Macey v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 02 November 2010 |
| Neutral Citation | [2010] UKFTT 533 (TC) |
| Date | 02 November 2010 |
| Court | First Tier Tribunal (Tax Chamber) |
[2010] UKFTT 533 (TC)
Michael Tildesley OBE (Tribunal Judge) (Chairman)
The Appellant appeared in person
David Weissand, HM Inspector of Taxes, for HMRC
Income tax - whether an one-off award of restricted stock units was an inducement to enter into a contract of employment and to perform services in the future or compensation for the loss of an asset unconnected with employment - the one-off award was an inducement to enter into a contract of employment - the one-off award on conversion to common stock was chargeable to income tax as earnings within the meaning of Income Tax (Earnings and Pensions) Act 2003 section 62 subsec-or-para 2section 62(2) ITEPA 2003 from employment - appeal dismissed
1. The Appellant was appealing against HMRC's amendment dated 8 June 2009 to his self assessment tax return for the year ended 5 April 2007. The amendment was that the amount assessable as employment income was increased by £156,734 resulting in a payment of tax in the sum of £224.78 rather than a repayment of £62,468.62. The reason for the amendment was that HMRC decided that a payment in respect of an award of restricted stock units constituted employment income within the meaning of Income Tax (Earnings and Pensions) Act 2003 section 62section 62 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).
2. The issue for determination was whether the value of the award of restricted stocks units in Morgan Stanley Dean Witter (Morgan Stanley), their conversion to shares of Morgan Stanley common stock and their subsequent disposal gave rise to taxable employment income.
3. The Appellant submitted that the award of restricted stock units represented compensation for the loss of a valuable asset unconnected with employment. HMRC, on the other hand, contended that the award was a Golden Hello, an inducement to enter into a contract of employment and to perform services in the future.
4. At the hearing the Appellant indicated that he was not pursuing his alternative ground of Appeal that the award of restricted units was connected to the loss of his practising certificate as an accountant.
5. The Appellant was a partner in Ernst & Young, a firm of accountants, from 1981 to 30 June 2001. His income from the partnership was assessed under Schedule D and his share of any gains on partnership assets were assessed under the Capital Gains Tax provisions. The Appellant's share of the partnership income for the year ended 30 June 2001 was £480,616.
6. In 2000 the partners of Ernst & Young formed a company and transferred their management consultancy business to it in exchange for shares allocated to the partners. The transaction gave rise to capital gains tax on each partner.
7. On 23 May 2000 the shares in the management consultancy business were disposed of to Cap Gemini in exchange for Cap Gemini ordinary shares. Each partner was allocated Cap Gemini shares in proportion to his ownership of the management consultancy company. The Appellant was awarded 5,192 shares. This transaction did not give rise to tax.
8. The Cap Gemini shares were subject to forfeiture provisions. Thus if a partner left Ernst & Young after 24 May 2001 and before 24 May 2002, 50 per cent of the shares would be forfeited to Ernst & Young.
9. In early 2001 the Head of International Tax for Morgan Stanley contacted the Appellant by telephone with a potential offer of employment. The Appellant responded to the effect that the potential remuneration associated with the job offer would not be sufficient to tempt him away from his established position at Ernst & Young. The Head of International Tax indicated that the Appellant's assessment of the potential remuneration package on offer may not be correct, in which case the Appellant agreed to continue with the negotiations. The Appellant believed that there was no discussion of the specifics of the remuneration package during the initial contact.
10. Shortly after the first contact, Morgan Stanley's Head of International Tax visited the United Kingdom when the Appellant had a meeting with him at which they discussed the Appellant's current remuneration with Ernst & Young. After which they had a telephone call during which a figure for the proposed remuneration was mentioned which was acceptable to the Appellant.
11. During the negotiations with Morgan Stanley the Appellant raised the matter of the potential loss to him arising from the forfeiture of the Cap Gemini shares on departure from Ernst & Young. In his letter dated 27 April 2008 to Mr Barnes of HMRC's Complex Personal Return Team the Appellant stated that
In any event it was I who raised the forfeiture of the Cap Gemini shares and indicated that I could not consider a move unless I could be compensated for the value I would be given up.
12. A draft offer of employment of Managing Director - Head of European Tax from Morgan Stanley to the Appellant was made in writing dated 22 March 2001. The draft offer set out the terms of the remuneration package which specified a total reward of £550,000 for the 2001 fiscal year. The total reward was inclusive of earnings from Ernst & Young for the period 1 December 2000 to the date of the departure. An award of Morgan Stanley restricted units and or stock options1 formed part of the total reward. In addition to the total award the Appellant received the following benefits:
(2) Participation in Morgan Stanley's profit sharing plan on the first day of the month following completion of one year service.
(3) Morgan Stanley's United Kingdom Group Pension Plan from date of hire.
(4) Membership of Morgan Stanley's Life Assurance, Personal Accident and Disability Plan and the Medical Plan.
(5) Annual leave of 30 days in each calendar year.
13. The formal offer of employment was made on 12 April 2001 which included an additional element under the heading of compensation. The letter stated that
In addition, the Firm will make you a one-time award of Morgan Stanley restricted stock units.
The value of your Morgan Stanley restricted stock units will be determined on your date of hire based on the closing price of Cap Gemini common stock on that date. The number of Morgan Stanley restricted stock units you will receive corresponding to this value will be determined using the closing price of Morgan Stanley common stock on your hire date.
Subject to satisfactory and continued employment, your stock units will vest and convert to shares according to the following schedule: all units will vest on the two year anniversary from your date of hire; and these units will convert to shares and most sales restrictions will lift from the shares on or as soon as practicable after the second year anniversary from your date of hire.
The award is intended to offset the Cap Gemini Stock award you forfeit and is contingent upon confirmation of such previous award. If you have not done so already please provide documentation of your forfeited award as we cannot grant your award until we receive satisfactory documentation.
14. This one-off award of restricted stock units was the subject of this Appeal.
15. The additional award of restricted stock units was designated as new hire stock units. The additional award was subject to the same conditions as those applying to normal compensation restricted stock units. Thus the additional award would vest after two years and convert into common stock. There was no right to sell, transfer or pledge the restricted stock units and would be forfeited if the Appellant terminated his employment with Morgan Stanley before 1 July 2003, subject to good leaver provisions. As with normal restricted stock units dividend equivalent payments would be made each time Morgan Stanley paid a dividend on its common stock. The additional award did not incorporate cash or stock option elements. Further there was no adjustment made for any tax that might arise on the additional award.
16. On 30 June 2001 the Appellant resigned as a partner in Ernst & Young and transferred 50 per cent of his shares in the Cap Gemini to the partnership under the forfeiture provisions. The transfer was a deemed disposal to connected parties with the result that tax was assessed on the market value of the disposal.
17. The Appellant joined Morgan Stanley on 1 July 2001 and given the additional award of 4,526 restricted stock units. The value of the restricted stock units was $259,340 which was the value of the forfeited Cap Gemini shares at that date.
18. The term sheet for the restricted stock unit award stated that the scheduled conversation date was 1 July 2006 rather than 1 July 2003 which was stated in the offer of employment. The Appellant produced a letter dated 28 July 2010 from Andrew Trapnell of Morgan Stanley2 who confirmed that there was an error with the scheduled conversation date in the term sheet:
Further to our recent discussions I can confirm that it is generally Morgan Stanley policy when compensating new joiners for the loss of rights or assets to attempt to match the conditions attaching to the original right or asset to the extent possible within the constraints of the available Morgan Stanley arrangements.
I can also confirm that it is clear that the award certificate in respect of the stock unit award to compensate you for the forfeiture of your Cap Gemini shares was incorrect and your offer letter states the correct position.
Whilst it is unfortunate that this caused the conversion into Morgan Stanley stock to be delayed there was no direct loss to you as the stock price increased over the extended period. However, it was clearly an error and I apologise for any inconvenience caused.
19. Despite the error, the date in the term sheet determined when the restricted stock units were converted into common stock which took place in July 2006.
20. The value of the restricted stock units was not reflected in the Appellant's compensation summary statements3 for...
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