Trigg unhappy – QCB conversion case goes against taxpayer at Upper Tribunal

Fri 15 Apr 2016

In 2014 Mr. Trigg won an appeal in the First Tier Tribunal (FTT) against HMRC’s refusal to accept that bonds containing a “future-proofing” clause whereby they would convert from sterling to euro denomination if the UK were to adopt the euro as its currency, were qualifying corporate bonds (QCBs).

Mr. Trigg bought the bonds second-hand believing that:

·         they were QCBs which meant that he would not be taxable on any gains or able to claim relief for any losses on disposal; and

·         they were undervalued, so that he was likely to be able to realise a profit.

He did not, the First Tier Tribunal judge found, acquire the bonds as part of a tax avoidance scheme but that was irrelevant since the status of a security as a QCB is fixed by its terms and nature.

The bonds were securities for CGT purposes: a security is a QCB if it meets the TCGA 1992 s 117 requirements:

·         it must be a “normal commercial loan”, which HMRC did not dispute; and

·         it must be expressed in sterling, with no provision for conversion into, or redemption in, a currency other than sterling (other than conversion by payment in another currency at the exchange rate prevailing at redemption).

It was that second part of the definition that created the dispute because the securities contained provision that if the UK changed its currency unit from sterling to another currency unit, the securities would become denominated in the unit of currency that replaced sterling.  

“Sterling” is not defined in law (tax or otherwise) and Trigg argued sterling should be taken as meaning the ‘lawful currency of the UK from time to time’ but The Judge found that “sterling” could only mean the pound.

However, the Judge then went on to apply a purposive construction based on the intention of Parliament, deciding that “Parliament is unlikely to have intended to make a distinction without practical difference.” and so a blanket ruling-out of any sort of conversion would be illogical.  Trigg’s securities had been drafted as QCBs and the conversion clauses were included solely to deal with the possibility of the UK’s currency being changed. The Judge found that “a purposive interpretation of s 117(2)(b) is that [the subclause in the security] includes a provision for conversion of the bond into another currency if the rate of exchange on conversion is identical to the rate of exchange prevailing at redemption, because there is no logic in making a distinction between the two positions, and Parliament cannot have intended absurdity.”

In other words the conversion clause conformed to the spirit of the exception for repayment in foreign currency converted at the rate applying on redemption.

The Upper Tribunal’s decision

In the Upper Tribunal (UT) (HMRC v Trigg [2016] UKUT 0165(TCC)) the Judges ruled that no element of purposive construction should be allowed and the meaning of “sterling” had to be taken strictly and literally from the precise wording of the statute. It could not be extended to mean “the lawful currency of the UK from time to time”.

The UT then went on to consider whether the provision for redenominating the bonds in euros would constitute a conversion for s 117 purposes, and if so, whether that was a conversion into a currency other than sterling. “Conversion” includes any change in the character, nature, form or function of the security and it did not matter that it was conditional on an outside event and so could not be triggered by any of the parties to the bond. Therefore the bonds did contain provision for conversion and that conversion could only be ignored if the conversion would make no change to the substance of the bond. The UT found that conversion would make a material difference.

Therefore the UT concluded that when he thought they were QCBs Mr. Trigg erred and the bonds were in fact non-QCBs.

Further steps?

Whether the matter will end there will depend on the amount at stake and the depth of Mr. Trigg’s pockets as the next stage of appeal would be to the Court of Appeal.