“In essence, Mr Healey was supplied by [KB] with six similar products described and marketed by KB as ‘Flexi-Notes’. Each Flexi-Note product contained a [FRN] issued by a corporate body (with an ‘A’ or ‘Aa’ credit 45 rating) from which the interest coupons were to be stripped on the instructions of KB. The stripped coupons relating to a specified period (‘the Flexi-Note Period’) were retained for the benefit of KB. The remaining interest coupons were, at the end of the Flexi-Note Period, re-attached to the 2 related FRNs (again on KB’s instructions) and those FRNs were then sold on the market by KB on behalf of Mr Healey.”
“In each case one must look at the real nature of the transaction and see 15 whether the purchase of the future obligation at a discount is really an investment of money at interest or not.”
“passed through the hands of half a dozen persons, who have made profits 25 out of it aggregating a larger sum than the difference between the issue price and the face value, such extra profits being, of course, exactly equalled by losses made by other holders.”
“what the purchaser really receives at maturity is the sum he paid together 35 with interest on that sum for the period of the currency of the bill.”
“for it is being taxed not only on interest or discount, but on an amount 5 increased by appreciation or accretion, or decreased by loss, of capital.”
“I can see no difference in principle between this [case] and the first. When a 10 holder, whether the original purchaser or not, realises during currency, he really receives a proportion of the total profit resulting from the fact that the bill was bought at a discount. It is true that that proportion may not bear an exact relation to the period of currency but may be determined by variations in the value of money, in the public credit and so forth. But it seems to me 15 that the total of the profits received by the various sellers after deducting losses, if any, cannot exceed the difference between the price originally paid and the sum payable at maturity, and that the considerations I have referred to merely affect the distribution of that difference between the various holders. Profits made by discounting bills seem to me to rest on the same 20 footing, and conversion into War Loan also.”
“The second question, which turns on the meaning of the expression ‘profits 25 on all discounts’ contained in rule 2, presents more difficulty. The question is whether this expression includes the whole profit made by the sale of a discounted bill before maturity or only such part of that profit as is due to the advance of the bill towards maturity. Upon the whole I prefer the former view, which commended itself to Mr Justice Rowlatt and Lord Justice 30 Warrington. The expression ‘profit on a discount’ is unusual, and (as Lord Justice Scrutton pointed out) is probably elliptical for ‘profit on a security bought at (or a transaction involving) a discount’; and if one has once embarked on such a transaction, I think that the resulting profit, though enhanced by adventitious circumstances, is all profit on the discount. The 35 value of a bill in the market may vary with the rise or fall of the value of money; but there is no real accretion to capital, for the amount secured by the bill remains unaltered.”
“When one of these bills is purchased from the Treasury, all the rights it 40 confers are purchased with it. One of those rights is that the holder of it can enforce payment of it by the Treasury at its maturity. When it is resold at an enhanced price that same right is purchased by the purchaser. The right is the same in quality and character on the occasion of both sales.”
“If A lends B£100 on the terms that B will pay him£110 at the expiration of two years, interpretation of the contract tells us that B’s obligation is to make this payment; it tells us nothing more. The contract does not explain the nature of the£10 . Yet who could doubt that the£10 represented interest for 20 the two years? The justification for reaching this conclusion may well be that, as the transaction is obviously a commercial one, the lender must be presumed to have acted on ordinary commercial lines and to have stipulated for interest on his money. In the case supposed, the£10 , if regarded as interest, is obviously interest at a reasonable commercial rate, a circumstance 25 which helps to stamp it as interest.”
“I refer to these problems not to attempt to solve them but to show that there 35 can be no general rule that any sum which a lender receives over and above the amount which he lends ought to be treated as income. Each case must, in my opinion, depend on its own facts, and evidence dehors the contract must always be admissible to explain what the contract itself usually disregards, namely, the quality which ought to be attributed to the sum in question.” 40 37. Lord Greene then explained that the same principles applied to company debentures issued at a discount or redeemable at a premium, and said, at 679, that he could find no ground for distinguishing the case under appeal “from that of an ordinary issue of debentures by a trading company”
“It may be convenient to sum up my conclusions in a few propositions. (1) Where a loan is made at or above such a reasonable commercial rate of 15 interest as is applicable to a reasonably sound security there is no presumption that a ‘discount’ at which the loan is made or a premium at which it is payable is in the nature of interest. (2) The true nature of the ‘discount’ or the premium (as the case may be) is to be ascertained from all the circumstances of the case, and, apart from any matter of law which may 20 bear on the question (such as the interpretation of the contract), will fall to be determined as a matter of fact by commissioners. (3) In deciding the true nature of the ‘discount’ or premium in so far as it is not conclusively determined by the contract, the following matters together with any other relevant circumstances are important to be considered, namely, the term of 25 the loan, the rate of interest expressly stipulated for, the nature of the capital risk, and the extent to which, if at all, the parties expressly took or may reasonably be supposed to have taken the capital risk into account in fixing the terms of the contract. In this summary I have purposely confined myself to a case such as the present where a reasonable commercial rate of interest 30 is charged. Where no interest is payable as such, different considerations will, of course, apply. In such a case, a ‘discount’ will normally, if not always, be a discount chargeable under para (b) of r.1 to Case III. Similarly, a ‘premium’ will normally, if not always, be interest …”
“It was that second transaction which gave rise to the actual profit which is claimed to be taxable.”
“The holder of the discount must, one assumes, be getting a return for his money. It is up to him to demonstrate the capital quality of the discount if he 25 asserts its existence. As regards the trustees’ return on their money … the profit which was made by the trustees represented a return of about 11% per annum on a simple interest basis.”
“But the fact that the issue of the note formed part of such consideration seems to me immaterial. I can see no reason why a discounting transaction 35 should not form part of a larger transaction which is itself a purchase and sale … I do not, therefore, think it helps the trustees to rely on the original transaction.”
“The starting point is that, as between JLP and the bank, the single lump sum payment was not a payment of rent. In this respect, the case is fundamentally different from the prepayment by a tenant of a lump sum representing the discounted value of future rents payable by the tenant under a lease. It is 30 common ground that a lump sum prepayment of rent by a tenant is income in the hands of the landlord. It retains its character as income, notwithstanding that it has been converted into a lump sum. In such a case, there is no disposal by the landlord of an asset. But in the present case there was a disposal of an asset. JLP’s right to receive six years’ rent was a chose in 35 action which could be assigned for value. In my view, it is irrelevant that the rent paid by John Lewis to JLP would be income in the hands of JLP. The relevant question is: what was the lump sum paid by the bank in the hands of JLP? It is true that the payment was for future income. But it does not follow that the payment was of the same character as the future income for which it 40 is was made. It seems to me that so to characterise the lump sum payment is to make the mistake of confusing the measure by which the payment is calculated with the payment itself …” [Emphasis in the original]
‘What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic 35 classification of the legal rights, if any, secured, employed or exhausted in the process.’
“For example, suppose company X which has a good credit rating, issues a£10m nominal promissory note at par. The note is redeemable at par in 5 15 years and carries interest at a fixed rate of 0.5% which is an arm’s length commercial rate at the time of issue. Two years later, when interest rates have increased substantially, the holder of the note decides to sell it in the market. Although X has a good credit rating, the note will inevitably be valued at a discount to£10m to reflect the fact that it carries a very low rate 20 of interest until redemption. The purchaser holds the note to redemption. He thereby makes a profit. His transaction is plainly a discounting transaction, but equally plainly his profit is not of an income nature. This is because the right which he acquired is a right to receive£10m which does not include interest: no part of the£10m represents a return for X’s use of money. The 25 fact that the purchaser acquires the note at a discount does not alter this.”