The Commissioners for HM Revenue and Customs v John Charman
| Jurisdiction | UK Non-devolved |
| Judge | Mrs Justice Falk,Judge Scott |
| Neutral Citation | [2020] UKUT 0253 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
| Subject Matter | Tax,27 August 2020 |
| Date | 27 August 2020 |
| Published date | 25 September 2020 |
[2020] UKUT 0253 (TCC)
Appeal numbers: UT/2019/0047
UT/2019/0048
INCOME TAX – whether a right to acquire securities arose at time when
share option was granted or only when it vested – held when granted –
whether shares issued on share-for-share exchange were acquired “as a
director or employee” where original shares were so acquired – held yes
UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
JOHN CHARMAN
Appellant/Respondent
- and -
THE COMMISSIONERS FOR HER
MAJESTY’S
REVENUE AND CUSTOMS
Respondents/Appellants
TRIBUNAL:
MRS JUSTICE FALK
JUDGE THOMAS SCOTT
Sitting in public by way of video hearing treated as taking place in London on 10
June 2020
Nicola Shaw QC and Michael Jones, instructed by Withers LLP, for Mr
Charman
Akash Nawbatt QC and Sebastian Purnell, instructed by the General Counsel
and Solicitor to HM Revenue and Customs, for HMRC
© CROWN COPYRIGHT 2020
DECISION
1. HMRC and Mr Charman each appeal against the decision of the First-tier
Tribunal (the “FTT”) reported at [2018] UKFTT 765 (TC) (“the Decision”).
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2. The Decision determined a number of questions concerning Mr Charman’s
tax residence and his liability to UK taxation on salary, bonuses, restricted shares
and share options. With permission of the FTT, HMRC appeal against the FTT’s
decision as to when certain share options were granted, and Mr Charman appeals
against the FTT’s decision as to whether certain restricted shares were acquired
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as a director or employee.
Background
3. In summary, the facts relevant to this appeal are as follows:
(1) Mr Charman was born in the UK. He was employed in the UK until
2001, by which time he was a senior executive in the insurance industry.
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(2) In April 2001 Mr Charman began discussions with a US company,
MMC Capital Inc (“MMC”), about setting up a new insurance entity in
Bermuda. In late November 2001 the new entity, Axis Specialty Limited
(“Axis Specialty”), started trading, with Mr Charman as its president and
chief executive.
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(3) Mr Charman’s employment contract with Axis Specialty was dated 20
November 2001. A Share Purchase Option Agreement was appended to
his employment contract, under which Mr Charman was awarded options
over 253,139 Axis Specialty shares. The options were stated to vest in
three equal tranches, on the first, second and third anniversaries of 20
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November 2001.
(4) With effect from 19 September 2002, Mr Charman was awarded
50,000 restricted shares in Axis Specialty (the “Axis Specialty Restricted
Shares”). The shares were restricted, as discussed further below, until 19
September 2005.
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(5) As part of an initial public offering, on 31 December 2002, shares in
Axis Specialty were exchanged for shares in Axis Capital Holdings
Limited (“Axis Capital”). Under that exchange, Mr Charman and the other
shareholders in Axis Specialty exchanged their shares in Axis Specialty for
shares in Axis Capital. The shares received by Mr Charman were restricted
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(the “Axis Capital Restricted Shares”). Following the exchange Mr
Charman’s shares in Axis Specialty were cancelled.
(6) On 9 January 2003 Mr Charman signed a Notice of Stock Option
Grant, stated to be effective as of 1 October 2001. Under that document,
Mr Charman was awarded options over 253,139 Axis Specialty shares.
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The options were expressed to vest in three equal tranches on the first,
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second and third anniversaries of 1 October 2001. Although the options
were stated to be over shares in Axis Specialty, in fact as a result of
changes made to other documents in anticipation of the share-for-share
exchange they were over an equivalent number of shares in Axis Capital.
We discuss below the apparent duplication between the options granted in
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November 2001 and those granted with effect from October 2001 under
the Notice of Stock Option Grant, but it was common ground that Mr
Charman was not awarded options over two lots of shares.
(7) On 30 June 2003 there was a stock split in respect of Axis Capital
shares which increased the number of Mr Charman’s Restricted Shares to
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400,000, and the number of shares over which his share options were
exercisable to 2,025,112.
(8) The restrictions on Mr Charman’s Axis Capital Restricted Shares were
lifted on 19 September 2005, at which point they were worth about $11.5
million.
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(9) On 19 and 20 March 2008 Mr Charman exercised some of his share
options and sold the shares, realising in total approximately $53 million
(and a profit of around $33 million).
(10) HMRC issued various closure notices and discovery assessments.
Mr Charman appealed to the FTT against the notices and assessments,
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including on the ground that he was not resident in the UK at the relevant
times.
4. The FTT determined a number of issues. Those which are relevant to this
appeal were as follows:
(1) Mr Charman was UK resident until 21 November 2003, and as a result
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was chargeable to tax on salary, expenses and bonuses received before that
date.
(2) Mr Charman did not acquire a “securities option” for the purposes of
section 420(8) of Income Tax (Earnings and Pensions) Act 2003
(“ITEPA”) until each occasion when a tranche of the options vested. He
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did not acquire such a right when the options were granted in 2001. This
meant that he acquired a securities option when he was UK resident as
regards the first two tranches, but when he had ceased to be UK resident as
regards the third tranche.
(3) By virtue of section 476 ITEPA, Mr Charman was liable to UK tax
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when he exercised the options which vested under the first two tranches,
even though by then (in 2008) he was no longer UK resident. He was not
liable to UK tax on exercise of the options which vested under the third
tranche, as a result of section 474(1) ITEPA.
(4) Mr Charman acquired his interest in the Axis Capital Restricted Shares
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“as a director or employee” for the purposes of Chapter 2 of Part 7 ITEPA,
and he was accordingly chargeable to income tax under that chapter when
his interest in those shares ceased to be conditional.
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