A N Employee v Her Majesty's Revenue & Customs, SPC 00673
| Jurisdiction | UK Non-devolved |
| Judge | Dr A Nuala BRICE |
| Judgment Date | 19 March 2008 |
| Respondent | Her Majesty's Revenue & Customs |
| Appellant | A N Employee |
| Reference | SPC 00673 |
| Court | First-tier Tribunal (Tax Chamber) |
Spc00673
SHARE OPTIONS – unapproved scheme - gains by employee – whether charge to income tax arises when options exercised but shares not sold – yes – ICTA 1988 s 135(1)
ASSESSMENT – power to raise assessment - whether loss of tax attributable to negligent conduct on the part of the Appellant or the person acting on his behalf – yes – whether at the relevant time the Revenue could not have been reasonably expected to be aware of the loss of tax – yes – appeal dismissed – TMA 1970 s 29 (4) and (5)
THE SPECIAL COMMISSIONERS
A N EMPLOYEE
Appellant
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS
Respondents
Special Commissioner : DR A N BRICE
Douglas Keel, Counsel, instructed by Bradley Trimmer, Solicitors for the Appellant
Ms June Kennerley, of the Appeal Unit, for the Respondents
© CROWN COPYRIGHT 2008
DECISIONThe appeal
1. Mr A N Employee (the Appellant) appeals against a Notice of Assessment dated 23 June 2005 for the year ending on 5 April 2001. The amount of tax charged by the assessment was £490,250. The assessment was issued by the Commissioners of Her Majesty’s Revenue and Customs (the Revenue) because they were of the view that the Appellant, who was an employee of a company, had realised a gain by the exercise of a right to acquire shares and was accordingly chargeable to income tax under Schedule E. The assessment was made out of time because the Revenue were of the view that the fact that income which ought to have been assessed to income tax had not been assessed was attributable to negligent conduct on the part of the Appellant or the person acting on his behalf and that the Revenue could not have been reasonably expected, on the basis of the information made available to them, to be aware that income which ought to have been assessed had not been assessed. 2. The Appellant appealed on the ground that the assessment had been made out of time. He argued that he had not been negligent and, on the basis of the information he had made available to the Revenue with his return, they would have been reasonably expected to be aware that income which ought to have been assessed had not been assessed. Later the Appellant also argued that there was no charge to income tax where share options were exercised but where the shares were retained and not sold.
The legislation
The legislation relating to share options
3. At the relevant time the legislation about income tax on share options was contained in section 135 of the Income and Corporation Taxes Act 1988 (the 1988 Act). The relevant parts of section 135 provided:
“135(1) Subject to section 185, where a person realises a gain by the exercise … 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. …
(3) Subject to section 136(4)-
(a) the gain realised by the exercise of any such right at any time shall be taken to be the difference between the amount that a person might reasonably expect to obtain from a sale in the open market at that time of the shares acquired and the amount or value of the consideration given whether for them or for the grant of the right; .. “
4. Section 185 of the 1988 Act contained provisions about approved share option schemes. However, the provisions of section 185 did not apply to unapproved share option schemes and the scheme at issue in this appeal was unapproved. Subject to stated exceptions, section 185(2) provided that income tax was not chargeable in respect of the grant of an option and section 185(3) provided that income tax was not chargeable in respect of the exercise of the option. Special provisions also applied to the calculation of chargeable gains in the context of approved share option schemes.
The legislation relating to the power to make an assessment
5. Before self-assessment was introduced a taxpayer made a return and tax was assessed by the Revenue. The taxpayer could challenge the assessment by an appeal. The present scheme is that a taxpayer must include in his return a self-assessment. The return should disclose all the relevant information and correctly assess, on the basis of it, the tax due. The Revenue may then formally enquire into the return and, at the end of any such enquiry, may amend the return and issue a closure notice. If the Revenue make no enquiry the self-assessment return becomes final subject only to the possibility of an assessment under section 29.of the Taxes Management Act 1970 (the 1970 Act). At the relevant time section 29 provided:
“29(1) If an officer of the Board or the Board discover, as regards any person (the taxpayer) and a year of assessment-
(a) that any income which ought to have been assessed to income tax .. have not been assessed, or …
the officer or, as the case may be, the Board may, subject to subsections (2) and (3) below, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax. …
(3) Where the taxpayer has made and delivered a return under section 8 or 8A of this Act in respect of the relevant year of assessment, he shall not be assessed under subsection (1) above
(a) in respect of the year of assessment mentioned in that subsection; and
(b) in the same capacity as that in which he made and delivered the return,
unless one of the two conditions mentioned below is fulfilled.
(4) The first condition is that the situation mentioned in subsection (1) above is attributable to fraudulent or negligent conduct on the part of the taxpayer or a person acting on his behalf.
(5) The second condition is that at the time when an officer of the Board –
(a) ceased to be entitled to give notice of his intention to enquire into the taxpayer’s return under section 8 or 8A of this Act in respect of the relevant year of assessment; or
(b) informed the taxpayer that he had completed his enquiries into that return,
the officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the situation mentioned in subsection (1) above.
(6) For the purposes of subsection (5) above, information is made available to an officer of the Board if-
(a) it is contained in the taxpayer’s return under section 8 or 8A of this Act in respect of the relevant year of assessment (the return) or in any accounts, statements or documents accompanying the return. … or
(d) it is information the existence of which and the relevance of which as regards the situation mentioned in subsection (1) above-
(i) could reasonably be expected to be inferred by an officer of the Board from information falling within paragraphs (a) to (c) above; or
(ii) are notified in writing by the taxpayer to an officer of the Board. “
Application to hear a preliminary issue
6. A hearing for directions under regulation 9 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 SI 1994 No.1811 (the Regulations) was held on 12 October 2007 when directions were given leading to the substantive hearing of this appeal on 13 to 15 November 2007. At that time it was understood that the only issue in the appeal was whether the Revenue had power to raise an assessment under section 29 of the 1970 Act. I refer to that issue as the section 29 issue.
7. On 6 November 2007 the Appellant’s advisers indicated in correspondence that, if the Appellant were unsuccessful on the section 29 issue, they wished to argue that section 135 did not...
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