SPC00441

TRANSFERS OF SECURITIES – loan notes provided for a fixed rate of interest of 7.43375% from issue to redemption but also provided for interest to be paid on irregular days and in irregular amounts -  whether loan notes carried interest at a rate which was a fixed rate which was the same throughout the period from issue to redemption – no – whether inspector made a just and reasonable determination – yes - appeal dismissed – ICTA 1988 S717(2)(a) and (9)

THE SPECIAL COMMISSIONERS

	CADBURY SCHWEPPES PLC (1)
CADBURY SCHWEPPES OVERSEAS LIMITED (2)
Appellants 

	- and -

	ALAN WILLIAMS
(H M INSPECTOR OF TAXES)
Respondent

			Special Commissioners : DR A N BRICE 
MALCOLM J F PALMER

Sitting in public in London on 13 and 14 September 2004

Julian Ghosh of counsel, instructed by Gordon Slater, Group Tax Adviser for Cadbury Schweppes,  for the Appellants

Ingrid Simler of counsel, instructed by the Solicitor of Inland Revenue, for the Respondent

© CROWN COPYRIGHT 2004

DECISION

The appeal

1.	Cadbury Schweppes Plc (the First Appellant) appeals against a notice of determination under section 41A of the Taxes Management Act 1970. The notice of determination was issued on 13 July 2001 and related to the accounting period ending on 31 December 1995. Cadbury Schweppes Overseas Limited (the Second Appellant) appeals against a notice of assessment to corporation tax dated 21 November 2001; the assessment was also in respect of  the year ending on 31 December 1995. 
2.	Parts of each of the notice of determination and the assessment were issued because the Inland Revenue were of the view that the receipts from the transfers of certain securities should be taxed as income and not partly as capital. The Appellants appealed because they were of the view that most of the relevant receipts should be taxed as capital (against which they had capital losses to set).

The legislation

3.	Part XVII (sections 703 to 787) of the Income and Corporation Taxes Act (the 1988 Act) contains provisions about tax avoidance. Chapter II of Part XVII (sections 710 to 738) contains provisions about the transfer of securities. Sections 710 to 712 contain some definitions and sections 713 and 714 contain the provisions of what is known as the accrued income scheme. The aim of this legislation is to ensure that, where a person sells the right to receive interest that has already accrued on securities, the interest element (the accrued amount) is taxed as income and not as capital. The accrued amount is taxed on the transferor but section 713(2)(b) gives the transferee the right to relief of a similar amount. The calculations assume a constant rate of interest. 

4.	Section 717 is intended to prevent the accrued income scheme being circumvented by the use of securities which carry a variable rate of interest. Accordingly, section 717(9) provides that, if section 717 applies, then income tax is, instead of being paid on the accrued amount, paid instead on “such amount (if any) as … is just and reasonable”. Also, by providing that section 713(2)(b) does not apply, section 717(9) also provides that in such cases the transferee is not entitled to any relief.   

5.	      At the relevant time the relevant parts of section 717 provided: 
“717  Variable interest rate
(1)	This section applies to securities other than securities falling within subsection (2) … below.
(2)	Securities fall within this subsection if their terms of issue provide that throughout the period from issue to redemption (whenever redemption might occur) they are to carry interest at a rate which falls into one, and one only, of the following categories-
(a)	a fixed rate which is the same throughout the period; 
(b)	a rate which bears to a standard published base rate the same fixed relationship throughout the period; 
(c)	a rate which bears to a published index of prices the same fixed relationship throughout the period. …
(6)Subsections (7) to (11) below apply if securities to which this section applies are transferred at any time between the time they are issued and the time they are redeemed. …
(9)Where there is a transfer as mentioned in subsection (6) above … section 713 shall have effect with the omission of subsection (2)(b) and with the substitution for subsections (3) to (6) of the following subsection- 
“(3) In subsection (2) above “the accrued amount” means such amount (if any) as an inspector decides is just and reasonable; and the jurisdiction of … the Special Commissioners on any appeal shall include jurisdiction to review such a decision of the inspector.” 
The issues
6.	An associated company of the First Appellant issued loan notes to the First Appellant. The nominal value of each note was £25M and each note was redeemable on 15 December 1995. The advance was expressed to bear interest at 7.43375% per annum. However, each note provided that interest was payable by irregular amounts on irregular dates, namely: £152,748.29 on 15 June 1995; £1,705,689.21 on 15 September 1995; and £463,336.47 on 15 December 1995. On 30 May 1995 the First Appellant transferred the loan notes to the Second Appellant for £157,913,679. On 31 May 1995 the Second Appellant transferred the loan notes to Lloyds Bank for £158,138,679.   

7.	The parties agreed that, if section 717 did not apply, then following the transfers of the loan notes, each of the First Appellant and the Second Appellant should pay income tax under the accrued income scheme. The dispute concerned the tax treatment of the balance of the gain. The Appellants argued that the balance of the gain was taxable as a chargeable gain because section 717 did not apply; they relied upon section 717(2)(a) and argued that the loan notes carried interest at a fixed rate which was the same throughout the period, namely 7.43375%. The Inland Revenue argued that the balance of the gain was taxable as income because section 717 did apply. They argued that the exemption in section 717(2)(a) was not applicable because, although the loan notes provided for a notional fixed rate of interest, that was not the rate at which interest was to be paid and received and so the loan notes did not carry interest at a fixed rate which was the same throughout the period from issue to redemption. 
8.	Thus the main issue for determination in the appeal was whether the loan notes carried interest at a fixed rate which was the same throughout the period from issue to redemption within the meaning of section 717(2)(a). 
9.	There was also a second issue, namely, whether, if section 717 did apply, the Inspector had made a just and reasonable determination pursuant to section 717(9). 
The facts
10.	We find the following facts which were not in dispute.
11.	Prior to the transactions the subject of the appeal the Appellants received a prospectus from a merchant bank about what was called an “accrued income scheme”. The prospectus stated that the merchant bank had developed a proprietary inter-company loan instrument which had an unusual payment profile. If the First Appellant were to invest £100M in a bond, and then to dispose of it after eleven months, it would realise a capital gain of £5.5M which the First Appellant could shelter by using capital losses within the group. The new structure involved the issue of a bond with an uneven payment profile. The optimum after-tax return would be derived if the bond were sold just before the first interest payment date. The scheme was stated to be designed to defeat the provisions of sections 713 and 714 of the 1988 Act under which, where a security is purchased with accrued interest, and money is paid for that interest, that money is deemed to be income and not capital. The Appellants adopted the principles of the scheme.  
12.	Accordingly, on 15 September 1994, in consideration of an advance from the First Appellant to an associated company called Cadbury Schweppes Finance Limited (Finance), Finance issued six loan notes to the First Appellant. The nominal value of each note was £25M and each note was redeemable on 15 December 1995. Paragraph 2 of the loan notes provided, in so far as relevant:
“2	Interest
(A)	The principal amount of the Note shall carry interest at the fixed rate of 7.43375 per cent. per annum for the period from (and including) the Issue Date … to (but excluding) the Maturity Date or the date on which it is earlier redeemed in accordance with the terms of paragraph 4 (the “Early Redemption Date”) which shall be calculated on the basis of actual days elapsed (but without any compounding) and a year of 365 days and shall be paid as described in paragraph 2(B).
(B)	The interest on this Note (calculated in accordance with paragraph 2(A)) shall be paid as follows:
Payment Date				Amount of interest to be paid
(I)	On 15 June 1995  …			 £152,748.29
(II)	On 15 September 1995 …		£1,705,689.21
(iii)	On the Maturity Date			£463,336.47
or
On the Early Redemption Date:
An amount equal to interest for the period from (and including) the Issue Date to (but excluding) the Early Redemption Date less, if the early Redemption Date falls after the First Interest Payment Date, an amount equal to the interest payable on the First Interest Payment Date and, if the Early Redemption Date falls after the Second Interest Payment Date, an amount equal to the interest payable on the Second Interest Payment Date.” 
13.	Thus each note provided that interest was payable by irregular amounts on three specified dates. These dates, together with the months which elapsed from the issue date, the amount of payment due, and the equivalent months of interest which the amount of each payment represented, were:
Date interest payable	Months after issue	Amount of interest Months of interest	
15 June 1995		nine			£152,748.29		one
15 September 1995	twelve			£1,705,689.21		eleven
15 December 1995	fifteen			£463,336.47		three
14.	Thus it will be seen that no interest at all was payable for nine months after which approximately one month’s interest became payable. No further interest was payable until the anniversary of the loan notes (15 September 1995) when approximately all the outstanding interest was payable. When the loan notes were redeemed on 15 December 1995 the remaining three months’ interest was payable.   
15.	On 30 May 1995 (that is, before the first interest date) the First Appellant assigned the loan notes to the Second Appellant for £157,913,679. On 31 May 1995 the Second Appellant assigned the loan notes to Lloyds Bank for £158,138,679   
16.	On 9 July 1998 the Inspector of Taxes wrote to the Appellants saying that it was his view that the loan notes were variable rate securities within section 717 of the 1998 Act. The consequence of the loan notes falling within section 717 was that the accrued amount of interest on the transfer was such amount as the Inspector decided was just and reasonable. The Inspector considered that the just and reasonable amounts to be included as Case VI income for the year ending on 31 December 1995 were: 

The First Appellant			257
					----
365	x £11,150,625 = £7,851,261

The Second Appellant			1
					---
					365	x £11,150,625 = £30,549. 

17.	The just and reasonable amounts calculated by the Inspector, of £7,851,261 for the First Appellant and £30,549 for the Second Appellant, made a total of £7,811,810. These sums represented the amount that accrued on a straight line basis on the loan notes in the hands of the respective holders prior to the respective settlement dates. 

Reasons for decision

18	Before turning to consider the issues in the appeal we first summarise the relevant legislative context and the areas of agreement between the parties. 

The  legislative context

19.	As mentioned above, section 717 appears in Part XVII of the 1988 Act which contains provisions about tax avoidance. Chapter II of Part XVII contains provisions about the transfer of securities and the aim of this legislation is to ensure that, where a person sells the right to receive interest that has already accrued on securities, the accrued interest is taxed as income and not as capital. 

20.	Accordingly, where securities within the scope of these sections are transferred the sections seek to tax as income that part of the consideration attributable to interest. Tax is charged on the amount received by a transferor of a security which represents (calculated on a daily basis) the amount of interest to which the transferor was entitled to for that part of the interest period in which the sale takes place up to the date of sale.  Thus section 713(2) provides that, where securities are transferred with accrued interest, the transferor shall be treated as entitled to an amount equal to the “accrued amount” and the transferee shall be treated as entitled to relief of the same amount. Section 714(4)(b) provides that the accrued amount is an amount equal to the accrued proportion of the interest applicable to the securities for the period. In order to calculate the “accrued amount” in this appeal the following steps would be followed: 

First one would ascertain the “interest period” in which the loan notes were transferred (section 711(3)). In respect of both assignments this was the period beginning with the day following that on which the loan notes were issued (16 September 1994) and ending with the first interest payment day (15 June 1995). 

Next one would ascertain the “interest applicable” to the securities for that interest period (section 711(7)) This is defined as “the interest payable on them on the interest payment day with which the period ends” It was agreed that, for each loan note in this appeal, this amount was £152,748.29 for both the First Appellant and the Second Appellant as that was the amount of interest payable on 15 June 1995 which was the interest payment day with which the period ended. 

Thirdly, one would ascertain the “accrued proportion” of the interest applicable to the securities for the relevant interest period, being the number of days in the interest period up to (and including) the settlement day, divided by the number of days in the interest period (section 713(6)) and one would apply that fraction to the interest applicable to the securities for the relevant interest period.

21.	Under section 714 a person who is treated under section 713 as entitled to an amount equal to the accrued interest is treated as having received annual profits of that amount and that part of the consideration attributable to interest is taxed under Case VI of Schedule D in the hands of the transferor. The transferee, of course, receives the interest he has acquired and would normally be taxed on it. However, in order to avoid the double taxing of the interest element (which has already been taxed in the hands of the transferor) relief for the same amount is given to the transferee. 

22.	Section 717 is an anti-avoidance provision which prevents the accrued income scheme being circumvented by the use of securities which carry a variable rate of interest. The reason is that in such cases the normal operation of the accrued income scheme, which makes calculations by reference to numbers of days, does not adequately  reflect the real value of the interest which has accrued up to the date of the sale. Neither does it adequately reflect the real value of the interest effectively capitalised in the sale price. Accordingly, securities which carry a variable rate of interest could still be used to convert income into capital. The purpose of section 717, therefore, is to provide that where variable rate securities are transferred there is an income tax charge on the real commercial value of the interest transferred and not on an artificially deflated value. It does this by providing in section 717(9) that, if section 717 applies, then instead of tax being paid on the “accrued amount” under section 713, it is paid on “such amount (if any) as … is just and reasonable”.  Section 719(9) also provides that section 713 has effect with the omission of section 713(2)(b) which means that, if section 717 applies, the transferee is not entitled to any relief.   

The areas of agreement

23.	The parties agreed that each of the assignments of the loan notes (1) by the First Appellant to the Second Appellant and (2) by the Second Appellant to Lloyds Bank was a transfer of securities with accrued interest and therefore subject to the provisions of the accrued income scheme if section 717 did not apply. It was also agreed that, if section 717 did apply, then the application of the accrued income scheme would be modified. Relief under section 713(2)(b) would be denied to the transferee (section 717(9)); and the accrued amount would be such amount (if any) as was just and reasonable (section 717(9)). Accordingly, if section 717 applied to both assignments of the loan notes (1) by the First Appellant to the Second Appellant and (2) by the Second Appellant to Lloyds’ Bank, then both the First and Second Appellants would be taxed under Case VI of Schedule D not on the accrued proportion of £152,748.29 for each loan note as mentioned in paragraph 20 above, but on a just and reasonable amount which had been calculated by the Inspector as a total of £7,811,810, although this figure was not agreed by the Appellants. 

24.	These areas of agreement place the arguments of the parties into context and illustrate why the Appellants sought to argue that section 717 did not apply because the transactions came within the exception in section 717(2)(a).

25.	We now consider separately each of the issues for determination in the appeal. 

Issue (1) – Did the loan notes carry interest at a fixed rate?

26.	The first issue is whether the loan notes carried interest at a fixed rate which was the same throughout the period from its issue to redemption within the meaning of section 717(2)(a). 
27.	  For the Appellants Mr Ghosh relied upon the terms of the loan notes; the language of section 717(2)(a); the scheme of the accrued income scheme; and anomalies which would otherwise arise. He also argued that the purpose of the Appellants was not relevant to a construction of section 717(2)(a) although he acknowledged that the purpose of the transactions in the appeals, and the way in which the interest payments were structured, was to have the profit taxed as capital and not as income. For the Inland Revenue Ms Simler argued that, while it might be literally correct to say that the loan notes provided for a notionally fixed rate of accrual, on any arithmetical basis the rate at which the interest fell to be paid and received was not the same throughout the period from issue to redemption. The uneven payment profile meant that the loan notes could not be regarded as having a fixed rate which was the same throughout the period from issue to redemption. 
28.	In considering the arguments of the parties, we accept that the terms of the issue of the loan notes contained a specific provision that they would carry interest at the fixed rate of 7.43375 per cent. per annum from issue to redemption We also accept that on redemption, whenever that might occur, the holder would get interest at the rate of 7.43375%. However, we do not regard either of those factors as conclusive in deciding whether the loan notes came within the meaning of section 717(2)(a).

29.	In order to answer the question (whether the loan notes carried interest at a fixed rate which was the same throughout the period from issue to redemption within the meaning of section 717(2)(a)) we first consider what is meant by the rate of interest “throughout” the period between issue and redemption.  In our view the use of the word “throughout” means that it is not sufficient to consider the interest paid over that period considered as a whole: what we need to consider is the interest rate at each  relevant moment within that period.  For example a baton in a relay race will be carried at one rate calculated over the whole distance: but it is likely to have been carried at different rates at different points “throughout” the race.  Similarly, here section 717(2)(a) requires us to consider the rate of interest carried by each Note at each relevant time in the period from issue to redemption. 

30.	The context of our consideration, and of the relevant legislation, is that of the transfer of securities. In our view what is relevant is the day by day interest “carried” by the security and, particularly, the rate “carried” at the date of a transfer. A transferee of one of the loan notes in this appeal would be concerned to identify the interest carried by the note on the date on which it was transferred to him. If that date was, say, the date before an interest payment date he would pay more for the note than if the date was the date after an interest payment date.  

31.	This leads us to the second point we need to consider. Is the rate of interest that each note can be said to “carry” at any relevant point between issue and redemption always the same? Carry is not defined in the legislation. Mr Ghosh relied upon the meanings of the word “carry” in the Oxford English Dictionary 5th Edition 2002 of “have as an attribute, property, meaning, consequence, etc”. We adopt those meanings and, in our view, the attribute, property, meaning and consequence of these loan notes, in other words, what these loan notes “carried”, were the entitlements of a holder of the note in accordance with its terms. These terms include both clause 2(A) and 2(B).  In our view a loan note could not be said in any commercial sense at any specific time during its life from issue to redemption to “carry” interest that has already been paid in accordance with its terms.  We consider, therefore, that a note “carries” at any specific time the rights that a holder would then have as a holder of the note. It therefore no longer “carries” the right to interest that has been paid in accordance with its terms.  That paid interest is no longer the concern of the holder.  

32.	On 15 June 1995, in accordance with the terms of each note and nine months after its issue, interest of £152,748.29 was paid. This was equivalent to only one month’s interest at 7.43375% on the principal amount of £25,000,000. Whether the notes can be said to have carried interest at the same rate throughout its term can, therefore, be considered by comparing the rate of interest which a note carried on 14 June 1995 before that payment with the rate it carried on 16 June after the payment.

33.	Mr Ghosh relied upon the meanings of the word “rate” in the Oxford English Dictionary 5th Edition 2002 of “a stated numerical amount of one thing corresponding proportionally to a certain amount of some other thing”. We accept that definition and, in our view a rate of interest is an expression which relates the amount payable to a period of time.  In view of the terms of clauses 2(A) and (B) of each note the amount of interest remaining payable on 16 June 1995 was the fixed amount of £2,169,025.68 to be paid in two instalments; the first instalment being £1,705,689.21 payable on 15 September 1995 and the second £463,336.47 payable on 15 December 1995. These were the entitlements to interest on 16 June 1995 which the notes still carried.  Whatever period is taken as relevant to calculate the rate of the interest that a note then carried (whether, for example from 15 June 1995 to redemption or to the next payment date of 15 September 1995 or even from issue to redemption), the rate has inevitably changed from the rate it carried on 14 June 1995. All that clause 2(A) fixes is the rate of interest to be used without compounding to calculate the aggregate amount of interest payable over the whole term from issue to redemption. 

34.	For these reasons we conclude that each of these notes did not carry interest at the same rate throughout the relevant period for the purposes of section 717(2)(a).

The purpose of the legislation

35.	We heard argument about the purpose of the legislation. Ms Simler cited MacNiven v Westmoreland Investments Limited STC 237 and argued that the phrase “carry interest at a fixed rate” was a practical commercial concept which was broader than simply the accrual rate. The uneven payment profile could not be ignored when considering whether the loan notes carried a fixed rate of interest. Mr Ghosh argued that the principle in MacNiven was a principle of construction, not of rectification and it was not possible to use the MacNiven approach to distort the normal meanings of words. He agreed that he same word could have different meanings in different statutes and that the meaning could depend upon the purpose of the statute. The context could also determine whether a word had a narrow or wide meaning. The approach to the statute  should be consistent for the taxpayer and the Inland Revenue. Mr Ghosh argued that it was not the intention of Parliament to catch a note like this where there was a constant rate of interest but with irregular payments. He distinguished Carreras Group Limited v The Stamp Commissioners [2004] UKPC 16.  

36.	In considering these arguments it is relevant that section 717 is an anti-avoidance provision. Its purpose is to prevent the accrued income scheme being circumvented by the use of securities which carry a variable rate of interest. The reason is that in such cases the normal measure applied by the accrued income scheme (of the interest which has accrued up to the date of sale) does not adequately reflect the real value of the interest which has accrued up to the date of the sale. Nor does it adequately reflect the real value of the interest effectively capitalised in the sale price. The result is that the conversion of income into capital is still capable of being achieved. The purpose of section 717, therefore, is to provide that where variable rate securities are transferred there is an income tax charge on the real commercial value of the interest transferred and not on the artificially deflated value. That purpose is reinforced by the side note to section 717 which is ”Variable interest rate”.  
37.	As Lord Nicholls said in MacNiven, the need to consider a transaction in its context, and the need to adopt a purposive approach when construing tax legislation, are principles of general application. In considering whether the rate of interest in this appeal is a fixed rate which is the same throughout the period from issue to redemption (as argued by the Appellants) or a variable rate (as argued by the Inland Revenue) it is relevant that, on a transfer of the securities in this appeal, the normal measure applied by the accrued income scheme (of the interest which has accrued up to the date of sale) does not adequately reflect the real value of the interest which has accrued up to the date of the sale. Neither does it adequately reflect the real value of the interest effectively capitalised in the sale price. If these securities were not within the provisions of section 717, the result would be that the conversion of income into capital would be achieved. In our view that would not be the purpose of the section and that confirms our view that the securities do not fall within the meaning of section 717(2)(a).

37.	However, we regard the question of purpose of the legislation as very much a subsidiary issue. The principal and decisive reason for our decision is our approach to the interpretation of the words of section 717(2)(a). The consideration of purpose is nevertheless a helpful exercise and confirms our interpretation of section 717(2)(a).

The Appellant’s other arguments

38.	A number of other arguments were put to us on behalf of the Appellants. First, Mr Ghosh argued that the phrase “carry interest throughout the period” applied also to section 717(2)(b) and (c) and in those contexts the word “rate” did not refer to the amounts of interest payable but required a fixed relationship throughout the period. To us, sections 717(2)(b) and (c) confirm the view we have already reached. The whole of section 717(2) identifies the transfers of securities which are outside the provisions of section 717. Section 717 applies to securities with what might very broadly be called variable interest rates.  Section 717(2) provides for an exception for what can broadly be described as fixed rate securities and section 712(2)(b) and (c) make it clear that rates which are related to a standard published rate or a published index of prices are to be treated as fixed rate securities and remain outside section 717. It seems to us that all three of the sub subsections of section 717(2) describe rates of interest which are constant throughout and not open to manipulation by the use of irregular amounts of payment and irregular payment dates. 

39.	Next, Mr Ghosh referred to the Finance Act 1993 which provided a successor to the accrued income scheme for cross-border debt. Section 62 defined exempted debts as those which met three conditions. The first condition, in section 62(2), was that the terms of the debt provided that any interest carried by it should be at a rate which fell into one of three categories. Those categories were described in the same words as used in section 717(2)(a), (b) and (c)). Section 62(3) described the second condition which was that the terms of the debt had to provide for interest to be payable as it accrued at intervals of twelve months or less. Mr Ghosh also referred to sections 84 and 85 of the Finance Act 1996 which dealt with loan relationships. Unlike section 62(3) of the Finance Act 1993, section 84(1)(a) made no reference to what was payable but referred to sums which, in accordance with an authorised accounting method, fairly represented profits and gains, etc. and section 85(3)(a) allocated payments to the period to which they related without regard to the periods in which they were made and received. Mr Ghosh accepted that this was subsequent legislation but argued that in both examples the draughtsman had had to change the test in section 717(2)(a) because it did not achieve the purpose intended. We have not found these comparisons to be helpful. We have to interpret the words “carry” “rate” and “throughout” in the context of section 717(2)(a) and that is what we have done. We are mindful of the principle in Frankland v Inland Revenue Commissioners [1997] STC 1450 at 1455e-f. that if there is no statutory connection between two sections it is not possible to construe one in the light of the other and that if something is done expressly in a statute it is to be assumed that the Parliamentary draughtsman knew what he was doing. Also, Parliament may well have intended that different tests should apply in 1993 and 1996 from that applied in the 1988 Act.   

40.	Mr Ghosh also argued that if section 717 applied there would be double taxation because the relief normally available to the transferee under section 713(2)(b) would not be available. He referred to section 715 which provided that sections 713 and 714 did not apply if the transferor carried on a trade and the transfer fell to be taken into account in computing the profits or losses of the trade. Section 715(2) provided that section 713(2)(b) did not apply in that case but that was understandable because relief would already have been obtained in computing the profits or losses of the trade. The scheme of the legislation was not to permit the same interest to be taxed twice. However, the fact is that section 717(9) is quite specific and provides that the provisions in section 713(2)(b), which give relief to a transferee, are omitted if section 717 applies. There is no ambiguity about that provision and it is to be assumed that the Parliamentary draughtsman knew what he was doing.   

41.	Mr Ghosh identified a number of anomalies which would occur if the Inland Revenue’s view was right. 

The first was only an anomaly if interest was compound. It concerned a security with a life of five years where interest was 10% compound payable quarterly in years 1 and 2 but half-yearly in years 3, 4 and 5. Thus the amounts of interest payable over the life of the security would be different. The fact that the rate of payment was not constant would make such a security a variable rate security and subject to section 717 with the result that the transferor would be taxed and the transferee would lose its right to relief; the tax would be on a just and reasonable basis.

The second anomaly concerned a security with simple interest at 10% per annum but where interest payments in years 1 and 2 were deferred. until redemption.  If the Inland Revenue were right that would  be a variable interest rate just because the amounts payable were different. The result would be that the transferor would be taxed and the transferee would lose its right to relief. The tax would be on a just and reasonable basis. 
    
The third anomaly concerned a security with an issue price of £1,000 and simple interest at 6% per annum payable in equal instalments of £5 each on the last business day in each month. As different months had different numbers of days and as weekends and holidays fell at different times the periods of payment would be irregular although the amounts payable were constant. In the first three months of 2004 the first three payment dates would have been 30 January, 27 February and 31 March giving interest periods of 30, 28 and 33 days respectively with rates of 6.1%, 6.53% and 5.55% respectively.   

42.	We accept that these anomalies could exist but they have not persuaded us that our view of the meaning of section 717(2)(a) is incorrect. 

43.	Finally, Mr Ghosh argued that the purpose of the Appellants was irrelevant. He accepted that the loan notes were drafted to achieve the result that in the event of a transfer before 16 June 1995 both the First and Second Appellants would be subject to tax under Case VI of Schedule D on a maximum of £916,410 being six times the interest of £152,748.29 payable on that date on each note, the balance of the gain being a chargeable gain. However, it was necessary to look only at the terms of the loan notes. He cited Spectros International Limited v Madden [1997] STC 114 at 136a as authority for the principle that, where the parties to a proposed transaction can achieve a practical and economic result by different methods, the courts will give effect to the method adopted and argued that the two Appellants were free to structure the loan notes so that the application of the accrued income scheme only applied to the £152,748.2 payable on 15 June 1995 in respect of each loan note.  Mr Ghosh also relied upon Frankland v Inland Revenue Commissioners [1997] STC 1450 at 1455e-f. for the principles that statutory provisions could not be re-written as the courts’ function was to interpret legislation not to legislate under the guise of interpretation.
44.	We accept these arguments and have reached our decision without any reference to the purpose of the Appellants. 

45.	Our conclusion on the first issue in the appeal is that the loan notes did not carry interest at a fixed rate which was the same throughout the period from issue to redemption within the meaning of section 717(2)(a). Accordingly, section 717 applies to the loan notes. 
Issue (2)- Was the determination of the Inspector just and reasonable?	

46.	The second issue for determination in the appeal is whether, if section 717 applies to the loan notes, the Inspector made a just and reasonable determination within the meaning of section 717(9). 

47.	For the Appellants Mr Ghosh did not concede that the Inspector’s determination was just and reasonable but reserved his position on this issue. He put forward no separate arguments except to say that his arguments on the first issue also had an impact on the submissions he would wish to put on the second issue. For the Inland Revenue Ms Simler argued that the determination of the Inspector, contained in his letter of 9 July 1998, was just and reasonable.   

48.	In the absence of any argument to the contrary we conclude that the Inspector did make a just and reasonable determination on 9 July 1998 within the meaning of section 717(9).

Decision

49.	Our decisions on the issues for determination in the appeal are:
(1)	that the loan notes did not carry interest at a fixed rate which was the same throughout the period from issue to redemption within the meaning of section 717(2)(a); accordingly section 717 applied; and . 
(2)	that the Inspector did make a just and reasonable determination pursuant to section 717(9). 

50.	The appeal is, therefore, dismissed.

             DR A N BRICE

MALCOLM J F PALMER

SPECIAL COMMISSIONERS

Release Date: 9 November 2004

Sc/3027/2004
SC 3028/2004
05.11.04