“126 Application of sections 127 to 131 30 (1) For the purposes of this section and sections 127 to 131 “reorganisation” means a reorganisation or reduction of a company's share capital, and in relation to the reorganisation— (a) “original shares” means shares held before and concerned in the reorganisation, 35 (b) “new holding” means, in relation to any original shares, the shares in and debentures of the company which as a result of the reorganisation represent the original shares (including such, if any, of the original shares as remain). (2) The reference in sub-section (1) above to the reorganisation of a 40 company's share capital includes- (a) any case where persons are, whether for payment or not, allotted shares in or debentures of the company in respect of and in proportion 5 to (or as nearly as may be in proportion to) their holdings of shares in the company or of any class of shares in the company, and (b) any case where there are more than one class of share and the rights attached to shares of any 5 class are altered.” 127 Equation of original shares and new holding Subject to sections 128 to 130, a reorganisation shall not be treated as involving any disposal of the original shares or any acquisition of the new holding or any 10 part of it, but the original shares (taken as a single asset) and the new holding (taken as a single asset) shall be treated as the same asset acquired as the original shares were acquired.”
“45. It is evident that a “reorganisation” of share capital within s 126 is capable of encompassing a case where 30 more than one class of shares is concerned in the reorganisation. Section 130 expressly envisages a new holding comprising more than one class of shares or debentures. Section 127 envisages shares that would not otherwise be treated as a single asset being taken to 35 be a single asset. Any adaptation of s 127 to s 131 required by s 132 would have to encompass a similar result in the case of conversions of securities. In the context of the reorganisations rules, there is therefore, in our view, no bar in principle to a conversion of 40 securities being a single conversion encompassing a conversion of more than one class of security into a different security.”
“47. In our judgment 5 s 116(3) and (4) should be construed so as to apply both where the original shares or the new holding comprised only the QCB, and where the original shares or the new asset merely included a QCB. Only in this way could effect be given to 10 circumstances that s 116(1) makes clear are intended to be governed by s 116. Given the meaning of “original shares” and “new holding” within s 126, as modified for s 132 purposes, the true construction of s 116(3) and (4) is, in our view, to encompass any QCB that, 15 respectively, forms part of the description “original shares” or “new holding”, whether or not there is another asset included within the same description in respect of the same reorganisation or conversion.”
“50. The reason why this short point of construction is of such importance to the parties is that, upon issue to Mr Harding, the Loan Notes had rolled-over into them a 10 very substantial capital gain which had accrued by reason of the large increase in the value of the shares for which the Loan Notes were exchanged. If HMRC’s case on construction is correct, then that rolled-over gain, together with any additional gain between the 15 issue and redemption of the Loan Notes, became chargeable to tax on1st July 1995 . If Mr Harding’s case on construction is correct, then the rolled-over gain simply disappeared from tax altogether when his currency conversion option lapsed on 23rd January, with 20 the delightful consequence (for him) that it will never be taxable at all. Since Mr Southern who appeared for Mr Harding could not point to any other circumstances in which Parliament had consciously legislated for a rolled-over gain to disappear altogether from tax, and 25 could suggest no reason why it should have been consciously intended as the consequence of the specific language of section 117(1)(b), it is, or at least became, common ground before me that if this appeal should succeed, Mr Harding would obtain a windfall benefit as 30 the unintended result of a drafting anomaly.”
“Whatever the difficulties the court has to do its best to make sense of the statute, and that means not only 40 making grammatical sense of the text but also finding a rational scheme in the legislation. That is not to say that 1 The amendments introduced to section 132(1) as from November 1996 expanding the word transaction to include a conversion “whether effected by a transaction or occurring in consequence of the operation of the terms of any security or of any debenture which is not a security” were aimed at closing the anomaly which Mr Harding had identified: see paragraph 66 of Briggs J’s judgment. 12 the court should start off with preconceptions about what it expects to find, or that it should shrink from saying so in the rare case where a tax statute has ‘plainly missed fire’ (the expression used by Lord Macmillan in Ayrshire 5 Employers Mutual Insurance Association Ltd v. IRC 1946 SC (HL) 1 at 9, 27 TC 331 at 347). But as Viscount Simon LC said in Nokes v. Doncaster Amalgamated Collieries Ltd[1940] AC 1014 at 1022 (which was not a tax case, but has often been 10 cited in tax cases)− ‘… if the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation, we should avoid a construction which would reduce the legislation to 15 futility and should rather accept the bolder construction based on the view that Parliament would legislate only for the purpose of bringing about an effective result.’ These authorities were not cited, but they are well known.” 20 33. Briggs J then referred to the judgment of Neuberger J in Jenks v Dickinson[1997] STC 853 , another case about anomalies arising from a particular construction of the QCB regime. Having cited from the judgment of the Privy Council in Mangin v Commissioner of Inland Revenue[1971] AC 739 at 746 and from the speech of Lord Reid in Luke v IRC[1963] AC 557 , at 577 and 579 Neuberger J applied 25 those principles to the anomaly with which he was faced as follows: “The taxpayer’s construction does produce an undoubted anomaly which is contradictory to the evident purpose of the relevant statutory provisions 30 viewed as a whole, viz that capital gains made on qualifying corporate bonds should be exempt from tax, whereas capital gains made on shares should be subject to tax. In these circumstances, principle, common sense and authority show that the court is ‘entitled, and indeed 35 bound, to … adopt some other possible meaning’ if it exists. “… the signposts in this case point firmly to the conclusion that the one thing the legislature did not intend was that capital gains – particularly those which 40 had already accrued on shares- should be exempt from tax. … 13 “Where a particular construction produces an anomaly which only arises in a rather unusual set of facts, its force as an aid to construction, is, in my judgment, somewhat weakened. If, in construing a statute, the court’s object is ‘to ascertain the will of 5 the legislature’, it is a little easier to accept a construction which gives rise to an undisputed anomaly only in the context of a somewhat unusual set of facts, whose existence simply may not have occurred to the legislature, than where 10 such an anomaly is comparatively self-evident or of more general application …”
“59. In my judgment a cardinal feature of the task of 15 construction in the present case is the anomaly [arising] from Mr Harding’s construction which, by permitting a security to change after acquisition from a non-QCB to a QCB before disposal but without any transaction, thereby enables substantial accrued gains to fall 20 altogether out of tax. It is one which is not created by any other provision in section 117 (since all the other potential changes of status are triggered by transactions). The most egregious example of the anomaly is where the non-QCB has, because of its 25 status as such, rolled-over into it a substantial chargeable gain already accrued on the shares for which it was exchanged. In that context it falls fairly and squarely foul of Neuberger J’s analysis in Jenks v. Dickinson, and it gives rise to an apparently irresistible 30 temptation for tax avoidance. The holder of shares replete with chargeable gains may, rather than by selling them and paying the tax, exchange them for a security which is only not a QCB because of a currency conversion option, and then by declining to exercise it 35 convert the security into a QCB which is redeemable tax-free. …”
“67. On the basis of the evidence, we find that, at the time Mr and Mrs Hancock entered into the transaction 25 whereby their [08/00 Loan Notes] and [Revised 03/01 Loan Notes] were converted into the Secured Discounted Loan Notes 2004, they intended to redeem the Secured Discounted Loan Notes 2004 as soon as practicable after the conversion. There was no practical 30 likelihood that such a redemption would not take place, as indeed it did. The earliest redemption date in the Secured Discounted Loan Notes 2004 had been specifically fixed so as to enable such a redemption.”