[2010] UKFTT 533 (TC)

TC00787

 

Appeal number:TC/2009/14964

 

INCOME TAX – Whether an one-off award of restricted stock units was an inducement to enter into a  contract of employment and to perform services in the future or compensation for the loss of an asset unconnected with employment – the one-off award was an inducement to enter into a contract of employment – the one-off award on conversion to common stock was chargeable to income tax as earnings within the meaning of section 62(2) ITEPA 2003 from employment – Appeal dismissed.

 

 

FIRST-TIER TRIBUNAL

 

TAX

 

Mr BARRIE MACEY Appellant

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

 

 

TRIBUNAL: MICHAEL TILDESLEY OBE (TRIBUNAL JUDGE)

Sitting in public at 45 Bedford Square, London WC1 on 30 July 2010

 

The Appellant appeared in person

 

David Weissand, HM Inspector of Taxes, for HMRC

 

 

© CROWN COPYRIGHT 2010

DECISION

The Appeal

1.       The Appellant was appealing against HMRC’s amendment dated 8 June 2009 to his self assessment tax return for the year ended 5 April 2007. The amendment was that the amount assessable as employment income was increased by ₤156,734 resulting in a payment of tax in the sum of ₤224.78 rather than a repayment of ₤62,468.62. The reason for the amendment was that HMRC decided that a payment in respect of an award of restricted stock units constituted employment income within the meaning of section 62 of the Income (Earnings and Pensions) Act 2003 (ICTA).

2.       The issue for determination was whether the value of the award of restricted stocks units in Morgan Stanley Dean Witter (Morgan Stanley), their conversion to shares of Morgan Stanley common stock and their subsequent disposal gave rise to taxable employment income.

3.       The Appellant submitted that the award of restricted stock units represented compensation for the loss of a valuable asset unconnected with employment. HMRC, on the other hand, contended that the award was a Golden Hello, an inducement to enter into a contract of employment and to perform services in the future.

4.       At the hearing the Appellant indicated that he was not pursuing his alternative ground of Appeal that the award of restricted units was connected to the loss of his practising certificate as an accountant.

Background and Agreed Statement of Facts

5.       The Appellant was a partner in Ernst & Young, a firm of accountants, from 1981 to 30 June 2001. His income from the partnership was assessed under Schedule D and his share of any gains on partnership assets were assessed under the Capital Gains Tax provisions. The Appellant’s share of the partnership income for the year ended 30 June 2001 was ₤480,616.

6.       In 2000 the partners of Ernst & Young formed a company and transferred their management consultancy business to it in exchange for shares allocated to the partners. The transaction gave rise to capital gains tax on each partner.

7.       On 23 May 2000 the shares in the management consultancy business were disposed of to Cap Gemini in exchange for Cap Gemini ordinary shares. Each partner was allocated Cap Gemini shares in proportion to his ownership of the management consultancy company. The Appellant was awarded 5,192 shares. This transaction did not give rise to tax.

8.       The Cap Gemini shares were subject to forfeiture provisions. Thus if a partner left Ernst & Young after 24 May 2001 and before 24 May 2002, 50 per cent of the shares would be forfeited to Ernst & Young.

9.       In early 2001 the Head of International Tax for Morgan Stanley contacted the Appellant by telephone with a potential offer of employment. The Appellant responded to the effect that the potential remuneration associated with the job offer would not be sufficient to tempt him away from his established position at Ernst & Young. The Head of International Tax indicated that the Appellant’s assessment of the potential remuneration package on offer may not be correct, in which case the Appellant agreed to continue with the negotiations. The Appellant believed that there was no discussion of the specifics of the remuneration package during the initial contact.

10.    Shortly after the first contact, Morgan Stanley’s Head of International Tax visited the United Kingdom when the Appellant had a meeting with him at which they discussed the Appellant’s current remuneration with Ernst & Young. After which they had a telephone call during which a figure for the proposed remuneration was mentioned which was acceptable to the Appellant.

11.    During the negotiations with Morgan Stanley the Appellant raised the matter of the potential loss to him arising from the forfeiture of the Cap Gemini shares on departure from Ernst & Young. In his letter dated 27 April 2008 to Mr Barnes of HMRC’s Complex Personal Return Team the Appellant stated that

“In any event it was I who raised the forfeiture of the Cap Gemini shares and indicated that I could not consider a move unless I could be compensated for the value I would be given up.

12.    A draft offer of employment of Managing Director – Head of European Tax from Morgan Stanley to the Appellant was made in writing dated 22 March 2001. The draft offer set out the terms of the remuneration package which specified a total reward of ₤550,000 for the 2001 fiscal year. The total reward was inclusive of earnings from Ernst & Young for the period 1 December 2000 to the date of the departure. An award of Morgan Stanley restricted units and or stock options[1] formed part of the total reward. In addition to the total award the Appellant received the following benefits:

1)     Participation in Morgan Stanley’s profit sharing plan on the first day of the month following completion of one year service.

2)     Morgan Stanley’s United Kingdom Group Pension Plan from date of hire.

3)     Membership of Morgan Stanley’s Life Assurance, Personal Accident and Disability Plan and the Medical Plan.

4)     Annual leave of 30 days in each calendar year.

13.    The formal offer of employment was made on 12 April 2001 which included an additional element under the heading of compensation. The letter stated that

“In addition, the Firm will make you a one-time award of Morgan Stanley restricted stock units.

The value of your Morgan Stanley restricted stock units will be determined on your date of hire based on the closing price of Cap Gemini common stock on that date. The number of Morgan Stanley restricted stock units you will receive corresponding to this value will be determined using the closing price of Morgan Stanley common stock on your hire date.

Subject to satisfactory and continued employment, your stock units will vest and convert to shares according to the following schedule: all units will vest on the two year anniversary from your date of hire; and these units will convert to shares and most sales restrictions will lift from the shares on or as soon as practicable after the second year anniversary from your date of hire.

The award is intended to offset the Cap Gemini Stock award you forfeit and is contingent upon confirmation of such previous award. If you have not done so already please provide documentation of your forfeited award as we cannot grant your award until we receive satisfactory documentation”.

14.    This one-off award of restricted stock units was the subject of this Appeal.

15.    The additional award of restricted stock units was designated as new hire stock units. The additional award was subject to the same conditions as those applying to normal compensation restricted stock units. Thus the additional award would vest after two years and convert into common stock. There was no right to sell, transfer or pledge the restricted stock units and would be forfeited if the Appellant terminated his employment with Morgan Stanley before 1 July 2003, subject to good leaver provisions. As with normal restricted stock units dividend equivalent payments would be made each time Morgan Stanley paid a dividend on its common stock. The additional award did not incorporate cash or stock option elements. Further there was no adjustment made for any tax that might arise on the additional award.

16.    On 30 June 2001 the Appellant resigned as a partner in Ernst & Young and transferred 50 per cent of his shares in the Cap Gemini to the partnership under the forfeiture provisions. The transfer was a deemed disposal to connected parties with the result that tax was assessed on the market value of the disposal.

17.     The Appellant joined Morgan Stanley on 1 July 2001 and given the additional award of 4,526 restricted stock units. The value of the restricted stock units was $259,340 which was the value of the forfeited Cap Gemini shares at that date.

18.    The term sheet for the restricted stock unit award stated that the scheduled conversation date was 1 July 2006 rather than 1 July 2003 which was stated in the offer of employment.  The Appellant produced a letter dated 28 July 2010 from Andrew Trapnell of Morgan Stanley[2] who confirmed that there was an error with the scheduled conversation date in the term sheet:

“Further to our recent discussions I can confirm that it is generally Morgan Stanley policy when compensating new joiners for the loss of rights or assets to attempt to match the conditions attaching to the original right or asset to the extent possible within the constraints of the available Morgan Stanley arrangements.

I can also confirm that it is clear that the award certificate in respect of the stock unit award to compensate you for the forfeiture of your Cap Gemini shares was incorrect and your offer letter states the correct position.

Whilst it is unfortunate that this caused the conversion into Morgan Stanley stock to be delayed there was no direct loss to you as the stock price increased over the extended period. However, it was clearly an error and I apologise for any inconvenience caused”.

19.    Despite the error, the date in the term sheet determined when the restricted stock units were converted into common stock which took place in July 2006.

20.    The value of the restricted stock units was not reflected in the Appellant’s compensation summary statements[3] for years subsequent to 2001.  The Appellant received total compensation of ₤550,000 for 2002,   ₤605,000 for 2003 and ₤662,000 for 2004.

21.    The restricted stock units converted into common stock on 1 July 2006, and the conversion was assessed to PAYE in accordance with Morgan Stanley’s usual practice.

22.    The parties agreed that if the additional award of restricted stock units gave rise to income tax, the amount assessable would be based on the value of Morgan Stanley common stock acquired on conversion in the tax year that the conversion took place.

The Law

23.    Section 6(1) ITEPA 2003 provides that for the purposes of income tax, the charge to tax on employment income is a charge to tax on general earnings and specific employment income. Section 7 ITEPA 2003 defines employment income and general earnings as earnings within Part 3 Chapter 1 ITEPA 2003. 

24.    For the purposes of Part 3 Chapter 1 ITEPA 2003 section 62(2) provides that earnings in relation to an employment means:

a)     Any salary, wages or fee;

b)     Any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth, or

c)     Anything else that constitutes an emolument of the employment.

25.    Section 9(2) ITEPA provides that in the case of general earnings, the amount charged to tax is the net taxable earnings from an employment in the year.

26.    The legal question posed by this Appeal is whether the additional award of restricted stock units constituted earnings within the meaning of section 62(2) ITPA from the Appellant’s employment with Morgan Stanley.

27.    The significance of the words from employment has received considerable judicial attention. Lord Radcliffe, however, observed in Hochstrasser v Mayes [1960] 38 TC 673 at 708 that there have been several explanations for the words from employment but the explanations were no substitute for the statutory words:

“The test to be applied is the same for all. It is contained in the statutory requirement that the payment, if it is to be the subject of assessment, must arise "from" the office or employment. In the past several explanations have been offered by Judges of eminence as to the significance of the word "from" in this context. It has been said that the payment must have been made to the employee "as such". It has been said that it must have been made to him "in his capacity of employee". It has been said that it is assessable if paid "by way of remuneration for his services", and said further that this is what is meant by payment to him "as such". These are all glosses and they are all of value as illustrating the idea which is expressed by the words of the Statute. But it is perhaps worth observing that they do not displace those words. For my part I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee”.

28.    Lord Templeman in Shilton v Wilmshurst (HM Inspector of Taxes) [1991] STC 88 at 91 highlighted that an emolument from employment means an emolument from being or becoming an employee which includes an emolument paid as an inducement to enter into a contract of employment and to perform services in the future.

“I sympathise with the conclusion which absolves the taxpayer from part of the tax claimed by the Revenue but if that conclusion is to be upheld it must be consistent with the logical construction and application of the taxing statute. Section 181 is not confined to 'emoluments from the employer' but embraces all 'emoluments from employment'; the section must therefore comprehend an emolument provided by a third party, a person who is not the employer. Section 181 is not limited to emoluments provided in the course of employment; the section must therefore apply first to an emolument which is paid as a reward for past services and as an inducement to continue to perform services and, second, to an emolument which is paid as an inducement to enter into a contract of employment and to perform services in the future. The result is that an emolument 'from employment' means an emolument 'from being or becoming an employee'. The authorities are consistent with this analysis and are concerned to distinguish in each case between an emolument which is derived 'from being or becoming an employee' on the one hand, and an emolument which is attributable to something else on the other hand, for example, to a desire on the part of the provider of the emolument to relieve distress or to provide assistance to a home buyer. If an emolument is not paid as a reward for past services or as an inducement to enter into employment and provide future services but is paid for some other reason, then the emolument is not received 'from the employment”.

29.    Lord Templeman’s analysis in Shilton encapsulated the dispute in this Appeal by his observation that the authorities were concerned to distinguish in each case between an emolument which was derived from being or becoming an employee on the one hand, and an emolument which was attributable to something-else. In this Appeal the Appellant asserted that the additional award of restricted stock units was attributable to something-else, namely, compensation for the loss of an asset independent of the employment. In contrast HMRC contended that the award was a Golden Hello or an inducement to take up employment with Morgan Stanley.

30.    The Appellant placed weight on specific aspects of Viscount Simonds’ judgment in Hochstrasser. He referred to Viscount Simonds’ pronouncements that the court should be concerned with the substance not the form of the payment when considering whether it was made from employment. Further the question should be addressed from the standpoint of the person receiving the payment.

“But I do not apologise for going back to the very words of the Statute and ignoring explanatory words like "as such", nor do I think it useful to examine whether an agreement under which payment is made is "collateral". The question is one of substance, not form. I accept, as I am bound to do, that the test of taxability is whether from the standpoint of the person who receives it the profit accrues to him by virtue of his office: see Reed v Seymour, 11 TC 625, and Herbert v McQuade, 4 TC 489”. (38 TC 673 at 707)

31.    The Appellant interpreted from the standpoint of the person as giving pre-eminence to the employee’s viewpoint on the status of the disputed payments. The Tribunal disagrees with the Appellant’s construction of from the standpoint of the person.  The origin of this phrase was the Court of Appeal decision in Herbert v McQuade 4 TC 489, which was concerned with the particular circumstances of  income received by Ministers of Religion. The specific issue concerned the taxable status of voluntary payments made to Ministers of Religion to supplement their stipend. Lord Hanworth MR in Reed v Seymour  11 TC 625 at 633 perhaps gave the best exposition of the principle established in Herbert v McQuade:

A number of cases have been decided upon these words and on the question of the chargeability of persons holding an employment of profit. The sums that are received in the course of that employment of profit of course vary very largely in their nature, but in the case of Herbert v McQuade ¹, [1902] 2 KB 631, Lord Collins, then Master of the Rolls, at page 649 laid down what is the test as to whether a payment falls to be charged or not. "Now that judgment," he says, "is certainly an affirmation of a principle of law that a payment may be liable to Income Tax although it is voluntary on the part of the persons who made it, and that the test is whether, from the standpoint of the person who receives it, it accrues to him in virtue of his office; if it does, it does not matter whether it was voluntary or whether it was compulsory on the part of the persons who paid it." The test, therefore, shortly put is: ‘Does the sum accrue to the subject in virtue of his office? If it does, it is taxable’.

That test has received very remarkable testimony of approval. It is approved in Cowan v Seymour ² by Lord Justice Atkin and the other members of the Court, and it also received approval from Lord Justice Cozens Hardy in Poynting v Faulkner ³, and, indeed, in no case that I know of has that test been in any way altered or varied, still less differed from.

On the other side it has been said in Poynting v Faulkner, in 5 Tax Cases at page 157, that in considering whether a person receives a sum in the course of or as one of the profits of the office or whether he receives it from his personal qualities only, it is fair to say that "the object is that the person who is fit to discharge properly the functions of a minister to a particular congregation should receive an adequate return for his services in that charge. There may be other balancing circumstances which would make the personal qualifications of the minister so predominant over considerations for the congregation that, in a particular case, if you had a series of facts pointing all that way, they might suffice to turn the balance in the direction of making it a purely personal gift to the minister, and not part of the stipend in return for the services to be rendered by him." I have quoted that passage on the other side because I think it may be added to the test laid down by Lord Collins. If, in fact, he does receive it while he is employed and in the course of his employment it would be chargeable unless there are considerations pointing in the direction of making it a purely personal gift and not part of the stipend in return for the services to be rendered by him. Perhaps lastly I may say that in these cases, as in all other Income Tax cases, one has to regard the substance of the matter. In the case before the House of Lords in Blakiston v Cooper ¹, Lord Loreburn used the word "substantial" and again applied the test - what you choose to call it matters little; the point is, what was it in reality? With those cases to guide me I approach the facts in the present case”.

32.    The Tribunal concludes from the judgment of Lord Harnworth MR that the phrase from the standpoint of the person was shorthand for the established test as articulated and developed by Lord Templeman in Shilton, namely, was the payment an emolument derived from being or becoming an employee or was it attributable to something-else. Lord Harnworth emphasised that the question regarding the taxable status of a payment was one of fact having regard to the reality of the disputed transaction which was echoed by Viscount Simonds in Hochstrasser with his reference to the substance rather than the form of the transaction.

33.    The Appellant also emphasised the importance placed by Viscount Simonds in Hochstrasser on the comparative salary levels as a significant fact for determining whether an emolument was derived from employment or not:

“There is nothing express or implicit in the agreement which suggests that the payment is a reward for services except the single fact of the relationship of the parties, and it is clear enough from the case of Duke of Westminster v Commissioners of Inland Revenue, 19 TC 490, that that fact alone will not justify such a conclusion. On the other hand, there is the significant fact that the salary earned by the employee compares favourably with salaries paid by other employers not operating a housing scheme, and is the same whether or not he takes advantage of the housing scheme. This at once suggests that there is some other reason for the payment for services rendered or to be rendered” (38 TC 673 at 707).

34.    The Appellant rightly identified features in the various authorities which were supportive of his case. In a similar vein Mr Weissand highlighted facts from other cases which bolstered HMRC’s submissions. The following observation of Lord Templeman in Shilton  was such an example [1991] STC 88 at 92:

“If the provider of the emolument is the employer who has an interest in the performance of the contract, the court may find difficulty in accepting that the emolument was not 'from the employment' but from something else. The difficulty is not so great where a person who is not the employer provides an emolument because such a person may well be activated by motives other than desire to see that the employee enters into or continues in the employment of another”.

35.    The parties referred the Tribunal to other authorities, Glantree Engineering Ltd v Goodhand [1982] BTC 396, Hamblett v Godfrey [1987] BTC 83, Hose v Warwick (1943-1947) 27 TC 459, Jarrold v Boustead (1961-1964) 41 TC 701, Pritchard v Arundale (1968-1972) 47 TC 680 and Vaughan-Neil v IR Commissioners (1979-1983) 54 TC 223. The Tribunal notes the various facts from the above authorities relied upon by the parties. The Tribunal, however, is of the view that the question of law in this Appeal was uncontroversial, straightforward and summed up in paragraph 29 above. Further the question was one of fact having regard to all the circumstances with no particular fact being decisive.  In this respect the Tribunal considers that Special Commissioner J Gordon Reid QC in Teward v IR Commissioners [2001] STC (SCD) 36 at 42 has provided a helpful summary of the principles derived from the authorities. The Tribunal adopts the following guidance set out in Teward:

 “Nevertheless, from these cases, and the other cases mentioned above, the following guidance may be extracted:

(1) In general, a payment is assessable if it has been paid to the employee for acting, being or becoming an employee (see Hochstrasser (Inspector of Taxes) v Mayes [1960] AC 376 at 391-392, 38 TC 673 at 707 and Shilton v Wilmshurst (Inspector of Taxes) [1991] STC 88 at 91, [1991] 1 AC 684 at 689-690). 

(2) The status of the payment and the context in which it was made are relevant considerations (see Wilcock (Inspector of Taxes) v Eve [1995] STC 18 at 25-26) as is the question whether the payment is directly or intimately connected with the employment, or something distinct therefrom (see Wilcock (Inspector of Taxes) v Eve [1995] STC 18 at 26-27). 

(3) It is possible to have almost an infinite variety of situations which, although they have common characteristics, as a matter of fact and degree fall on one side of the border or the other.  In each case, ultimately, it is a matter of applying the statutory language to the facts (see Mairs (Inspector of Taxes) v Haughey [1993] STC 569 at 578, [1994] 1 AC 303 at 320). 

(4) The nature or character of a payment made in lieu of a sum which might, subject to a contingency, have been payable will be affected by the nature of that sum which might otherwise have been paid (see Mairs (Inspector of Taxes) v Haughey [1993] STC 569 at 577, [1994] 1 AC 303 at 319, and Wilcock (Inspector of Taxes) v Eve [1995] STC 18 at 28)”.

The Evidence

36.    The Appellant was allocated 5,192 Cap Gemini ordinary shares in his capacity as a partner of Ernst & Young. He was required to forfeit 50 per cent of the shares to Ernst & Young when he left the partnership on 30 June 2001.

37.    Morgan Stanley approached the Appellant with a view to offering him an employed position as a Managing Director – Head of European Tax. At their first contact the Appellant doubted whether the financial offer from Morgan Stanley would be sufficiently attractive to induce him to leave his present position.

38.    The Appellant accepted that during the course of the negotiations with Morgan Stanley he raised the issue of compensation for the loss of his 50 per cent shareholding in Cap Gemini arising from giving up his partnership with Ernst & Young. In cross-examination the Appellant stated that he was not going to walk away from a substantial asset without asking.

39.    In his letter to Mr Barnes of HMRC dated 27 April 2008 the Appellant stated that he indicated to Morgan Stanley that he would not consider a move unless he could be compensated for the value of the 50 per cent shareholding in Cap Gemini. In cross-examination the Appellant described his statement to Mr Barnes as loose wording. He considered that the statement simply demonstrated that he was trying to achieve the best possible situation from the negotiations. The statement did not mean that he would have refused the position with Morgan Stanley if he did not secure compensation for the Cap Gemini shares. In the Appellant’s view the compensation for the shares was icing on the cake.

40.    Morgan Stanley’s offer of employment to the Appellant dated 12 April 2001 specified an actual total reward of ₤550,000 and a wide range of employee benefits (profit sharing plan, pension, medical plan, life assurance, and personal accident and disability plans). In addition the offer gave the Appellant a one-time award of restricted stock units in Morgan Stanley. 

41.    His new employer, Morgan Stanley, granted the one time award of restricted stock units, which was set out in the remuneration[4] section of the employment offer letter. The term sheet for the restricted stocks units was described as the new hire award, in which the units had the name of new hire stock. 

42.    The award of restricted stock units was not a like to like replacement for the forfeited Cap Gemini shares. The restricted stock units were notional shares that constituted an unsecured promise to pay one share of Morgan Stanley common stock. The award did not give an immediate right to payment. Further the award did not guarantee the value of the units on conversion which was dependent on the performance in the stock market. 

43.    The Appellant had no right to sell, transfer or pledge the stock units until conversion. The vesting and conversion of the units was subject to satisfactory and continued employment with Morgan Stanley until 1 July 2003.

44.    The Appellant accepted that the stock units were subject to vesting and conversion provisions. The Appellant, however, believed that the units were the best match with the conditions attaching to the Cap Gemini shares within the constraints of Morgan Stanley available arrangements. Further the award differed from a normal 2001 award in that it did not include a stock option element. Mr Teward in his letter dated 28 July 2010 referred in general to Morgan Stanley’s policy for compensating new joiners but did not go into detail about the policy constraints and the specifics of the one-off award to the Appellant.

45.    The Appellant pointed out that the letter of employment dated 12 April 2001 stated that the intention for the award of restricted stock units was to offset the value of the Cap Gemini shares forfeited. The value of the restricted stock units award was based on the closing price of Cap Gemini shares on the date of hire with Morgan Stanley.

46.    The Appellant received further awards of Morgan Stanley restricted stock units as part of his annual total reward and in respect of his service as an employee of Morgan Stanley. The Appellant accepted that these further awards potentially gave rise to a charge to tax as employment income.

47.    The Appellant stated that the award of restricted stock units to offset the Cap Gemini shares only appeared in the actual column of his compensation summary for 2001 and did not appear in subsequent compensation summaries.

48.    The Appellant asserted that he would have joined Morgan Stanley even if he had not been compensated for his loss of the Cap Gemini shares. The Appellant stated that he had nothing more to prove with Ernst & Young and that the opportunity with Morgan Stanley was a dream position which would represent the culmination of his career. In addition he was being offered a substantial increase in remuneration with the prospect of further increases and significant employee benefits which he had to provide for himself at Ernst & Young. As part of the employment offer the Appellant had secured guarantees regarding his first year income and that he would retain his deferred compensation if he left earlier.

49.    The Appellant pointed out that the total reward package offered by Morgan Stanley was at the top level of remuneration earned by tax specialists at the time. Moreover the difference between the reward offered by Morgan Stanley and his annual earnings from Ernst & Young meant after two years that it exceeded the potential monetary loss from the forfeiture of Cap Gemini shares. This applied without any increase on the total reward offered by Morgan Stanley on 12 April 2001.

50.    The Appellant stated that the forfeiture of the Cap Gemini shares constituted a deemed disposal with the result that the value of the forfeited shares had already been subject to tax. This meant that HMRC was in effect trying to recover tax twice on the value of the forfeited shares by its insistence that the award of the restricted stock units was taxable as employment income.

Consideration

51.    The issue is whether the one-off award of the restricted stocks units was an inducement to join Morgan Stanley and in recognition of future service as an employee or compensation for the surrender of a personal asset unconnected with his employment. The determination of this issue is a question of fact having regard to all the circumstances.

52.    The Appellant made a skilful presentation highlighting those aspects of the factual context which supported his case that the one-off award was for something-else unconnected with his employment with Morgan Stanley. The Appellant emphasised that his reward package excluding the one off award of stock units was at the top end of the remuneration scale for tax practitioners. The Appellant asserted that he would have taken the position even if Morgan Stanley had not compensated him for the loss occasioned by the forfeiture of the Cap Gemini shares. The Appellant relied on the documentary evidence which in his view demonstrated a clear link between the one-off award and the surrender of the Cap Gemini shares. The Appellant downplayed the conditions attached to the one-off award, saying that they were the best fit with the Cap Gemini shares within the constraints of the Morgan Stanley arrangements. The Appellant pointed out subtle differences between the conditions attached to the one-off award and those normally associated with the issue of restricted stock units by Morgan Stanley. The Appellant concluded that the facts proved that the one-off award was not an emolument from employment but compensation for the loss of an asset unconnected with his employment.

53.    Mr Weissand for HMRC made an equally skilful rebuttal of the Appellant’s case. He placed weight on those facts which showed that the one-off award was inextricably linked with becoming an employee with Morgan Stanley. Mr Weissand did not accept that there was a connection between the forfeiture of the Cap Gemini shares and the one-off award of the restricted stock units. Further he considered the fact that the Appellant has paid tax in connection with the creation and disposal of the Cap Gemini shareholding was irrelevant to the correct tax analysis of the award of the restricted stock units. Mr Weissand placed weight on those facts which stressed the employment character of the award. The award arose from the Appellant’s negotiations with Morgan Stanley over his eventual remuneration package. The restricted stock units were awarded by his new employer at nil cost. They were not a like for like replacement of the Appellant’s Cap Gemini shares being a conditional award dependent upon satisfactory and continuous employment until the date of their conversion.  Further at the time of vesting or conversion there was no guarantee that the one-off award would have any value. Mr Weissand  submitted that the conclusion must be that the one-off award was an inducement to join Morgan Stanley and in recognition of future service as an employee.

54.    The Tribunal task is assess the facts, attaching weight where appropriate, and have regard to all the circumstances rather than the partial views presented by the parties.

55.    The Tribunal is not convinced with the Appellant’s assertions that he would have taken the position with Morgan Stanley regardless of whether he was compensated for the loss of his Cap Gemini shares. The Tribunal considers that his assertions were the product of his reflections on being with Morgan Stanley for nine years in the knowledge that his job with the bank has proved to be a fulfilling experience.

56.    The Tribunal is concerned with the Appellant’s state of mind at the time of the job offer in 2001. In this respect the Tribunal places weight on the contents of his letter to Mr Barnes dated 27 April 2008. In that letter the Appellant recollected that he did not believe that the new position with Morgan Stanley would be able to provide sufficient remuneration to tempt him away from Ernst & Young. Further that he would not consider a move unless he received compensation for the value of the Cap Gemini shares given up. The Appellant sought to minimise the import of the letter by describing it as loose wording. His attempt was somewhat thwarted by  his explanation at the hearing that he was not going to walk away from a substantial asset value without asking and that the shares represented the icing on the cake.

57.    The Tribunal infers from the contents of the letter of 27 April 2008 that the potential remuneration package on offer was the uppermost consideration for the Appellant at the time he was contemplating a move to Morgan Stanley. Further the potential loss of the value of the forfeited Cap Gemini shares was being used as a bargaining tool as part and parcel of the remuneration negotiations. The Appellant adduced no evidence that the potential loss arising from the Cap Gemini shares constituted a separate line of negotiations from that about the reward package. The facts that he secured a reward and benefits package at the top end for tax specialists and that the increased reward excluding the stock units covered the loss from his Cap Gemini shares did not establish, as asserted by the Appellant, that there was some other reason for the one-off award. The Tribunal prefers the explanation that his success with the eventual remuneration package was due to the effectiveness of his negotiating skills in securing the best possible deal for himself.

58.     The Tribunal’s finding that the value of the forfeited Cap Gemini shares was a bargaining tool as part and parcel of the remuneration negotiations was not decisive in itself of the disputed issue. The finding still allowed the possibility that the one-off award operated as compensation for the loss of a valuable asset. In those circumstances it is necessary to consider the actions of the other party to the negotiations, Morgan Stanley, to complete the picture.

59.    The Tribunal finds that Morgan Stanley included the one-off award of the restricted stock units as part of the remuneration package for the new job in its letter offering employment. There was no separate correspondence dealing with the one-off award. Moreover the award did not entitle the Appellant to immediate payment. Instead Morgan Stanley made the vesting and conversion of the award into common stock conditional on satisfactory and continuous employment with the firm. The Tribunal considers these facts strongly indicate that the character of the award was one to do with the Appellant’s future employment with Morgan Stanley.

60.    The Tribunal was not convinced with the Appellant’s suggestion that it should effectively ignore the conditional nature of the award because it was the best fit with the forfeited Cap Gemini shares within the existing Morgan Stanley arrangements. There was no evidence from Morgan Stanley that it could not offer alternative arrangements. The statement of Mr Trapnell[5] was open to various interpretations and not conclusive that the one off award was the only possibility within the Morgan Stanley arrangements. The Tribunal gives weight to the description of  the award as a new hire stock unit award, which was the one normally given to new joiners and reinforced the connection of the one-off award with the Appellant’s future employment.

61.    The Appellant understandably emphasised the reference in the letter offering employment which linked the number of stock units to the closing price of Cap Gemini Stock and that the one-off award was intended to offset the loss of the Cap Gemini shares. The Tribunal agrees with Mr Weissand’s interpretation that this reference did not mean that the two sets of stock were connected in the sense portrayed by the Appellant. The one-off award was not a like for like replacement of the Cap Gemini shares. The conditions attaching to the two sets of stock awards were different. Critically the one-off award did not give the Appellant an immediate right to payment, and no guarantee of future payment. The Tribunal considers the right to payment of some kind without conditions would have been present in the arrangements if the one-off award was in reality compensation for loss of a valuable asset, as asserted by the Appellant. The absence of any guarantee of recompense with the restricted stock units was indicative that it had nothing to do with a standalone compensation award.  The Tribunal forms the view that the reference to the Cap Gemini shares was simply to fix the number of restricted stock units offered as part of the remuneration package and nothing more.

62.    The Tribunal does not consider that the payment of tax on the transfer and disposal of the Cap Gemini shares relevant to the disputed issue. The Appellant put forward no persuasive argument of the significance of the tax payment for the dispute. It appeared to the Tribunal, he was complaining about a perceived sense of unfairness.

63.    In summary the Tribunal finds that

1)     The value of the forfeited Cap Gemini shares was used by the Appellant as a bargaining tool and was part and parcel of his remuneration negotiations with Morgan Stanley.

2)     The Appellant’s new employers, Morgan Stanley awarded the restricted stock units to the Appellant as part of the remuneration package  for his new job.

3)     The one-off award of restricted stock units did not entitle the Appellant to immediate payment or a guarantee of future payment.

4)     The vesting and conversion of the one-off award into common stock were conditional on satisfactory and continuous employment with Morgan Stanley.

5)     The reference to the Cap Gemini shares in the employment offer letter was simply to fix the number of restricted stock units included in the remuneration package and nothing more.  .

 

64.    The Tribunal holds on the above findings that the one-off award of restricted stock units was granted as an inducement for the Appellant to enter into the contract of employment with Morgan Stanley and to perform services for Morgan Stanley in the future. The Tribunal is, therefore, satisfied that the one-off award of restricted stock units constituted earnings within the meaning of section 62(2) ITPA from the Appellant’s employment with Morgan Stanley which gave rise to a charge to income tax on conversion.

65.    The Tribunal dismisses the Appeal and upholds the amendment to the self-assessment return for 2006/2007.

66.    The Tribunal expresses its gratitude to the parties for their thoughtful presentations. The Tribunal apologises for the delay in the publication of the decision which was occasioned by illness.

67.    This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

 

 

 

 

 

 

MICHAEL TILDESLEY OBE

TRIBUNAL JUDGE

RELEASE DATE: 2 November 2010

 

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