England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		21 July 2005

Mr Justice Etherton :

Introduction

1. This is an appeal by Cadbury Schweppes Plc ("CS plc") and Cadbury Schweppes Overseas Limited ("CSOL") (together "the Appellants") against a decision ("the Decision") of the Special Commissioners (Dr A. N. Brice and Mr Malcolm J. F. Palmer) ("the Commissioners") on 5 November 2004 dismissing an appeal against a notice of determination under the Taxes Management Act 1970 s.41A in relation to CS plc and a notice of assessment to corporation tax dated 21 November 2001 in respect of CSOL for the year ending 31 December 1995.
2. CS plc and CSOL appealed the notice of determination and the notice of assessment respectively on the ground that the Inland Revenue was incorrect in the extent to which it regarded the receipts from transfers of six loan notes issued on 15 September 1994 by Cadbury Schweppes Finance Limited ("the Notes") as income rather than capital.
3. The appeal turns on the proper meaning and effect of the tax avoidance provisions in Chapter II of Part XVII of the Income and Corporation Taxes Act 1988 ("TA 1988"), and, in particular, TA 1988 s.717.

The relevant facts

4. The Commissioners, in a clear and careful decision, set out the relevant facts, which were not in dispute, as follows.

"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.

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."

5. The Appellants contend that, if the relevant provisions of TA 1988 ss 713 and 717 are properly applied, instead of those figures £862,776.00 will be taxable under Schedule D, Case VI, as income of CS plc, and £3,357.00 as Schedule D, Case VI, income of CSOL, and the balance of the consideration proceeds received by CSOL will be subject to the regime for corporation tax on chargeable gains within the Taxation of Chargeable Gains Act 1992.

The relevant legislation

6. The relevant legislation falls within TA 1988 Part XVII, which contains provisions dealing with tax avoidance. Sections 710 – 728 of Chapter II of Part XVII contains what is generally known as the accrued income scheme. The purpose of the legislative scheme is to ensure that, when a person sells a security on which interest has already accrued, a proportion of the purchase consideration fairly attributable to that accrued interest is taxed as income rather than as capital. The legislation, in short, is designed to prevent the conversion of interest income into a capital gain for tax purposes.
7. The relevant provisions of Chapter II of Part XVII of TA 1988, for the purposes of this appeal, are as follows:

"710. Meaning of "securities", "transfer" etc. for purposes of sections 711 to 728;

….

(2) "Securities" … includes any loan stock or similar security -

(a) whether of the government of the United Kingdom, any other government, any public or local authority in the United Kingdom or elsewhere, or any company or other body; and

(b) whether or not secured, whether or not carrying a right to interest of a fixed amount or at a fixed rate per cent of the nominal value of the securities, and whether or not in bearer form.

….

(5) "Transfer", in relation to securities, means transfer by way of sale, exchange, gift or otherwise.

…."

"711. Meaning of "interest", "transfers with or without accrued interest" etc.

….

(2) An interest payment day, in relation to securities, is a day on which interest on them is payable; …

….

(5) Securities are transferred with accrued interest if they are transferred with the right to receive interest payable on -

(a) the settlement day, if that is an interest payment day; or

(b) the next (or first) interest payment day to fall after the settlement day, in any other case;

…

(7) The interest applicable to securities for an interest period is … the interest payable on them on the interest payment day with which the period ends.

…"

"712. Meaning of "settlement day" for purposes of sections 712 to 728

…

(3) Where the consideration for the transfer is money alone, and the transferee agrees to pay the whole of it on or before the next (or first) interest payment day to fall after an agreement for transfer is made, the settlement day is the day on which he agrees to make the payment ...

"713. Deemed sums and reliefs

(1) Subject to sections 714 to 728, this section applies whether the securities in question are transferred before, on or after 6^th April 1988 and in this section references to a period are references to the interest period in which the settlement day falls.

(2) If securities are transferred with accrued interest -

(a) the transferor shall be treated as entitled to a sum on them in the period of an amount equal to the accrued amount; and

(b) the transferee shall be treated as entitled to relief on them in the period of the same amount

….

(4) In subsection (2) above "the accrued amount" means -

(a) if the securities are transferred under an arrangement by virtue of which the transferee accounts to the transferor separately for the consideration for the securities and for gross interest accruing to the settlement day, an amount equal to the amount (if any) of gross interest so accounted for; and

(b) in any other case, an amount equal to the accrued proportion of the interest applicable to the securities for the period.

….

(6) In this section -

(a) the accrued portion is - A

B

….

where –

A is the number of days in the period up to (and including) the

settlement day, and

B is the number of days in the period."

"714. Treatment of deemed sums and reliefs

(1) Subsection (2) below applies if a person is treated as entitled under section 713 to a sum on securities of a particular kind in an interest period, and either –

(a) he is not treated as entitled under that section to relief on securities of that kind in the period; or

(b) the sum (or total sum) to which he is treated as entitled exceeds the amount (or total amount) or relief to which he is treated as entitled under that section on securities of that kind in the period.

(2) The person shall be treated as receiving on the day the period ends annual profits or gains whose amount is (depending on whether subsection (1)(a) or (1)(b) above applies) equal to the sum (or total sum) to which he is treated as entitled or equal to the amount of the excess; and the profits or gains shall be chargeable to tax under Case VI of Schedule D for the chargeable period in which they are treated as received.

"717. Variable interest rate

(1) This section applies to securities other than securities falling within subsection (2) or (4) 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.

(3) In subsection (2)(c) above "published index of prices" means the retail prices index or any similar general index of prices which is published by, or by an agent of, the government of any territory outside the United Kingdom.

(4) Securities fall within this subsection if they are deep discount securities and the rate of interest for each (or their only) interest period is equal to or less than the yield to maturity.

(5) In subsection (4) above "deep discount securities" and "yield to maturity" have the same meanings as in Schedule 4; and for the purposes of that subsection the rate of interest for an interest period is, in relation to securities, the rate of return (expressed as a percentage) attributable to the interest applicable to them for the interest 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.

(7) If the securities are transferred without accrued interest they shall be treated for the purposes of sections 710 to 728 as transferred with accrued interest.

(8) The person entitled to the securities immediately before they are redeemed shall be treated for the purposes of those sections as transferring them with accrued interest on the day they are redeemed.

(9) Where there is a transfer as mentioned in subsection (6) above or by virtue of subsection (8) 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 General Commissioners of the Special Commissioners on any appeal shall include jurisdiction to review such decision of the inspector.

…"

The Decision

8. Briefly summarised, the Commissioners' analysis in the Decision was as follows. First, they held that the word "throughout" in s.717(2)(a) means that the interest rate has to be considered at each relevant moment during the period from issue to redemption. Second, they considered that a loan note cannot be said, for the purposes of s.717(2), at any specific time during its life from issue to redemption "to carry interest" if that interest has already been paid in accordance with the terms of the note. Third, they took the view that the provisions of paras 2(A) and (B) of the Notes, by stipulating an irregular pattern of interest payments, did not impose a fixed rate which was the same throughout the relevant period for the purposes of s.717(2)(a). Fourth, they considered that their interpretation of s.717(2)(a) was supported by the purpose of s.717, namely as an anti-avoidance provision to deal with rates of interest which are not "constant throughout and [are] open to manipulation by the use of irregular amounts of payment and irregular payment dates": see para 38 of the Determination. Fifth, their view was not shaken by reference to subsequent legislation, which, in any event, they considered irrelevant in the absence of any ambiguity in the provisions of s.717. Sixth, they were not persuaded to take a different view by reason of various anomalies which Mr Ghosh, counsel for CS Plc and CSOL, identified if the Inland Revenue's view of the meaning and effect of s.717 is correct. Accordingly, seventh, the Inland Revenue was correct to take the view that the Notes did not fall within s.717(2), and the Inspector had been correct to apply a "just and reasonable" apportionment under s.717(9) rather than an apportionment under s.713(2) – (6) by reference to the interest payable on 15 June 1995, being the first interest payment date following the transfer of the Notes.

The Appellants' case

9. The Appellants dispute each and every stage of the analysis of the Commissioners.
10. The starting point of Mr Ghosh, who appeared for CS Plc and CSOL before me as he had before the Commissioners, is that s.717 is not, contrary to the Commissioners' observations, an anti-avoidance provision intended to prevent the accrued income scheme being circumvented by the use of securities which carry a variable rate of interest. He submitted, rather, that s.717 is an acknowledgment that the mechanism contained in s.713 may give rise to an unfair result (either to the transferor taxpayer, or to the transferee taxpayer, or to the Inland Revenue) where the interest rate on a security is volatile or unpredictable, and that it is intended to avoid such unfairness. He submitted that its purpose is neither more nor less than that.
11. In this connection, Mr Ghosh emphasised that s.717(9) applies s.713, save only with the omission of s.713(2)(b) and the substitution of a "just and reasonable" apportionment in place of the amounts calculated in accordance with s.713(3) - (6). All the other assumptions underlying s.713, he submitted, continue to apply. One of those assumptions, and a fundamental one, is that the relevant interest, of which an apportionment is to be calculated, is the interest payable up to the next interest payment day following the transfer of the security: see s.711(2) and (7). Mr Ghosh explained this aspect of the policy underlying the accrued income scheme on the basis that, at the time the scheme was enacted, interest was taxed on a receipts basis: Parkside Leasing Ltd v Smith [1985] 1 WLR 310, 313. The draftsperson, therefore, Mr Ghosh said, selected the next interest payment date following transfer as the point of reference economically closest to actual receipt of interest, and treated everything receivable after that date as too detached to be taken into account for the purpose of the accrued income scheme.
12. Accordingly, the Appellants' contention, on the policy underlying s.717, is that s.717 is intended to modify the application of s.713 to the extent, and to the extent only, of providing that, for the purpose of the accrued income scheme, in a case where the terms of the security make it difficult or impossible to apply s.717(3)-(6) because the interest rate is volatile or unpredictable, the accrued proportion of the interest payable on the next interest payment day following the transfer of the security is to be such just and reasonable proportion as the Inspector determines.
13. That policy analysis provides the backdrop to the Appellants' basic complaint about the Inland Revenue's approach and the Decision, namely that the application of s.717 to the Notes, where the interest rate is entirely clear and ascertainable and indeed "fixed", is an application of s.717 outside its statutory purpose.
14. Turning from policy to the actual wording of s.717(2)(a), the Appellants' case is that the Notes fall fairly and squarely within that wording.
15. Mr Ghosh submitted that "the period" specified in s.717(2)(a) is the entirety of the period from issue to redemption, and not any subdivision of that period. He said that s.717(2)(a) is satisfied if the security provides for a fixed rate "throughout" that period, irrespective of the regularity of interest payment dates during that period and irrespective of any variations in the rate of interest from time to time if calculated by reference to actual amounts of interest due on different interest payment dates during that period. He submitted that the Commissioners were wrong to hold that, for the purposes of s.717(2)(a), what must be considered is not the interest paid over the period considered as a whole, but the interest rate at each relevant moment within the period.
16. The draftsperson, Mr Ghosh submitted, has directed attention under s.717(2) to the single and undivided period commencing with the issue of security and ending on redemption, whenever redemption might occur under the terms of the security: if, under the terms of issue of the security, whenever redemption might occur, interest will be or will have been paid in respect the entire period at a fixed rate specified in the terms of issue, s.717(2)(a) is satisfied. In other words, it is the Appellants' case that the actual or possible date of redemption both fixes the duration of the relevant period under s.717(2)(a) and provides the occasion for assessing whether the interest paid or payable over the period from issue to redemption, treating that as a single and indivisible period, has been or will be at the same fixed rate as specified under the terms of issue of the security.
17. That approach to the treatment of the relevant period under s.717(2)(a) as a single and undivided period is supported, Mr Ghosh submitted, by the provisions in s.717(4) and (5). Those provisions expressly require consideration of individual interest periods in the case of deep discount securities. Those provisions are necessary, Mr Ghosh submitted, because such individual interest periods are required to be ignored under s.717(2)(a).
18. Applying the actual facts to that analysis, Mr Ghosh submitted that the terms of the Notes clearly satisfy the test in s.717(2)(a). Para 2(A) of the Notes expressly specifies that each Note carries interest "at the fixed rate of 7.43375 per cent per annum" from the date of issue to maturity or early redemption in accordance with the terms of para 4 of the Notes.
19. Mr Ghosh submitted that it is contrary to principle to treat the irregular payment profile under para 2(B) of the Notes as giving rise to a variable rate of interest in the context of s.717(2). He emphasised that there is only one rate of interest specified in the Notes, that is to say "the fixed rate of 7.43375 per cent per annum" specified in para 2(A), and that rate of interest is to be distinguished from the amounts and times when it is to be paid, that is to say the manner of payment. That distinction, he said, is recognised within the relevant legislation itself; for example, in TA s.710(2)(b) which distinguishes between "interest of a fixed amount" and interest "at a fixed rate".
20. In any event, he further contended, even if the interest rate in the Notes had been expressed as different rates for the three periods to 15 June 1995, 15 September 1995 and the maturity date respectively, the effect of para 2(B) of the Notes ("the Catch Up Provision") is that the actual rate at which interest was payable in respect of the period between the date of issue and the date of redemption, whenever redemption might occur, treating that period as a single and indivisible whole, would always be the stated fixed rate of 7.43375 per cent per annum.
21. In short, there is no conceivable situation in which, taking the period from issue of the Notes to redemption, whenever that might occur, as a single and indivisible period, the rate of interest under the Notes could be anything other than 7.43375 per cent as specified in para 2(A) of the Notes. Such interest, Mr Ghosh submitted, would be accounted for, by an accountant, on a straight line basis over the period in question.
22. The position in the absence of the Catch Up Provision would, of course be, very different. In the case of variable rates of interest during the period from the issue of the security until redemption, the test in s.717(2)(a) would not be satisfied, in the absence of a clause similar to the Catch Up Provision, if there was any possibility of redemption following a change in the interest rate under the terms of the security.
23. The Appellants' case is that their approach to the interpretation and effect of s.717 is not only consistent with the policy and purpose underlying the section, but is also appropriate in the light of the removal by s.717(9) of the relief against double taxation under s.713(2): that is to say, appropriate bearing in mind that the more limited the scope of s.717(2), the fewer the number of (ostensibly, anomalous) "double recovery" cases in which tax might be recovered from both the transferor and the transferee of the security in respect of the same interest.
24. The Appellants also rely, in support of their analysis of s.717 and its application to the facts of the present case, on the provisions in the Finance Act 1993 ("FA 1993") s.62.
25. The relevant provisions of FA 1993 s.62 are as follows:

"62. Exempted debts for those purposes

(1) A debt is an exempted debt for the purposes of sections 63 to 66 below at any time if each of the first, second and third conditions mentioned below-

(a) is fulfilled at that time;

(b) has been fulfilled throughout so much of the period of the debt as falls before that time; and

(c) is likely to be fulfilled throughout so much of that period as falls after that time.

(2) The first condition is that the terms of the debt provide that any interest carried by it shall be at a rate which falls in to one, and one only, of the following categories-

(a) a fixed rate which is the same throughout the period of the debt;

(b) a rate which bears to a standard published rate the same fixed relationship throughout that period;

(c) a rate which bears to a published index of prices the same fixed relationship throughout that period.

(3) The second condition is that those terms provide for any such interest to be payable as it accrues at intervals of 12 months or less."

…."

26. Those provisions are part of a group of sections in FA 1993 which introduced a change in the manner of taxing interest payable by an associated non-resident company to a UK resident company. Under that legislation, interest is taxed when it accrues rather than when it arises, that is to say when it is paid. A qualifying debt, as defined by s.61, and not exempted by s.62, is treated, for the purposes of the accrued income scheme under Chapter II of Part XVII of TA 1988, as having been transferred by and to the resident company on the occasions specified in FA 1993 s.63(2) and (4).
27. Mr Ghosh pointed out, as he did before the Commissioners, that FA 1993 s.62(2) reflects the provisions in s.717(2) of TA 1988, whereas FA 1993 s.62(3) is a new condition not to be found in TA 1988 s.717. He submitted that the enactment of FA 1993 s.62(3) confirms that the test in TA 1988 s.717(2)(a) has nothing to do with the manner of payment of interest during the course of the period from issue to redemption.
28. Mr Ghosh submitted that, in the light of the Inland Revenue's contentions in the present dispute, the relevant provisions in TA 1988 are ambiguous, and so it is permissible for the Appellants to refer to, and rely upon, the later legislation in FA 1993 (that is to say, FA 1993 s.62(3)) in order to interpret the earlier provisions of s.717 of TA 1988.
29. Further, Mr Ghosh submitted that the Inland Revenue's interpretation of s.717 both produces anomalous results and is, indeed, unworkable. He has given various examples in paragraphs 39 to 43 of his written skeleton argument.
30. In paragraph 39 of his skeleton argument he postulates a loan note issued on 1^st January and redeemed on 31 December, which carries a fixed simple rate of interest of 7%, payable in equal instalments at regular intervals, say on the 15^th of each month. He says as follows:

"If the amount of interest payable before and after any date in the period from issue to redemption is relevant to calculate the interest rate carried at any particular time during the life of the Note, calculating the interest rate on the Note from 1^st January to 14^th June (5 payments over 167 days) and from 1^st January to 16^th June (6 payments over 169 days) produces two different results and would mean that the "rate" of the Notes was not "fixed" (that the Note did not "carry" interest at the same rate throughout the period from issue to redemption on all possible redemption dates, which may not, of course, be interest payment days). Only daily interest payments could avoid this result, or if the comparisons were only made between interest payment days and no other dates within the period from issue to redemption (this is impermissible: the rate must be the same "throughout" the period from issue to redemption). This demonstrates the absurdity of using the amounts of interest which are due and payable to calculate the "rate" of interest "carried" by a Note at any particular time."

31. In another example, in paragraph 40 of his skeleton argument, Mr Ghost postulates a case in which interest payments are deferred. He says:

"On the Special Commissioners' approach, the following security is not a fixed interest note: suppose the security has an issue price of £100, with interest payable at 10% simple interest per annum. In Years 1 and 2 the interest payments are deferred. In Years 3 and 4 £10 interest is paid in each of those years. In Year 5 £30 interest is paid (10% for each of Years 1, 2 and 5). It means any deferral of interest will prevent any security from being a fixed interest security. This is absurd."

32. Mr Ghosh gives a further example in paragraph 41 of his skeleton argument, as follows:

"The Special Commissioners' approach also means that the following security is not a fixed interest security: suppose the security has an issue price of £1,000, with interest payable at 6% per annum (simple interest). Suppose it is issued on 31^st December 2004, with interest payable in equal instalments of £5 on the last business day of each month. Different months have different numbers of days. Weekends and holidays exacerbate the difference by varying the date on which the last business day will fall. This means that the period between payments are irregular, but the amount payable is constant, and so the Special Commissioners' approach gives a variable "rate of interest". In this example, the first three payment dates are 30^th January 2005, 27^th February 2005 and 31^st March 2005 giving interest "rates" of:-

(i) first period of 30 days - (£5/(£,1000 x 30/365))

x 100 = 6.1%

(ii) second period of 28 days - (£5/(£1,000 x 28/365))

x 100 = 6.53%

(iii) third period of 33 days - (£5/(£1,000 x 33/365))

x 100 = 5.55%.

This security can only be brought within the notion of a "fixed interest" security within Section 717(2)(a) by using a year as the relevant unit of time rather than a month. This is arbitrary. Nothing in Section 717(2) permits the selection of a year, rather than a month, as a relevant unit of time to determine the rate of interest. Rather only one unit of time is relevant, the period from issue to redemption."

33. In paragraph 42 of his skeleton argument, Mr Ghosh contends that, on the Commissioners' approach, a security which carries interest at a rate of, say, 1% above a published base rate, throughout its life, will not fall within s.717(2)(b). He continues and explains as follows:

"How can the relationship with interest and the comparator rates in Section 717(2)(b) (and indeed Section 717(2)(c)) be "fixed" if "fixed" requires consideration of amounts due and payable? An amount of interest due and payable after a change in, say, published base rates, cannot have the same relationship to a published base rate, where that base rate changes during an interest period (that is on a date falling between two interest payment days), as an amount due and payable for an interest period where the base rate does not change (because the first amount of interest, at the time when it is payable, would have been partially calculated, before becoming payable, by reference to the old base rate). Thus the Special Commissioners' approach prevents virtually all securities from falling within section 717(2)(b) and (c), since it is always possible that a comparator rate might change between two interest payment days."

34. Mr Ghosh contends that all those examples show that the approach of the Commissioners subjects virtually every security to the "just and reasonable" mechanism in TA 1988 s.717(9) and the consequent double taxation of the interest element. He pointed out that, in para 42 of the Decision, the Commissioners accepted that anomalies could exist. He submitted that merely to dismiss them, as did the Commissioners, on the basis that "they have not persuaded us that our view of the meaning of section 717(2)(a) is incorrect" is an unsatisfactory response. He contended that the avoidance of those anomalies, if the Appellants' approach to the interpretation and application of s.717(2)(a) is accepted, is very powerful support for that approach.

Analysis

35. The essence of the Commissioners' analysis is that the meaning of TA 1988 s.717(2)(a) is clear, but does not embrace the facts of the present case, and that result is consistent with the purpose of the legislation. That analysis is, in my judgment, entirely correct.
36. It is common ground that the relevant period, for the purpose of the test in TA 1988 s.717(2)(a), is the period from issue of the security to redemption. In order to satisfy that sub-section the security must carry the same fixed rate "throughout the period". The obvious and natural meaning of the words is that at each stage, or rather in respect of each interest period, throughout the period from issue to redemption and also on redemption the same fixed rate must apply. I reject, as contrary to the ordinary and natural meaning of the words, the Appellants' contention that the period from issue to redemption is, for the purposes of sub-section (2)(a), always to be treated as a single and indivisible unit of time, or that satisfaction of the requirements of the subsection is always to be tested at and by reference only to the moment and effect of redemption and not any other time during the period. The phrase " (whenever redemption might occur)" in s.717(2) does no more than recognise that the terms of issue of a security might provide for redemption prior to maturity.
37. Although the Inland Revenue submitted, and the Commissioners accepted, that the expression "carry interest" in s.717(2) supports the Inland Revenue's interpretation, I consider that expression to be entirely neutral. The expression is equally apt whether the requirements of s.717(2)(a) are to be judged by reference to the period between issue and maturity or redemption of the security as a single and indivisible unit of time or by reference to each and every interest period as well as on redemption.
38. Nor do the provisions of s.717(2)(b) and (c) throw any clear light on whether the interpretation of the Appellants or of the Inland Revenue is to be preferred in respect of subsection (2)(a). I do not accept Mr Ghosh's submission that they are inconsistent with the Inland Revenue's interpretation of subsection (2)(a). As Ms Simler, counsel for the Inland Revenue, said, they refer to rates of interest which it would be extremely difficult for the holder of the securities to manipulate, or to take advantage of, in order artificially to minimise what would otherwise be the amount of the purchase consideration fairly attributable to the right to receive accrued interest.
39. Nor do TA 1988 s.717(4) and (5) indicate, in my judgment, that the Inland Revenue's interpretation of s.717(2)(a) is incorrect. The former provisions deal with a particular type of security, namely deep discount securities. They stipulate, as Ms Simler submitted, a specific exclusion from the s.717 "just and reasonable" regime in the case of that particular type of security in a situation in which the interest return cannot easily be manipulated in an abusive manner. It is to be noted that, under those provisions, the relevant comparison is not between different interest periods between issue and maturity. The comparison required by s.717(4) is between the rate of interest for each (or the only) interest period and the yield to maturity. In short, the legislature considered that there is no need to subject deep discount securities to the s.717 "just and reasonable" regime where interest is less than the discount.
40. Nor do the provisions of FA 1993 s.62 provide any support for the Appellants' contention The relevant principle of statutory interpretation was described by Oliver LJ in Finch v IRC [1995] 1 Ch.1, 15 as follows:

"Reliance was placed on the decision of the House of Lords in Kirkness v John Hudson & Co Ltd. [1955] A.C. 696 and, particularly, on the speech of Viscount Simonds in that case, for the proposition that, where earlier legislation is ambiguous, recourse may be had to subsequent legislation as an aid to its construction. Now undoubtedly that case is authority for the proposition, but it is essential for its application that there is first established an ambiguity in the earlier legislation. It is clear from Viscount Simonds's speech, and from that of Lord Reid, that "ambiguity" in this context does not mean merely that different minds may come to different conclusions as to the meaning (see pp. 711, 713 and 735). If subsequent legislation is to be invoked, the earlier provision must be such that, to use Lord Buckmaster's phrases in Ormond Investment Co. v Betts [1928] A.C. 143, 154, 156, it is "open to two perfectly clear and plain constructions" or "fairly and equally open to divers meanings" (emphasis supplied). The same notion is to be found in the Ormond case in the speeches of Viscount Sumner and Lord Atkinson. Viscount Sumner at p. 159 expressed reference to subsequent legislation as permissible where there is no reason, on the face of the prior Act, why one construction should be more right than another, and Lord Atkinson at p. 164 expressed the principle as applying where the Act was "readily" capable of more than one interpretation.

It is, as it seems to me, clear from this that it is not enough to show simply that there are two arguable constructions. One has to go further and show that they are both equally tenable, and that there are no indications in the Act under construction favouring one rather than the other."

41. I agree with the Commissioners that, since there is no ambiguity in TA 1988 in s.717(2)(a), it is not permissible to refer to the subsequent legislation in FA 1993 as an aid to interpretation of the earlier provisions.
42. Further, I was not referred to any legislative or other material explaining the perceived need for, or purpose of, FA 1993 s.62(3). Mr Ghosh accepted that, if its purpose was merely to deal with the situation in which interest is rolled up between issue and redemption, FA 1993 s.62(3) is, as an aid to the interpretation of TA 1988 s.717(2)(a), entirely neutral. In the absence of any sure guidance as to the reason for FA 1993 s.62(3) it is impossible to deduce that the legislature was there recognising that, under TA 1988 s.717(2)(a), the period between issue and redemption is always to be treated as a single indivisible unit of time and that, prior to redemption, the manner of payment of interest, in terms of the relationship between the actual amount of interest payable on particular interest dates and the capital outstanding at the time of those payments, is always irrelevant.
43. The Inland Revenue's interpretation of TA 1988 s.717(2)(a) is entirely consistent with the purpose of the legislation. I reject Mr Ghosh's explanation that s.717 is no more than an acknowledgement that the mechanism contained in s.713 may give rise to an unfair result, either to a transferor taxpayer or to a transferee taxpayer or to the Inland Revenue, where the interest rate of a security is volatile or unpredictable.
44. The basic objective of the accrued income scheme is to tax as income that part of the consideration for the transfer of a security as is fairly attributable to the purchase of the right to receive accrued interest. The purpose of s.717 is to counter arrangements which undermine that objective. I agree with the Commissioners' statement, in para 4 of the Decision, that s.717 "is intended to prevent the accrued income scheme being circumvented by the use of securities which carry a variable rate of interest". In short, s.717 is itself an anti-avoidance provision to prevent the avoidance of an anti-avoidance scheme.
45. Section 717 is addressing the situation in which, by a combination of the timing of a transfer of a security and the change or changes in the rate of interest applicable to the security, it is possible artificially to reduce the proportion of accrued interest that would otherwise be treated as income under s.713 by reference to the next interest payment date after the transfer.
46. The draftsperson is clearly looking at the possibility of a transfer of a security at any time between its issue and its redemption (see s.717(6)), and at a situation in which the timing of that transfer is designed to inter-relate with a change in the rate of interest so as to undermine the operation of the provisions of s.713(3) - (6) which are directed to the interest payable on the next interest day following the transfer. It would make no sense, in the light of those considerations, for the draftsperson to have concentrated in s.717(2) on the effect of redemption.
47. Mr Ghosh explained, in the course of his oral submissions, that the reason why the draftsperson concentrated in s.717(2) on redemption, although the mischief of s.717 was aimed at the payment for transfers of the security at any stage between issue and redemption, was because the draftsperson was aware that, at some stage, someone would be holding the security who would be concerned with what happens on redemption. I do not understand that explanation - in particular, when, as in the present case of the Notes, the security could be transferred one or more times before redemption.
48. I reject Mr Ghosh's central submission, in his analysis of the policy underlying s.717, that s.717(9) applies s.713, save only with the omission of s.713(2)(b) and the substitution of a "just and reasonable" apportionment in place of the amounts calculated in accordance with s.713(3)-(6); and, in particular, his submission that all the other assumptions underlying s.713 continue to apply, including the principle that the deemed accrued interest is to be a proportion of the interest payable on the next interest day following transfer of the security. The provisions of TA 1988 s.711(2) and (7), on which Mr Ghosh particularly relied for this part of his analysis, are relevant to the meaning and application of the provisions, including the formula, in s.713(4) - (6). Those provisions, however, are expressly excluded from the s.717 "just and reasonable" regime by s.717(9).
49. Further, whereas s.711(7), and its related provisions in s.713(4) - (6), are looking at the interest payable on a single interest payment date in respect of a single interest period, s.717(2) is looking at the entire period from issue of the security to redemption.
50. There is indeed a fundamental and stark contrast between the s.713 regime, under which the apportionment of accrued interest is related to the interest payable on the next interest payment date after the transfer of the security, and the s.719 "just and reasonable" regime, under which the Inland Revenue is given the maximum flexibility to effect a just and reasonable apportionment.
51. Further, I do not accept Mr Ghosh's submission that the Inland Revenue's interpretation of TA 1988 s.717(2)(a) makes the legislation unworkable or produces anomalies which are so egregious that they lead to the inevitable conclusion that the Inland Revenue's interpretation cannot be correct.
52. I agree with Ms Simler's submission that the analysis and examples in paragraphs 39 and 41 of Mr Ghosh's skeleton argument turn upon the selection of the relevant unit of time for calculating the rate of interest, that is to say, whether the rate of interest is calculated and expressed on a daily basis or, as Ms Simler suggested, and I agree, a sensible reference period (monthly, three monthly etc) appropriate to reflect the actual terms of the security, including the payment dates for interest.
53. Ms Simler is content to accept that the analysis and example in paragraph 40 of Mr Ghosh's skeleton argument, that is to say where interest is deferred, are correct, and that the requirements of s.717(2)(a) are not satisfied in that case. I agree with Ms Simler that, even if the analysis there is correct, it does not render the legislation unworkable.
54. Further, I agree with the view expressed by the Commissioners that the existence of anomalies does not, of itself, lead to the conclusion that s.7171(2)(a) should be interpreted in any other way than in accordance with the ordinary and natural meaning of its words.
55. As I have said, Mr Ghosh emphasised that the Appellants' approach is consistent with, since it recognises and restricts, the draconian effect of the abolition, in relation to the s.717 "just and reasonable" regime, of the double taxation relief which would otherwise be available under s.713(2)(b). The abolition of that relief is, indeed, draconian. Various explanations as to the purpose and effect of its abolition under s.717(9) were given by Ms Simler, but it is not necessary for me to comment on them. As the Commissioners observed, there is no ambiguity about the abolition under s.717(9). In the absence of any ambiguity in the provisions of s.717(2)(a), the abolition cannot affect the meaning and application of those provisions.
56. Turning back to the Notes themselves, I agree with the Commissioners that they did not carry interest at the same fixed rate throughout the period from issue to redemption, whenever redemption might occur, for the purposes of s.717(2)(a). It is true that the only rate of interest expressly specified in the Notes is the "fixed rate of 7.43375 per cent per annum" in para 2(A). It is also true that the amount of interest paid during the last three months of the Notes, and, by reason of the Catch Up Provision, the amount of interest payable over the entire duration of the Notes to maturity or earlier redemption, was at the rate of 7.43375 per cent per annum.
57. On the other hand, the amount of interest payable from issue to the first interest payment date on 15 June 1995, and from that interest payment date to the next interest payment date on 15 September 1995, was not at the rate of 7.43375 per cent per annum. The true rate of interest payable from time to time is the product of the inter-relationship between the dates of interest payments, the amounts of interest to be paid on those dates and the amounts of outstanding principal on those dates. As Ms Simler put it, the rate of interest represents (the amount of interest X 100) over (principal X time). The fact that the parties to the security may have stated in the governing documentation that the rate of interest is a "fixed" rate, when it is not, or may have specified in that documentation a rate in respect of the entire period from issue to redemption, rather than different rates for different interest periods, when the rates for those periods are in fact different from the specified rate, is not conclusive.
58. For the reasons I have given, s.717(2)(a) requires the security to carry the same fixed rate during each interest period from issue to redemption. That rate is to be ascertained having regard to the actual rights and obligations of the parties to the security in respect of the payment of interest for those interest periods, irrespective of the rate specified by the parties themselves in relation to another period or periods or for particular circumstances. In that sense, there is an analogy with the approach of the court in deciding, for example, whether the grant of an interest in land amounts to the grant of a tenancy, irrespective of whether the parties have described the grant as a licence (Street v Mountford [1985] AC 809), and whether a debenture has created a fixed or floating charge, irrespective of which of those labels the parties have chosen to place on the rights and liabilities actually granted (Agnew v Commissioners of Inland Revenue [2001] 2 AC 710).
59. Under the terms of the Notes, the actual rate of interest for the interest period ending on 15 June 1995 was 0.8 per cent, and for the interest period on ending 15 September 1995 was 27.3 per cent, and for the interest period ending on the maturity date was 7.4 per cent. Accordingly, the terms of the Notes did not provide for a fixed rate of interest which was the same throughout the period from issue to redemption, whenever redemption might occur, within TA 1988 s.717(2)(a).

Decision

60. For the reasons I have given, notwithstanding the able submissions of Mr Ghosh, I find that the Notes do not fall within TA 1988 s.717(2)(a). Accordingly, I dismiss this appeal.