Norman
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 June 2015 |
| Date | 22 June 2015 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Richard Thomas, Susan Lousada
Mr David Norman of D W Norman & Co, Accountants appeared for the Appellant
Mr Philip Oborne of HMRC Local Compliance Appeals and Reviews Unit appeared for the Respondents
Income tax – Assessment to income tax on gain from exercise of share options – Whether the conditions with respect to discovery in Taxes Management Act 1970 (“TMA 1970”), s. 29(4) or (5) met – Whether income gain correctly calculated under Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”), Pt. 7, Ch. 5 – Whether tribunal could give effect to consequential CGT issues.
The First-tier Tribunal has upheld HMRC's assessment on the taxpayer under TMA 1970, s. 29. HMRC were entitled to make a discovery assessment under that provision, and the assessment correctly charged the gain arising on exercise of share options to income tax. The Tribunal held it had no power to alter the amount of CGT payable by the taxpayer pursuant to his self-assessment, but suggested that, if necessary, he had a basis for making appropriate statutory claims to have the CGT liability reduced, probably to nil.
The taxpayer (N) was recruited in December 2008 by Q Ltd, a subsidiary of a multinational group whose parent company shares subsequently listed on the NASDAQ exchange in New York. The letter offering N employment had referred to Q Ltd “applying for 15,000 stock options as part of your package” and that such application “does not form any part of any contractual terms and conditions of employment”. Another document indicated that if N left employment within five years, his entitlement to exercise options would be proportionately reduced.
N in fact resigned his employment in January 2011. A transaction record note prepared by the group's US brokers and provided to the Tribunal indicated that stock options over 6563 shares (in the listed parent) were exercised and the resulting shares sold on the same day in March 2011. That note indicated sale proceeds of some $150,000, and that tax of some $80,000 had been withheld. N's evidence was that he received a net amount by transfer to his bank account of some £50,000.
N reported the share transaction as capital gains on his 2010/11 tax return, with the benefit also of the 10% CGT rate under Entrepreneurs' relief. In April 2013, HMRC informed N they were making a compliance check, and that if any additional tax was found to be due, this would be assessed under TMA 1970, s. 29. The reason for the compliance check was because the year end P14 put in by Q Ltd referred to N's pay in his employment as an amount of some £176,000, which did not match the amount returned by N on the employment pages of his tax return (such amount being some £101,000 (and associated PAYE tax), as included in his P45 received on termination of employment in January 2011). In March 2014, HMRC made an assessment under s. 29, against which N appealed.
The Tribunal said the main issues in the appeal were:
a) whether HMRC were entitled to make a discovery assessment under TMA 1970, s. 29 (this issue, on which it was established that the burden of proof lay with HMRC, should necessarily be addressed as the first issue);
b) if yes, whether the share option gains were correctly assessed to income tax under ITEPA 2003, s. 478; and
c) if yes, what the CGT consequences were.
Concerning issue (a), the Tribunal considered that, given the only two documents N had were his P45 and the brokers' note of the share sale transaction, it was sensible that N's accountants should conclude the share sale gave rise to chargeable gains. N had correctly transferred the P45 salary and tax deducted information to the employment pages of his tax return, and had no reason to make his own enquiries or seek specialist advice; as for his accountants, they were clearly of the opinion the gain did not arise from N's employment because it was not part of his employment contract. HMRC had not shown “carelessness” within TMA 1970, s. 29(4).
However, HMRC (or the hypothetical officer at HMRC) could not be expected to have inferred that there was a tax loss from N's tax return, nor, in the Tribunal's view, should such officer be assumed to have “interrogated the system” to discover whether there was a discrepancy between the return (and hence the P45) and the P14. HMRC had therefore discharged the onus of showing the alternative s. 29(5) condition was met.
Concerning issue (b), N argued the stock options were outside the terms of his contract of employment. The Tribunal determined though that what enabled N to obtain the stock options was the employment or prospective employment (and if not the sole cause, it was a dominant cause). The stock options fell within ITEPA 2003, Pt. 7, Ch. 5 (and this was so in any event given the deemed “by reason of employment” rule in s. 471(3)).
In relation to the resulting charge to income tax on exercise of the options, the Tribunal's own calculation of the s. 476 gain (counting as employment income) was £87,025. It considered that the discrepancy between this figure and the amount assessed by HMRC (being £75,679, the difference between N's total employment income per the P14 and that specified in his P45) was likely to be explained by the fact that N had agreed to pay the employer's NIC and was entitled to relief under s. 481. In any event, there was no evidence to show the amount of employment income that should be charged by the s. 29 assessment was any greater than £75,679.
Concerning issue (c), HMRC's statement of case in relation to the s. 29 assessment stated that the tax claimed, of some £20,200 was “to be amended to” some £12,600 (to give credit for the tax paid by N as CGT).
However, the Tribunal took the view that N was not “overcharged” by the TMA 1970,s. 29 assessment, which therefore had to stand good (and could not be reduced by the Tribunal), in accordance with TMA 1970, s. 50(6). The Tribunal suggested (in an analysis contained in an Appendix to its decision) that N would, strictly, need to seek to make a claim to reduce his CGT liability and, being out of time to amend his self-assessment, might look to possible remedy by way of TMA 1970, s. 33 and Sch. 1AB, or under s. 32. But the CGT consequences could not, in the Tribunal's view, be determined by the Tribunal in the absence of a relevant appealable decision.
The Tribunal noted that HMRC had in this case given certain assurances that the necessary tax adjustments would be made, and also that a penalty that had been assessed (and not appealed by N) would be removed in light of the Tribunal's finding that there had been no carelessness on the part of N in completing his return.
The Tribunal determined that under TMA 1970, s. 50(6) the assessment to income tax stood good and therefore N's appeal was to be dismissed.
The Tribunal judge set out his reasoning in some considerable detail. The charging of the stock option gains to income tax is not surprising. The conclusion drawn on carelessness under TMA 1970, s. 29(4) might, arguably, be regarded as more so. Most interesting is the Tribunal's analysis of the “CGT consequences” of its decision that the option gains were to be taxed as income: for example, the suggestion that the cost (exercise price) of the shares might not be allowable in the CGT computation (though the Tribunal's analysis that such cost is part of “DA” in ITEPA 2003, s. 480 does not look right); and the approach that the taxpayer's remedy in relation to discharge of his CGT self-assessment must lie, strictly, in further claim under TMA 1970, s. 32 or s. 33.
[1] The appeal before the Tribunal was made by Mr Alistair Norman, against a further assessment to income tax on employment income for the tax year 2010–11 made under s 29 Taxes Management Act 1970 (TMA) in the amount of £75,679 charging additional tax of £20,214 after giving credit for additional tax deducted under Pay As You Earn (PAYE) of £15,134. Because of the similarity of names of the appellant and his representative (they are in fact son and father) any reference to a Norman in this decision (except in this paragraph) is a reference to Mr David Norman, the representative, and Mr Alistair Norman is called “the appellant”.
[2] The appellant will wish to know without reading all the way through this rather lengthy decision what our decision is. We have upheld the assessment made by HM Revenue and Customs (HMRC) with the result that the appellant is liable to pay the tax charged by it. We also hold that we have no power to alter the amount of capital gains tax (CGT) payable by the appellant, but that it appears that his CGT liability ought to be substantially reduced, probably to nil. We suggest that the appellant makes appropriate claims to HMRC on one or other or both of the bases which we have identified (see paragraphs 24 to 32 of Appendix 2 to this decision) and we look to HMRC to give effect to those claims, particularly as they have already agreed that the liability to CGT is incorrectly stated in the appellant's self-assessment.
[3] And because we have found that neither the appellant nor Mr Norman acting on the appellant's behalf was careless in completing his tax return and self-assessment, we look to HMRC to honour the undertaking they gave us to cancel the penalty assessed on the appellant, but which the appellant for some reason did not appeal against.
[4] The appellant gave sworn oral evidence and he was cross-examined by Mr Oborne for HMRC and was questioned by the Tribunal. Mr Norman at one stage in his submissions also gave what amounted to evidence as to how the appellant's tax return was prepared and filed.
[5] We also had three documents supplied by the appellant, consisting of:
1) an email about his appointment as marketing director of QlikTech UK Ltd (QlikTech)
2) a P45 from that employer and
3) a record of a transaction on his behalf...
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