Chilcott and Others v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | MRS JUSTICE PROUDMAN |
| Judgment Date | 16 November 2009 |
| Neutral Citation | [2009] EWHC 3287 (Ch) |
| Date | 16 November 2009 |
| Court | Chancery Division |
| Docket Number | CH/2009/APP/0005 |
[2009] EWHC 3287 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand
London WC2A 2LL
Mrs Justice Proudman
CH/2009/APP/0005
MR P YERBURY (instructed by Fasken Martineau LLP) appeared on behalf of the Appellants.
MR A NAWBATT (instructed by HMRC) appeared on behalf of the Respondent.
This is an appeal in point of law by taxpayers, Mr Chilcott and Mr Griffiths and Evolution Group Services Limited (“EGS”), against the decision of the Special Commissioner Mr John Clark sitting in London on 22 nd October 2008 upholding assessments on Mr Chilcott and Mr Griffiths to income tax under section 144A of the Income and Corporation Taxes Act 1988 (“the Taxes Act”)
The appeal concerns the construction and application of that section. Section 144A was inserted into the Taxes Act by the Finance Act 1994. The section has been replaced by section 222 of the Income Tax (Earnings and Pensions) Act 2003 in similar terms, save that for payments treated as made on or after 6 th April 2003 a period of 90 days is substituted for the period of 30 days in section 144A.
The agreed facts are set out at length in the decision. For present purposes I propose to summarise them.
Mr Chilcott and Mr Griffiths were employees of EGS. They were granted and exercised options over EGS Group company shares and they respectively exercised those options in December and June 2001, making substantial unrealised gains.
Mr Chilcott and Mr Griffiths advanced arguments that a notional gain had not arisen under section 135 of the Taxes Act, but they eventually dropped those arguments and accepted that there were notional gains chargeable to income tax under that section in the year ended 5 th April 2002. They disclosed the chargeable amounts on their 2001/2003 self-assessment returns and paid the amount of income tax due.
Section 135(1) of the Taxes Act provides as follows.
“…where a person realises a gain by the exercise, or by the assignment or release, of a right to acquire shares in a body corporate obtained by that person as a director or employee of that or any other body corporate, he shall be chargeable to tax under Schedule E on an amount equal to the amount of his gain, as computed in accordance with this section.”
The exercise of the share options constituted a notional payment by the employer, who was therefore required if possible to operate Pay As You Earn by virtue of section 203FB of the Taxes Act. However, EGS could not do so because it was making no payment from which tax could be deducted. In such circumstances section 203J of the Taxes Act prescribed how the employer should deduct and account for the tax in cases where section 203B to 203I applied. In summary, the employer should first deduct from any actual payments (such as salary) made at the same time or later in the income tax period as a notional payment occurred. However if the employer was unable to deduct a sufficient amount to cover the PAYE tax the employer was still required to account for the tax – see section 203J(1) and (3).
The legislation made no provision for how the employer might recover any balance of tax from the employee which is left as a matter between them. However, it has been held that the employer can require the employee to repay the tax as money paid to his use: see McCarthy v McCarthy & Stone plc [2006] EWHC 1851 at paragraphs 69 to 73.
The legislation did, however, make provision for a charge on the employee where the employee did not make good, within 30 days of the notional payment, the amount required to account for under section 203J. That provision was section 144A of the Taxes Act which provided as follows:
“Payments etc. received free of tax.
(1) In any case where-
(a) an employer is treated, by virtue of any of sections 203B to 203I, as having made a payment of income of an employee which is assessable to income tax under Schedule E,
(b) the employer is required, by virtue of section 203J(3), to account for an amount of income tax ('the due amount') in respect of that payment, and
(c) the employee does not, before the end of the period of thirty days from the date on which the employer is treated as making that payment, make good the due amount to the employer,
the due amount shall be treated as income of the employee which arises on the date mentioned in paragraph (c) above and is assessable to income tax under Schedule E.”
Mr Chilcott and Mr Griffiths did not reimburse EGS for Schedule E tax payable on the notional gains within 30 days of the date that the notional gains arose. HMRC therefore contended that a tax charge applied under Section 144A of the Taxes Act and assessed Mr Chilcott and Mr Griffiths accordingly for the year 2001/2002. It was those assessments that were confirmed by the Special Commissioner.
At the heart of Mr Yerbury's submissions on the appellants' behalf is the contention that section 144A of the Taxes Act falls to be construed as not applying in any situation where the PAYE tax has in fact been made good by reimbursement at any time.
Mr Yerbury prays in aid a number of matters which he says lead to this interpretation. First, he says that a purposive construction should be applied and relies on the well-known decision in MacNiven v Westmoreland Investments Limited [2006] STC 237 to that effect. He also relies on the heading to section 144A “Payments received free of tax” for guidance as to the purpose of the section. He says that section 144A of the Taxes Act applied to the whole bundle of provisions contained in section 203B to 203J, and that the Special Commissioner ignored the fact that all the other provisions, namely sections 203B to I, comprise anti-avoidance sections.
Mr Nawbatt for HMRC disputes that this is the case, saying that section 203D and E are not so much anti-avoidance provisions as situations where it is difficult to collect tax on payments. Mr Yerbury also submitted that as the tax payable under section 144A was expressly said to be payable under Schedule E, it had the character of an emolument. In such circumstances he submitted that there could be no emolument where the employer was reimbursed the payment it had made. He placed heavy reliance on section 156(1) of the Taxes Act, which makes express provision for the situation where the taxpayer makes good the value of a benefit in kind provided by an employer, i.e. reimburses him. It is only the balance, if any, which is taxable under section 154. Mr Yerbury submitted that the construction placed on this section by the Special Commissioner involves tax upon tax and, in effect, double taxation. These were all factors which the Special Commissioner ignored or gave insufficient weight to...
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