Cyclops Electronics Ltd and Graceland Fixing Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judge | Mr Justice Marcus Smith,Judge Herrington |
| Neutral Citation | [2018] UKUT 0007 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
| Subject Matter | Tax,17 January 2018 |
| Date | 17 January 2018 |
| Published date | 17 January 2018 |
[2018] UKUT 0007 (TCC)
Appeal number:UT/2016/0193
UT/2017/0195
INCOME TAX, NATIONAL INSURANCE CONTRIBUTIONS – award of bonuses
in the form of loan notes – whether those loan notes were restricted securities for
the purposes of Part 7 ITEPA – whether employees to be treated as receiving cash
UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
CYCLOPS ELECTRONICS LIMITED
GRACELAND FIXING LIMITED
Appellants
- and -
THE COMMISSIONERS FOR HER
MAJESTY’S REVENUE AND CUSTOMS
Respondents
TRIBUNAL:
The Honourable Mr. Justice Marcus Smith
Judge Timothy Herrington
Sitting in public at The Rolls Building, Fetter Lane, London EC4A 1NL on 10
and 11 December 2017
Michael Sherry, instructed by Charterhouse (Accountants) Limited,
accountants, for the First Appellant and by Haines Watts Farnborough LLP,
accountants, for the second Appellant
Malcolm Gammie, Q.C. and Laura Poots, instructed by the General Counsel and
Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2018
2
DECISION
Introduction
1. This is a decision relating to two appeals, heard together, from the decision (the
“Decision”) of the First-Tier Tribunal (Tax Chamber) (Judge Jonathan Richards) (the 5 “FTT”) released on 12 July 2016, by which the FTT decided that the acquisition of
certain loan notes (the “Loan Notes”) by various employees (the “Employees”) of the
two appellants (who we will refer to individually as “Cyclops” and “Graceland”; and
together as the “Appellants”) gave rise to obligations on the part of the Appellants to
account for national insurance contributions (“NICs”) and to pay income tax under the 10 PAYE system.
2. Before the FTT, these appeals were lead cases under the FTT’s Rule 18
procedure, with more than one hundred appeals designated as related cases which
remain stayed before the FTT.
3. In essence, the question to be determined on these appeals is whether, because 15 of the existence of a forfeiture provision in the terms of the Loan Notes, the Loan
Notes were “restricted securities” for the purposes of Part 7 of the Income Tax
(Earnings and Pensions) Act 2003 (“ITEPA”). If, as the Appellants contend, the Loan
Notes were restricted securities, then by virtue of section 425 ITEPA (and
corresponding provisions in the NIC legislation) there was no income tax or NIC 20 payable upon acquisition by the Employees of the Loan Notes. The Loan Notes at
issue in Graceland’s appeal were redeemed in tax year 2004-05 and Graceland
contends that the detailed operation of Part 7 ITEPA means that there was no income
tax (or NIC) payable on this redemption.
4. HMRC contend that because, inter alia, there was no business purpose for the 25 inclusion of the forfeiture provision in the Loan Notes’ terms, the effect of the
judgment of the Supreme Court in two appeals, UBS AG v HMRC and Deutsche Bank
Group Services (UK) Ltd v HMRC [2016] UKSC 13, [2016] STC 934 (the “UBS
decision”) is that the Loan Notes were not restricted securities and that the acquisition
of the Loan Notes by the employees should be treated for PAYE and NIC purposes in 30 the same way as a payment of cash equal to the principal amount of the Loan Notes.
Without prejudice to those contentions, HMRC also contend that, as a result of the
Supreme Court’s judgment in RFC 2012 plc (in liquidation) (formerly Rangers
Football club plc) v Advocate General for Scotland [2017] STC 1556 (the “Rangers
decision”), a case which was published after the Decision, Cyclops and Graceland’s 35 respective subscriptions for cash of the Loan Notes prior to their acquisition by the
Employees was the first of a pre-ordained set of steps to deliver cash which
represented payment of the Employees’ money earnings. HMRC contended that the
effect of the Rangers decision was that the Employees were to be taxed on those sums
on the basis that they were money earnings. 40
5. In relation to Graceland’s appeal, HMRC contend that even if the Loan Notes
were restricted securities, Part 7 ITEPA did not operate in the way contended for by
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