Charman
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 December 2018 |
| Neutral Citation | [2018] UKFTT 765 (TC) |
| Date | 20 December 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0765 (TC)
Judge Rachel Short, Mrs Shameem Akhtar
Ms Nicola Shaw QC and Mr Michael Jones of Gray's Inn Tax Chambers, instructed by Withers LLP appeared for the appellant
Mr Akash Nawbatt QC and Mr Sebastian Purnell, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Residence – Full-time work abroad – Distinct break in pattern of life – Taxation of emoluments, founder's fee, restricted shares, share options.
The First-tier Tribunal in the main upheld income tax assessments on the taxpayer, who had not shown himself to be in full-time work abroad, nor to have made a distinct break from the UK, such as to have become non-UK resident for relevant tax years.
The taxpayer (“C”), a senior figure in the insurance industry, became involved with MMC, a US subsidiary of an international insurance group in New York, and in April 2001 started to discuss setting up a new insurance entity, ASL, which was to be based in Bermuda.
C's initial role with MMC included working with MMC in New York as a consultant. The events of 9/11 accelerated the establishment of the proposed new Bermuda entity for MMC.
In September 2001 C was also appointed as chief executive of an insurance company in the UK, NUL, a subsidiary of the same international group. He had previously acted for them on an informal basis since March 2001, when he had ceased his previous long-term employment in the UK.
After a period of fund raising and preliminary work between 19 September and 20 November 2001, ASL, the new Bermudan insurance entity proposed by MMC, started trading with C as its president and chief executive. A significant part of the funds raised for ASL were obtained from MMC, MMC's pension fund and some came from C's own capital.
In addition to provision for salary and bonus, C obtained stock options in November 2001 and December 2002; an award of Restricted shares in September 2002; and a Founder's fee in respect of the ASL project in late 2002 or early 2003.
In March 2003, C sent HMRC a form P85 “Leaving the United Kingdom” which stated that he had become non-resident in the UK for tax purposes on 27 January 2003. C left his family home in Kent for the final time in November 2003 and did not return there.
The assessments under appeal covered tax years between 2001/02 and 2007/08. These assessments included a combination of employment tax charges on salary, bonus, Founder's fee, Restricted shares (upon lifting of restrictions) and stock options (upon exercise).
The issues included whether C ceased to be resident in the UK for tax purposes before 20 November 2003 and if so, when did he cease to be resident. C's arguments included that:
- C could rely on the test related to UK tax residence set out at ICTA 1988, s. 335 which ignores any ownership of a place of abode in the UK, because he was working full time abroad from October 2001;
- Alternatively, that by October 2001 C had ceased to be UK resident by reference to common law principles;
- Neither the Founder's fee nor the Restricted shares were obtained by reason of employment;
- C was not resident at the time the stock options were granted to him.
The Tribunal said the approach to residence entailed a multi-factorial enquiry, in which no particular factor was definitive, and many different factors could be taken into account. The test was a qualitative more than a quantitative test, whatever method was used, and the results arrived at by a day count approach were just another component of the over-all multi-faceted approach. C's intention was relevant but not determinative.
The Tribunal said that from the perspective of presence in Bermuda, it could not be said C worked full time, in the sense of spending all five days of the working week in Bermuda. In addition, C spent other working time elsewhere. C regularly spent time in the UK and his employment contract specifically contemplated that he would travel between Bermuda and the UK for work purposes as well as for family purposes: the evidence suggested C viewed the London office as his home office while he was there and that the work he did in the UK was not entirely incidental. In addition, C worked for NUL in London. It could not be the case that C spent his “full time” working outside the UK.
The Tribunal said it took from the authorities, Glyn and Gaines-Cooper, the requirement for there to be a “distinct” or “definite” break in a taxpayer's existing pattern of life in order to demonstrate that ties with the UK had been sufficiently loosened to result in the taxpayer becoming non-resident. The definite break relied on by C was his change of intention towards his married life in the UK in the autumn of 2001 when he accepted the role with ASL. Other than to C himself though, there was no definite change in his lifestyle at this time; in particular he retained his home and personal belongings at his house in Kent.
The relatively small changes to the pattern of C's life in the periods October 2001 – November 2003 did not indicate a definite break or significant change in the pattern of C's life, either year by year or on a cumulative basis.
While C had become embedded with his professional and personal life in Bermuda by January 2003, the Tribunal did not consider that this could be taken to indicate that he had become non-resident in the UK. In the Tribunal's view, the required “definite break” did not occur until C left the family home in the UK in November 2003, never to return.
Against that finding that C was UK resident until November 2003, the Tribunal found:
- Salary and bonus payments would be chargeable to UK tax for the periods in which C was UK resident.
- There was argument between the parties as to whether C's 2003 bonus, paid in February 2004 at a time when it was accepted he was not UK resident, was nevertheless chargeable as paid in respect of services rendered for tax years in which he was UK resident. But the assessment in respect of this bonus was a discovery assessment: and where a lengthy delay in issuing an assessment had been occasioned by an error on behalf of HMRC (failure to open an enquiry for the 2003/04 tax year), HMRC should not be allowed to rely on the draconian rules in TMA 1970, s. 29 to correct their error. The discovery assessment for the 2003/04 tax year was therefore invalid and C's appeal should be allowed in respect of it.
- The Founder's fee was chargeable to UK tax when paid in February 2003 (and chargeable to Schedule D case VI rather than as an emolument).
- A tax charge arose for the year the restrictions were lifted on the Restricted shares, because C was UK resident at the time he obtained his beneficial interest in the shares (December 2002).
- C acquired the rights represented by the stock options on the dates they vested, not when granted. There were three such dates, by the third of which (October 2004) it was accepted by the parties that C was non-resident. Only this third tranche of options fell outside the charging provisions applicable upon an exercise of options.
This is another “residence” case, under the pre-Statutory Residence Test regime – drawing out again the relevant “distinct break” test, in a case where the taxpayer could not sustain “full-time working abroad” status. The decision as regards delay in assessing due to HMRC error affecting the validity of subsequent discovery, is also to be noted.
[1] This is an appeal by Mr Charman against assessments raised by HMRC for the tax years 2001–2, 2002–3, 2003–4, 2004–5, 2005–6 and 2007–8. The total amount of tax in dispute as stated in Mr Charman's appeal notice of 22 November 2010 is £13,019, 009.60 (thirteen million, nineteen hundred and nine pounds and sixty pence)
[2] HMRC have raised their assessments on the basis that Mr Charman was resident in the UK for tax purposes for the tax year 2001–2 and that he became non-UK tax resident on 27 January 2003.
[3] The assessments relate to employment income, including bonus payments and expenses, a “founders' fee”, share options and restricted shares awarded to Mr Charman.
[4] Mr Charman says that he became non-UK tax resident in October 2001 and therefore none of the amounts on which HMRC seek to charge tax are properly chargeable to UK tax and that HMRC's assessments have taxed some amounts twice.
[5] HMRC are now arguing that Mr Charman did not cease to be resident in the UK for tax purposes until 21 November 2003.
[6] Mr Charman was born in and was employed in the UK until 2001. By that date he was a very senior executive in the insurance industry. He had worked at Lloyds of London, was a Lloyds “Name” and had worked in a senior role at a number of insurance companies in the UK. He set up the first corporate syndicate at Lloyds and this was sold to a company called Ace Global Markets Limited (“Ace”) in July 1998.
[7] By this time Mr Charman was married and had two sons. His family home was at Dell House, Sevenoaks in Kent, which had been acquired as the family home in 1987.
[8] Ace was part of a large international insurance business listed in New York and registered in Bermuda. From July 1998 until 17 March 2001 Mr Charman was CEO of Ace, which was based in London. He was asked to move to Bermuda to work for Ace but refused to go because of his wife and sons. His Ace contract required him to travel overseas but he was not required to live outside the UK.
[9] In February 2001 Mr Charman was appointed group president and chief executive officer of Ace International Group, making him formally responsible for the international business of the Ace group. This involved significant international travel but Mr Charman again refused to move to Bermuda.
[10] Mr Charman was unfairly dismissed by Ace in March 2001. He received a substantial settlement payment which triggered a restrictive...
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