Evolution Group Services Ltd v R & C Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 18 October 2008 |
| Date | 18 October 2008 |
| Court | Special Commissioners |
special commissioners decision
John Clark
Paul Yerbury of Fasken Martineau Solicitors, for the Appellant
Colin Williams of HM Revenue and Customs Appeal Unit, Wales Scotland and Northern Ireland, for the Respondents
Income tax - notional gains on share options - employer reimbursed by employees over 30 days after event - whether tax charge on employees under Income and Corporation Taxes Act 1988 section 144As. 144A ICTA 1988 properly due - yes - appeal dismissed - whether in practice mitigation of charge possible
Two shareholder directors who exercised options under an unapproved executive share option scheme were liable to tax under ICTA 1988, Income and Corporation Taxes Act 1988 section 144As. 144A in respect of the Sch. E tax payable on the notional gains which had not been reimbursed within 30 days of the date when those gains arose.
The individual taxpayers (C and G) were shareholders and directors of a company. An unapproved executive share option scheme was established and C and G held options. In March 2001 the entire issued share capital and options in the company were exchanged for shares and options in another company (EG).
C and G exercised their options in 2001. EG did not deduct any PAYE, employer's or employee's National Insurance on the issue of new shares in EG in 2001, on the grounds that it believed that the options were not obtained by the taxpayers by reason of employment.
The issue of whether the options were obtained by virtue of being founder shareholders or as a consequence of employment was extensively discussed between the taxpayers and the Revenue. EG eventually indicated that to avoid expensive litigation it had decided to accept that there was a Sch. E liability arising on the exercise of the options but did not accept that there was any irregularity.
Following further correspondence, a reg. 80 determination (under the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682)) and Social Security Contributions (Transfer of Functions, etc) Act 1999 section 8s. 8 decisions (under the Social Security (Transfer of Functions) Act 1999) were issued for the year 2001-02 formally charging tax and Class 1 National Insurance contributions (NICs) on the taxpayer company, which was the group company which employed G and C, for failing to operate PAYE on the share options exercised by C and G. The taxpayer company appealed against the reg. 80 determination on the grounds that the tax in question had been paid by C and G and agreement had been made between them and the company to set off their own liabilities under self-assessment as a credit for the company's PAYE liability that should have been paid; and that it was not possible to make a reg. 80 determination as that only applied to PAYE from 2003-04. C appealed against a closure notice amending his self-assessment return for 2001-02 to charge tax under ICTA 1988, Income and Corporation Taxes Act 1988 section 144As. 144A, and G appealed against a discovery assessment for the year 2001-02 charging tax under Income and Corporation Taxes Act 1988 section 144As. 144A.
HMRC's view was that the exercise of the options should have resulted in the taxpayer company remitting the PAYE tax and secondary (but not primary) NICs at the time of exercise. The next point of action would have been for the company either to have obtained repayment of the PAYE tax from the individuals within the stated time-limits, or to declare the benefit under ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 222s. 222. The options had been declared by the two individuals via their self-assessment returns, but that did not negate the responsibilities of the employer. By concession and without prejudice, since G and C were stated to have paid the tax arising in respect of the exercised options, HMRC put forward a mandate to be executed by them under which they confirmed the inclusion of the exercise of the option on their self-assessment returns, payment of the tax arising, acknowledgment of the company's responsibility and authority for repayment to be set against the employer's liability.
Whether a charge to tax arose under ICTA 1988, Income and Corporation Taxes Act 1988 section 144As. 144A when the taxpayers exercised their options; and whether PAYE was due from the employer as the directors had made payments under their self-assessments.
The special commissioner (John Clark) (dismissing the appeals of C and G and making no determination in respect of the taxpayer company) said that it was clear that, on the basis that the option gains fell within ICTA 1988, Income and Corporation Taxes Act 1988 section 135 section 203FBs. 135, s. 203FB applied. As the gains were notional gains, Income and Corporation Taxes Act 1988 section 203Js. 203J came into play. Under Income and Corporation Taxes Act 1988 section 203J subsec-or-para 3s. 203J(3), the payments being notional and thus being in themselves incapable of being subjected to deduction of tax under PAYE, the obligation to account for the PAYE tax remained on the taxpayer company as employer despite the absence of deduction. The legislation did not provide any specific method by which an employee might reimburse the employer for the tax on the notional gain. Nevertheless, the basis on which Income and Corporation Taxes Act 1988 section 144As. 144A was framed suggested a normal expectation that there would be a prompt reimbursement within the relatively short period of 30 days.
Where there had been such a reimbursement, the employer should be in a position to make its monthly PAYE payment without difficulty. In the absence of reimbursement, the employer was left with the obligation to account for the PAYE, but was left to fund in some other way the element of the PAYE tax attributable to the notional payment. In the present case, the tax referable to the exercise of the options was not reimbursed in that way. Instead, C and G made payments in respect of their self-assessment liabilities.
The making of those mandated payments did not affect the obligations of the employer under Income and Corporation Taxes Act 1988 section 203Js. 203J. Such obligations continued whether or not there had been any reimbursement by the employee. In the same way, the credit for that tax taken into account under PAYE was available to the employee whether or not he had reimbursed the employer for the tax. That showed that the payment of the tax was assumed throughout to be the responsibility of the employer, and thus that if the employee intended to deal with the tax liability, he should do so by reimbursing the employer rather than by seeking to make payment in his capacity as an individual taxpayer. The method which C and G adopted, in dealing with matters through their self-assessments, was not appropriate and confused their position as individual taxpayers with the obligation which had fallen on the taxpayer company as their employer. The precondition to the operation of Income and Corporation Taxes Act 1988 section 144As. 144A set out in s. 144A(1)(c) was fulfilled.
It was not necessary for the income under s. 144A to fall within the description of an "emolument". Under s. 144A(1) "the due amount shall be treated as income of the employee which arises on the date mentioned in paragraph (c) and is assessable to income tax under Schedule E". That deeming process bought the income within Sch. E without the need to apply any other tests in order to determine whether it was so chargeable.
The circumstances of C and G brought them within the literal terms of Income and Corporation Taxes Act 1988 section 144As. 144A. The sidenote to s. 144A ("Payments etc received free of tax") could not be construed as limited to avoidance. What was contemplated by Income and Corporation Taxes Act 1988 section 203Bs. 203B to 203I as referred to in s. 144A(1)(a) was notional payments. The second precondition in s. 144A(1)(b) was that the employer was required by Income and Corporation Taxes Act 1988 section 203J subsec-or-para 3s. 203J(3) to account for an amount of income tax under PAYE. That requirement arose because the notional payment falling within Income and Corporation Taxes Act 1988 section 203FBs. 203FB in respect of the share option exercise could not be subjected to deduction of tax; there was no "actual income" to which s. 203J(1) could be applied. Apart from the absence of any reference in the sidenote to avoidance, there was nothing in the rest of Income and Corporation Taxes Act 1988 section 144As. 144A to suggest any such limitation. In all the circumstances, there was no basis for the charges under Income and Corporation Taxes Act 1988 section 144As. 144A not to be applied to C and G. It followed that their appeals had to be dismissed.
It was accepted that C and G were entitled under reg. 185 of the 2003 Regulations to treat as deducted any tax that the company was liable to deduct whether or not that tax was actually deducted. The tax that should have been deducted should therefore be treated as a credit within the employees' self-assessment returns. If as a result of those credits C and G had overpaid tax in respect of the year 2001-02, then the overpayments of tax could be reallocated against the company's reg. 80 determination, since they had provided the appropriate mandates authorising that that could be done. Since a Income and Corporation Taxes Act 1988 section 144As. 144A charge arose, the overpayments of tax in respect of C and G would be reduced and there would be less tax to be reallocated to the company as the employer.
1. This appeal concerns the application of a statutory provision in respect of events occurring in the tax year 2001-02. The provision in question is Income and Corporation Taxes Act 1988 section 144As. 144AIncome and Corporation Taxes Act 1988 ("ICTA...
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