TC02703: Steven Price and related appeals
| Jurisdiction | UK Non-devolved |
| Judgment Date | 30 April 2013 |
| Neutral Citation | [2013] UKFTT 297 (TC) |
| Date | 30 April 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 297 (TC)
Judge Charles Hellier, Shahwar Sadeque
David Ewart QC and Zizhen Yang instructed by NT Advisors Ltd appeared for the Appellants
Timothy Brennan QC and Nicola Shaw QC instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Capital Gains Tax - artificial scheme to create allowable loss - non commercial exercise of options - TCGA 1992, Taxation of Chargeable Gains Act 1992 section 17 section 144ss. 17 and 144; Taxation of Chargeable Gains Act 1992 section 144ZAs. 144ZA - whether disapplied by Taxation of Chargeable Gains Act 1992 section 144ZBs. 144ZB - whether a "securities option" within ITEPA, Income Tax (Earnings and Pensions) Act 2003 part 7 chapter 5Pt. 7, Ch. 5TCGA, Taxation of Chargeable Gains Act 1992 section 149AAs. 149AA - whether deed poll an arrangement for conversion of shares - whether employment related securitiesITEPA, Income Tax (Earnings and Pensions) Act 2003 part 7 chapter 5Pt. 7, Ch. 5: whether option acquired by reason of employment of another person; whether retrospective addition to Income Tax (Earnings and Pensions) Act 2003 section 420 subsec-or-para 8s. 420(8) has effectIncome tax - ICTA 88, Income and Corporation Taxes Act 1988 section 574s. 574 - CGT loss available against income - whether qualifying trading company - whether sale of shares bargain at arm's length.
The First-tier Tribunal decided that the Taxation of Chargeable Gains Act 1992 ("TCGA 1992") Taxation of Chargeable Gains Act 1992 section 144ZAs. 144ZA did not apply to the taxpayers' exercise of an option to buy shares in a company, pursuant to a scheme to create losses offsetable against taxable income. The market value rule under TCGA 1992, Taxation of Chargeable Gains Act 1992 section 17 subsec-or-para 1s. 17(1) did not apply since the options were not acquired or disposed by the taxpayers in recognition of a person's service with a company. Instead, they were acquired or disposed for the purposes of the scheme. As a result, the condition in TCGA 1992, Taxation of Chargeable Gains Act 1992 section 144ZA subsec-or-para 1s. 144ZA(1)(b) was not satisfied. Therefore, for capital gains tax ("CGT") purposes, the cost to each taxpayer of acquiring the shares was the exercise price of the option.
The Tribunal decided that TCGA 1992, Taxation of Chargeable Gains Act 1992 section 144ZBs. 144ZB applied since the option was not a securities option. The Income Tax (Earnings and Pensions) Act 2003 ("ITEPA 2003"), Income Tax (Earnings and Pensions) Act 2003 part 7 chapter 5Pt. 7, Ch. 5 did not apply since the opportunity to acquire the option was not available by reason of the employment of a person within the meaning of ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 471s. 471.
The Tribunal also decided that as TCGA 1992, Taxation of Chargeable Gains Act 1992 section 149AAs. 149AA related specifically to employment-related restricted or convertible securities, it would take precedence over the effect of the application of Taxation of Chargeable Gains Act 1992 section 144ZBs. 144ZB. However, the requirement in the deed poll for the holder to request the conversion entitlement before it was formally granted did not satisfy the words "if circumstances arise" within the meaning of ITEPA, Income Tax (Earnings and Pensions) Act 2003 section 436s. 436(b). Therefore, the securities were not convertible securities within the meaning of TCGA 1992, Taxation of Chargeable Gains Act 1992 section 149AAs. 149AA. As a result, the consideration for the acquisition of those shares in each case was not equal to the actual amount given for them.
Lastly, the Tribunal decided that the Income and Corporation Taxes Act 1988 ("ICTA 1988"), Income and Corporation Taxes Act 1988 section 574s. 574 applied to make any capital loss of the taxpayers available against their income. The company from whom the taxpayers acquired shares was a "qualifying trading company". No substantial part of the activities of the business of that company and its subsidiary, "taken together" and "regarded as one business", would consist in activities carried on otherwise than in the course of trade. Furthermore, the sales of the shares were by bargains at arm's length since the purchasers were likely to have acted in their own interests and the sellers knew that the shares they were practically and comparatively worthless.
The taxpayers ("Mr M", "Mr P", and "Mr L") appealed against HMRC's closure notices amending their returns for the year ending 5 April 2006. HMRC viewed that no loss accrued on the taxpayers' sale of the shares in a company ("SHL") and that if a capital loss arose, ICTA 1988, Income and Corporation Taxes Act 1988 section 574s. 574 did not transmute it into an income loss.
The taxpayers were participants in a scheme to create losses offsetable against taxable income. The scheme was organised by a consultancy firm. The firm collected together batches of individuals, who wished to use the scheme, and ran a "round" of the scheme for each batch. The taxpayers were participants in the first two rounds of the scheme.
On 14 March 2006, a company ("SHL") was incorporated. On 16 March 2006, it acquired the shares in another company ("Bathrooms"). Thereafter, SHL was in a position to be the parent company of a trading group so that capital losses on disposals of its shares might fall within ICTA 1988, Income and Corporation Taxes Act 1988 section 574s. 574.
In round one of the scheme, SHL granted three options to another company ("Plumbing"), each to subscribe for 10,000 B shares in SHL. Plumbing offered the options to its shareholder ("Mr J"), but Mr J directed the assignment to Mr M. Mr M exercised the option and paid some £6m. A few days later, he sold the shares for £552.
The same steps were followed in relation to round two, but with an additional tweak. On the same day as the shares were acquired by Mr P and Mr L in SHL, the shares were made the subject of a deed poll executed by SHL. Mr P and Mr L, too, sold their shares shortly after acquisition for an almost negligible amount and claimed capital losses of just less than the subscription amounts.
The magic of the scheme was to ensure that in the round, Mr M did not make the kind of economic loss which one would normally associate with acquiring shares for £6m and disposing of them for £552. After the pre-planned steps of the scheme had taken place, Mr M owed his subscription price for the SHL shares to a discretionary trust. He was the principal beneficiary of the trust whose assets consisted mainly of that debt. Thus, the principle economic effect of the scheme for Mr M was to leave him as the beneficiary of a trust to which he owed £6m.
The taxpayers contended that TCGA 1992, Taxation of Chargeable Gains Act 1992 section 144ZAs. 144ZA applied to their exercise of the option. For CGT purposes, the cost to the taxpayers of acquiring the B shares was the exercise price of the option. The result was unaffected by TCGA 1992, Taxation of Chargeable Gains Act 1992 section 144ZBs. 144ZB. That section did not apply by reason of TCGA 1992, Taxation of Chargeable Gains Act 1992 section 144ZB subsec-or-para 2s. 144ZB(2)(a) since each of the option was a "securities option" and one to which ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 part 7 chapter 5Pt. 7, Ch. 5 applied. Alternatively, in relation to round two, the B shares acquired by Mr P and Mr L were both "employment related securities" as defined in ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 421B subsec-or-para 1 section 421B subsec-or-para 3 section 421B subsec-or-para 8s. 421B(1), (3) and (8) and for the purposes of TCGA 1992, Taxation of Chargeable Gains Act 1992 section 149AA subsec-or-para 1s. 149AA(1). The shares were "convertible securities" as defined in ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 436s. 436 and for the purposes of TCGA 1992, Taxation of Chargeable Gains Act 1992 section 149AA subsec-or-para 1s. 149AA(1). Accordingly, the consideration for the acquisition of those shares in each case was taken to be equal to the actual amount given for them. Consequently, each taxpayer suffered an allowable loss for CGT purposes on disposing of the B shares that he had previously acquired on exercising his option. Since SHL was a "qualifying trading company" for the purposes of ICTA 1988, Income and Corporation Taxes Act 1988 section 574s. 574, each taxpayer could set the allowable loss against his taxable income.
(2) Whether TCGA 1992, Taxation of Chargeable Gains Act 1992 section 144ZAs. 144ZA applied so that the CGT base cost of the SHL shares, acquired on the exercise of an option, would be the exercise price of the option.
(3) Whether the options were available by reason of employment within ITEPA 2003, Income Tax (Earnings and Pensions) Act 2003 section 471s. 471 so that TCGA 1992, Taxation of Chargeable Gains Act 1992 section 144ZBs. 144ZB did not apply.
(4) Whether the B shares acquired by Mr P and Mr L were convertible securities within TCGA 1992, Taxation of Chargeable Gains Act 1992 section 149AA subsec-or-para 1s. 149AA(1)(b).
(5) Whether ICTA 1988, Income and Corporation Taxes Act 1988 section 574s. 574 applied to make any capital loss available against income.
Held, dismissing the taxpayer's appeal:
On the first issue, the Tribunal held that under TCGA 1992, Taxation of Chargeable Gains Act 1992 section 144ZAs. 144ZA, the CGT base cost of the shares acquired on the exercise of an option was the exercise price of the option. That section applied only if one of the transactions in TCGA 1992, Taxation of Chargeable Gains Act 1992 section 144ZA subsec-or-para 1s. 144ZA(1)(b) was subject to TCGA 1992, Taxation of Chargeable Gains Act 1992 section 17s. 17 ("the market value rule").
TCGA 1992, Taxation of Chargeable Gains Act 1992 section 17 subsec-or-para 1s. 17(1)(a)...
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