the original non-QCB were taxable.

This is an example of the CA, in an anti-avoidance context, finding differently to what might otherwise be considered to be a clear interpretation of the legislation, in circumstances where not to do so would be contrary to the evident intent of Parliament.

For further information please contact:

Paul Harden

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