The Supreme Court (SC) has judged on a case that could have impacted many business owners looking to retire or dispose of their businesses. The SC found in favour of HMRC dismissing the taxpayers’ appeal.
The taxpayers, a husband and wife, had sold shares in their restaurant company. In exchange for shares and control in their company they received non-qualifying corporate bonds (non-QCBs). These are essentially loan notes from their old company promising to pay them in the future with an option to pay in a currency other than pounds Sterling. Frequently the deferred consideration of business disposals is structured as non-QCBs so where the deferred consideration isn’t paid the owners have a capital loss to offset against gains. Where qualifying corporate bonds (QCBs), those that can only be redeemed in pounds Sterling, are used then a taxable gain arises at exchange for shares, but the taxable gain is deferred until the QCBs are cashed out.
The taxpayers converted some their non-QCBs into QCBs and then converted all their bonds into secured discounted loan notes that were QCBs. The taxpayers then argued that the conversions of both some of the non-QCBs and QCBs was a single transaction and therefore as they involved QCBs the transaction was exempt from capital gains tax. The wording of the legislation helped the taxpayers and the Court of Appeal had found that some words in the legislation had no point.
Similar to the Court of Appeal, the SC took a purposive approach to construing the legislation. Parliament had intended to enhance the market for Sterling denominated debt by granting the exemption from capital gains tax for QCBs but there was no intention to provide a businessperson the means to dispose of a business completely free of tax. The SC found that other sections of the legislation required that the various transactions were to be broken down and “necessary adaptions” were required to make Parliament’s intention work. The SC found in essence that the legislation itself required a purposive interpretation.
The decision can be found at: Hancock and another (Appellants) v Commissioners for Her Majesty’s Revenue and Customs (Respondent) – The Supreme Court
As representatives of taxpayers, it is always slightly disappointing when taxpayers lose but a result the other way would have meant all future disposals would be structured in a similar fashion to avoid tax and Parliament would be forced to redraft the legislation. This case clearly shows that careful consideration of structuring business disposals is important to ensure the tax treatment expected. Please contact us if you are considering disposing of a business as we can help structure the transaction or series of transactions so capital gains tax is minimised and deferred to the maximum extent possible.
