Chilcott and Others v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lloyd,Lord Justice Sedley,Master of the Rolls |
| Judgment Date | 06 December 2010 |
| Neutral Citation | [2010] EWCA Civ 1538 |
| Docket Number | Case No: A3/2010/0297 |
| Court | Court of Appeal (Civil Division) |
| Date | 06 December 2010 |
[2010] EWCA Civ 1538
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION OF THE HIGH COURT
(Mrs Justice Proudman)
Before: Master Of The Rolls (Lord Neuberger Of Abbotsbury) Lord Justice Sedley And Lord Justice Lloyd
Case No: A3/2010/0297
Mr Paul Yerbury solicitor-advocate (instructed by Messrs Fasken Martineau) appeared on behalf of the Appellant.
Mr Akash Nawbatt (instructed by HMRC Solicitor's Office) appeared on behalf of the Respondent.
Lord Justice Lloyd
This appeal raises a point of construction about s.144A of the Income and Corporation Taxes Act 1988, arising from the exercise of share options by each of the individual appellants, which had been granted by Evolution Services Limited (“EGS”), their employer at the relevant time. EGS is the third appellant.
The appeal, brought with permission granted by Etherton LJ, is from an order of Proudman J made on 16 November 2009. By that order she dismissed an appeal from a decision of Mr John Clark, the Special Commissioner, made on 18 December 2008. Her judgment is available under the citation [2009] EWHC 3287 (Ch).
Section 144A has now been replaced by Income Tax (Earnings and Pensions Act) 2003, section 222.
The appellants argue that, according to the contention put forward by HMRC and the decisions below, the terms of section 144A in the relevant circumstances impose income tax on them in respect of an amount, as if it were an emolument, which they did not receive, or if they did receive it for a time they did not retain it. In those circumstances they argue that the tax imposition is grossly unfair and that it cannot have been intended to apply, and accordingly that the section should be read in such a way that it does not apply in the relevant circumstances. To examine this contention it is necessary to recount the facts in summary and then to consider the legislation in some detail.
The principal facts were set out as an agreed statement in the decision of the Special Commissioner from which the judge took her summary and from which I will take my even shorter summary. The two individual appellants, Mr Chilcott and Mr Griffiths, were employees of EGS. They were granted options over shares in a company in the EGS group. They each exercised those options in December to June 2001. By doing so they made substantial unrealised gains. The individual appellants contended from the outset that the exercise of those options did not give rise to a notional gain chargeable to income tax, but they did not pursue that contention in the end. They accepted eventually that notional gains chargeable to income tax under Schedule E by virtue of section 135 of the Taxes Act arose on the exercise of the options relating to the year ending 5 April 2002. One of them put in a correct self-assessment form including the relevant gain. The other had already put in a self-assessment return which did not include it and he made an amended return so that it did include it. Each of them then paid the tax due. So far so good, one might suppose.
The exercise of the share option amounted to a notional payment by the employer to the employee, which ought in principle to be subject to the deduction of tax under the PAYE system and also, incidentally, to the payment of National Insurance Contributions. Since there was no actual payment there could be no actual deduction. Special provision is made by the legislation for such a case. The employer should deduct the tax from any actual payment made then or later in the year to the employee, such as salary. If and insofar as it cannot do that, it remains liable to account for the tax.
The Act does not provide for the employee to be obliged to reimburse the employer but it has been held that such an obligation arises once the employer has paid the tax, for money had and received: see McCarthy v McCarthy & Stone Ltd [2006] EWHC 1851 (Ch), affirmed at [2007] EWCA Civ 664.
In October 2003 EGS accepted liability to HMRC for NIC arising from the share option exercise, and paid some £246,000 in settlement. HMRC assessed each of the individuals to further tax, and also assessed EGS to additional tax and NIC. All three appealed against those assessments. Eventually by the time of the hearing before the Special Commissioner only one issue was live, namely as to the charge to income tax assessed on the individuals by virtue of section 144A. The Special Commissioner dismissed the appeal on that point and so did Proudman J. The Special Commissioner expressed misgivings at the end of his decision, in paragraphs 64 to 67, as regards the possible impact of the section in the circumstances such as those of the present case. The appellants share those concerns, but would not regard that expression as adequate to meet the injustice of the situation.
Section 144A(1) was as follows:
“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 to 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.”
This is a case in which EGS was treated as having made a payment to an employee which was assessable to income tax by virtue of section 203FB. Therefore section 144A(1) (a) is satisfied. That resulted in EGS being required to account for an amount of income tax under section 203(J) (3), so section 144A(1) (b) is satisfied. EGS was treated as making the payment at the time of the acquisition of the shares: see section 203FB(2) (a). Accordingly, under section 144A(1) (c) the 30 day period ran from that date. By the end of that 30 day period the individual appellants had not made good the due amount (that is to say the tax due) to EGS. It follows under the section, taken literally, that the individual appellants are to be charged income tax on the amount of income tax that was due from EGS. That is so, it appears, regardless of whether after the end of the 30 days the employee does in fact made good the tax to the employer or (which would be the same) in effect pays it over to the Revenue, as the individual appellants eventually did.
In McCarthy v McCarthy & Stone Limited [2006] EWHC 1851 (already mentioned) Peter Smith J mentioned in the course of his judgment the later equivalent of section 144A. He referred to it at paragraph 53 of his judgment. He described it as a rough-and-ready clause designed to penalise the employee who does not account to his employer. Mr Yerbury, the appellants' advocate below and before us, submitted that this is authority for the proposition that section 144A is a penal provision. In my judgment, that overstates the position. The character of that section was not in any way relevant to his decision and, when the matter came to this court on appeal, the section was not even mentioned. The comment of the judge is of course entitled to respect and it appears to me in one sense at least to be a fair comment, but it is no more than a dictum.
Proudman J dismissed the appeal because she considered the section to be clear and free from any ambiguity. She said that Mr Yerbury's argument would require the words in section 144A(1) (c) above the 30 day period to be deleted or ignored. She rejected an argument for reliance on parliamentary materials by reference to Pepper v Hart [1993] AC 593 because the section was in her judgment entirely clear. She also added that no help could in fact be got from those materials, there being no reference to this provision anywhere in the debates.
Mr Yerbury's principal argument on the appeal is that the section should be construed purposively and not so as to produce the absurdity of imposing tax on a notional benefit which the employee does not have or at any rate does not retain. He submitted that the section is legitimately concerned with cases of avoidance, of which this is not one, and with cases with a risk of tax leakage, which would arise if the employee does not repay money to the employer so the employer does not have the money with which to pay the tax. In his submission the section is not concerned with a case where the tax is indeed repaid by the employee to the employer, so that the employer is in a position to pay the tax and the tax is fully paid as it has been in the present case.
He pointed to the contrast between section 144A imposing the charge on an amount due if it...
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