Charman v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Neutral Citation | [2021] EWCA Civ 1804 |
| Year | 2021 |
| Court | Court of Appeal (Civil Division) |
2021 Nov 17, 18; Dec 3
Revenue - Income tax - Employment - Earnings - Employer granting taxpayer options to purchase shares in company - Options vesting in three tranches - Taxpayer resident in United Kingdom when first two tranches vesting but not third - Whether taxpayer liable to tax in respect of third tranche - Whether taxpayer resident in United Kingdom when third tranche of options acquired - Whether “acquisition” of options occurring when options granted or when options vesting -
Pursuant to a share purchase option agreement appended to his employment contract, the taxpayer was granted options to purchase a large number of shares in a company, which options were to vest in three tranches on specified dates. The taxpayer was resident in the UK on the date of the option agreement and when the first two tranches of options vested, but was resident overseas when the third tranche vested. Some years later, the taxpayer exercised some of his share options, making a profit of approximately $33m. The revenue issued various closure notices and discovery assessments in respect of the sums realised by the taxpayer by exercising those options. The First-tier Tribunal allowed the taxpayer’s appeal in part, holding that on each occasion that a tranche of options vested the taxpayer had “acquired” an employment-related securities option for the purposes of Chapter 5 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003F1; that, therefore, the taxpayer had been liable to income tax on the exercise of the first two tranches of options, since he had been resident in the UK when they vested; but that, by virtue of section 474(1) of the 2003 Act, he was not liable to tax on the exercise of the third tranche of options, since he had not been resident in the UK when that tranche had vested. The Upper Tribunal allowed the revenue’s appeal, holding that the taxpayer was liable to tax in respect of all three tranches since the options had been “acquired” when they were granted rather than when each tranche subsequently vested.
On appeal by the taxpayer—
Held, dismissing the appeal, that for the purposes of Chapter 5 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003, a person “acquired” an employment-related securities option when they acquired “a right to acquire securities” (including shares in a body corporate) within section 420(8) of the 2003 Act and the right to acquire that option was available by reason of the employment of that person; that “a right to acquire securities” within the meaning of section 420(8) was no less a right if the ability to exercise that right either did not vest for a period of time or was contingent upon some future event, since there was no express requirement in the 2003 Act that the right had to be immediately exercisable and there was no warrant for reading such a requirement into the scheme of the Act; that, therefore, in the present case, the taxpayer had “acquired” an employment-related securities option on the date of the share option agreement, notwithstanding the fact that the right to acquire the relevant shares could not be exercised until the subsequent vesting of the three tranches; that it followed that for the purposes of section 474(1) of the 2003 Act the taxpayer had been resident in the United Kingdom at the time of the “acquisition” of that employment-related securities option, with the consequence that section 474(1) was of no application; that, on the facts, the First-tier Tribunal had been entitled to find that the taxpayer had acquired the relevant shares by reason of his employment and that, therefore, he had acquired an employment-related securities option; and that, accordingly, the taxpayer had been liable to income tax pursuant to section 476 of the 2003 Act when he exercised the options under all three tranches (post, paras 24–25, 38–42, 52, 54, 55, 56).
The following cases are referred to in the judgment of Arnold LJ:
Abbott v Philbin [
Embiricos v Revenue and Customs Comrs
Gray’s Timber Products Ltd v Revenue and Customs Comrs
Hamblett v Godfrey [
Inland Revenue Comrs v Burton Group plc [
Inland Revenue Comrs v Eurocopy plc (
Inland Revenue Comrs v Reed International plc (
Kuehne + Nagel Drinks Logistics Ltd v Revenue and Customs Comrs
Mairs v Haughey [
R (Derry) v Revenue and Customs Comrs
RFC 2012 plc v Advocate General for Scotland
Tennant v Smith [
UBS AG v Revenue and Customs Comrs
Vermilion Holdings Ltd v Revenue and Customs Comrs
Wicks v Firth [
Wilcock v Eve [
The following additional case was cited in argument:
NCL Investments Ltd v Revenue and Customs Comrs
The following additional cases, although not cited, were referred to in the skeleton arguments:
Frankland v Inland Revenue Comrs [
Higgins v Revenue and Customs Comrs
Manning v Revenue and Customs Comrs
APPEAL from the Upper Tribunal (Tax and Chancery Chamber)
The taxpayer, John Charman, appealed to the First-tier Tribunal (Tax Chamber) against various closure notices and discovery assessments raised by the Revenue and Customs Commissioners assessing him liable to pay tax in respect of an approximately $33m profit realised in March 2008 from exercising certain share options. The taxpayer had been granted options to purchase 253,139 shares in a limited company, Axis Specialty Ltd (“ASL”), under a share purchase option agreement appended to his contract of employment with the company. Subsequently, following a recapitalisation of the company, the taxpayer and his fellow shareholders exchanged their ASL shares for shares in a newly formed holding company, Axis Capital Holdings Ltd (“ACH”). The options were effective as of 1 October 2001, but stated only to vest in three tranches on the anniversary date of the agreement on each of the next three years. The taxpayer was resident in the United Kingdom on 1 October 2001, and remained in the UK until 21 November 2003, when he ceased to be a UK resident. The taxpayer appealed the notices and assessments on the ground that, since “at the time of the acquisition” of the securities options he was resident outside the UK, he was not liable to pay UK tax on the exercise of the options as a result of section 474(1) of the Income Tax (Earnings and Pensions) Act 2003. By a decision dated 20 December 2018, the First-tier Tribunal (First-tier Tribunal Judge Rachel Short and Shameem Akhtar) [2018] UKFTT 765 (TC) allowed the appeal, concluding that the taxpayer had acquired a “securities option” for the purposes of Chapter 5 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 on each occasion when a tranche of the options vested with the result that since he was a UK resident on the vesting of the first two tranches he was liable to tax pursuant to section 476 of the 2003 Act when he exercised those options, but that since he was not resident in the UK when the third tranche vested, section 474(1) operated so as to preclude liability to UK tax under section 476. The tribunal further concluded that the taxpayer had acquired his interest in the ACH shares as a director or employee of ASL for the purposes of Chapter 2 of Part 7 of the 2003 Act.
The revenue appealed on the ground that a right to acquire securities arose when the options were granted rather than when they subsequently vested; that the taxpayer had accordingly been resident in the UK at the time of acquisition and was liable to pay tax in respect of the sums realised from the exercise of the options. By an appellant’s notice the taxpayer appealed against the finding that he had acquired his interest in ACH as a director or employee of ASL, contending that the interest had been acquired by virtue of his being a shareholder of ASL. By a decision dated 27 August 2020, the Upper Tribunal (Tax and Chancery Chamber) (Falk J and Upper Tribunal Judge Scott) allowed the revenue’s appeal and dismissed the taxpayer’s appeal [2020] UKUT 253 (TCC); [2020] STC 1907.
By an appellant’s notice filed on 28 October 2020 and with permission granted by the Upper Tribunal the taxpayer appealed on the grounds that the Upper Tribunal had erred (1) in concluding that the he had acquired his right to acquire securities when the options were granted so that he was liable to tax in respect of all three tranches and (2) in upholding the finding of the First-tier Tribunal that the interest in the ACH shares had been acquired as a director or employee of ASL
The facts are stated in the judgment of Arnold LJ, post, paras 2–14.
Hui Ling McCarthy QC (instructed by
Akash Nawbatt QC and Sebastian Purnell (instructed...
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MARK CAMPBELL v THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS [2023] UKUT 00265 (TCC)
...many decisions on the meaning of “by reason of employment”, including in particular Wicks v Firth 56 TC 318. In John Charman v HMRC [2021] EWCA Civ 1804 (“Charman”) the Court of Appeal said this about the test, at 47. There was little, if any, dispute between the parties as to the correct t......