QCB or Non QCB, That is the Question – Trigg v HMRC (UK FTT 967))
The preference for the receipt of loan notes in their QCB or Non QCB format has swung to-&-fro since the introduction of the Qualifying Corporate Bond concept in 1984.
As the tax arena stands today, the differential is marginal, with the key factors being:
- Any true gains realised on a QCB being free from capital gains tax
- If the loan notes become irrecoverable then CGT will still be paid in full on gains that are rolled into QCBs. “Bad debt relief” is available for non-QCBs.
Attaining the Taxpayer’s Preference
QCB or Non QCBs are effectively loan notes which are often exchanged for shares in a company to facilitate a deal where some of the cash will be paid at a later date. Tax on inherent gains within shares can often be deferred by rolling the gain into the loan notes. Loan notes in PLC companies are often traded on financial markets.
The First Tier Tribunal recently found that a “re-denomination” clause in a loan note was not sufficient for Non-QCB status. In Trigg, the relevant clause was that the notes should be re-nominated in Euros, should the UK’s currency change to Euros.
The Tribunal found that this did not provide for “conversion into or redemption in a currency other than Sterling”, as the redenomination clause meant that Sterling would no longer exist. The purposive decision being that the clause had to allow for conversion into a currency other than the UK’s own.
This decision means that the drafting of loan notes does require care in this area and a reference to the legislation and case law on a case by case basis. Supplementing clauses with a proper foreign currency conversion may be preferable, especially if a mechanism can be introduced to limit forex gains and losses.