First-tier Tribunal (Tax)

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Cite as: [2013] UKFTT 349 (TC)

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Michael Phair v Revenue & Customs [2013] UKFTT 349 (TC) (17 June 2013)
INCOME TAX/CORPORATION TAX
Assessment/self-assessment

[2013] UKFTT 349 (TC)

TC02752

Appeal number: TC/2011/07080

INCOME TAX – self assessment return – appeal against closure notice with amendments – whether employment- related security option – yes - whether Income Tax (Earnings and Pensions) Act 2003 Part 7 Chapter 5 applies to employer’s scheme – yes - whether there was a deductible amount for consideration – no - appeal dismissed – Tribunal procedure - costs under complex track – no “opt out” received from representative- whether appellant potentially liable for HMRC’s costs – yes.

FIRST-TIER TRIBUNAL

TAX CHAMBER

	MICHAEL PHAIR	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S	Respondents
	REVENUE & CUSTOMS

TRIBUNAL:	JUDGE ALISON MCKENNA
	MICHAEL SHARP

Sitting in public at Bedford Square on 4 February 2013

The Appellant appeared in person

Richard Vallat of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

DECISION

Background

1. Mr Phair was a senior employee of Bear Stearns International Limited (“the Company”) in the United Kingdom from May 2000 to January 2004. His remuneration scheme included the allocation of units in the Company’s Capital Accumulation Plan (“CAP”).

2. In his self assessment return for the tax year 2004/5, Mr Phair’s receipts from the CAP were deducted from earnings on the basis that he was non-resident in the UK at the time of distribution. He subsequently reclaimed the PAYE which had been deducted by the Company in relation to the CAP distribution when it was made. HMRC opened an enquiry and issued a Closure Notice including an amendment of return, dated 25 November 2011. The total amount of tax due under the amended return was £1,578,307. However, taking into account the payments already made under PAYE, it required Mr Phair to pay an additional £813,113 for the tax year ended 5 April 2005.

3. The amended return was reviewed by HMRC at Mr Phair’s request but by letter dated 31 May 2011 the decision in the Closure Notice was upheld. Mr Phair then lodged a Notice of Appeal with the Tribunal on 17 August 2011. His appeal was thus out of time, but he explained the reason for his delay as that, at the relevant time, he was in Switzerland and his papers were at his representative’s office in London so he had to arrange to travel to London to gain access to them. HMRC raised no objection to this appeal proceeding out of time and the Tribunal gives permission for it to do so.

4. The Tribunal was asked by the parties to determine the proper tax treatment of Mr Phair’s receipts from the CAP and any deduction due from those receipts, by answering the questions identified as “the issues” by the parties. It was agreed by the parties that the Tribunal would not be asked to determine the precise quantum of tax payable.

5. On the Notice of Appeal form sent to the Tribunal, Mr Phair listed his “representative” for the purposes of rule 11 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the Rules”) as AG Tax Limited. We note that AG Tax Limited submitted the Notice of Appeal form to the Tribunal with a covering letter on headed paper. It requested acknowledgement of receipt, which the Tribunal duly sent to AG Tax Limited by letter dated 13 October 2011.

6. Mr Phair’s appeal was assigned to the “complex track” under rule 23 of the Rules in view of its complexity and financial value. An appellant whose case is assigned to the complex track may “opt out” of potential liability for HMRC’s costs by notifying the Tribunal that he wishes to do so under rule 10 (1) (c) (ii) of the Rules. The Tribunal’s file shows that Mr Phair was notified of the assignment of this appeal to the complex track and of the right to opt out of potential liability for costs in a letter sent to his nominated representative dated 13 October 2011. This was the same letter in which receipt of the appeal was acknowledged, as requested by AG Tax Limited. No response to that letter was received, although the Tribunal’s file shows that AG Tax Limited continued to correspond with the Tribunal on Mr Phair’s behalf about other matters preparatory to the appeal hearing. At the hearing, Mr Phair submitted that his representative had not received the letter and furthermore that they did not understand the significance of it and so could not have advised him about it in any event. HMRC submitted that the requirements under the Rules for an award of costs to the successful party in this appeal had been satisfied. We give our decision as to costs at paragraph 42 below.

7. At the hearing of the appeal, Mr Phair represented himself, although a representative of AG Tax Limited was in attendance at the hearing. Mr Phair was concerned to assure the Tribunal that he did not seek to avoid any tax lawfully due but merely to establish the proper tax treatment of the CAP distribution by obtaining the ruling of the Tribunal, which he would accept. We, in turn, accept his assurances and thank him for them.

8. We are grateful to both parties to the appeal for their clear written submissions sent in advance of the hearing and for their oral submissions at the hearing itself. We were provided with a bundle of documentary evidence by the Appellant and a bundle of statutory and other materials by HMRC.

The Facts

9. The parties helpfully agreed a statement of facts and issues to assist the Tribunal. The factual background to this appeal was not in dispute. The relevant facts are as follows.

10. Mr Phair was employed by the Company as a senior managing director in the UK from 3 May 2000 to 2 January 2004. Although the title “director” was used, his role did not fall within the legislative definition of the term. In October 2000 Mr Phair signed an election to receive part of his “guaranteed bonus” in the form of units in the CAP. On 29 September 2004 and 18 March 2005 he received distributions from the CAP.

11. Mr Phair was also employed by Bear Stearns International Holdings Limited outside the UK from 3 May 2000 to 2 January 2004, although he was UK resident, UK ordinarily resident, and non-UK domiciled from January 1988. He ceased UK tax residence permanently on 30 March 2004 and has been non-UK tax resident ever since.

12. Mr Phair’s terms and conditions of employment, as set out in his service agreement, comprised a £90,000 salary and guaranteed bonuses. The Company offered Mr Phair the opportunity to elect to participate in its CAP, which he did on 16 October 2000. This meant that his future bonuses would be paid in the form of CAP units credited to his Capital Accumulation Account and, following dates specified in the plan, a number of shares of common stock in Bear Stearns Companies Inc equal to the number of CAP units would be issued to him. Mr Phair elected for an extended payment deferral period of eight years.

13. On 2 April 2004 Mr Phair’s employment with the Company was terminated and he left the UK. The circumstances of his termination were such that he retained his rights to the CAP units. On 29 September 2004 and 18 March 2005 Mr Phair received CAP distributions in the form of shares. The Company operated PAYE in relation to those distributions.

14. Mr Phair filed his 2005 self assessment return showing the CAP distributions deducted from his earnings, on the basis that he was not resident in the UK at the time of the distribution. HMRC opened an enquiry which resulted in the closure notice and amendment to assessment currently under appeal.

The Evidence

15. The Tribunal considered carefully the documentary materials before us, and in particular Mr Phair’s Service Agreement and the four key documents relating to his participation in the CAP. These were:

(a) The Bear Stearns Companies Inc Capital Accumulation Plan for Senior Managing Directors, for Plan Years beginning on or after 1 July 1999 (tab G);

(b) The Terms and Conditions of CAP Unit Award Granted to Michael Phair under the Bear Stearns Companies Inc. Capital Accumulation Plan for Senior Managing Directors for the years 2000, 2001 and 2002 (tabs J, N and P);

(d) The covering letter for the Initial Plan Election Form (tab E).

The Issues

16. It was unclear to the Tribunal whether the parties were agreed that the CAP units were employment-related security options. Mr Phair’s Statement of Case made “no comment” on this issue but his skeleton argument referred us to his counsel’s opinion to the contrary and asked the Tribunal to confirm the position.

17. The parties specifically asked the Tribunal to determine the following issues:

(a) Does Part 7 Chapter 5 of Income Tax (Employment and Pensions) Act (“ITEPA”) apply to options granted before 2003?

(b) Does the Appellant’s receipt of CAP units rather than other forms of payment give rise to a deduction under s 480 ITEPA?

The Law

18. ITEPA 2003 Part 7 Chapter 5 (as amended) charges the amount of any gain realised where securities are acquired pursuant to a “securities option”. The relevant provisions are as follows.

19. Section 420(8) ITEPA defines a “securities option” as “a right to acquire securities”. Section 471 ITEPA applies chapter 5 to securities options available by reason of employment.

20. Section 477 (3) (a) provides that a “chargeable event” occurs, inter alia, when there is an acquisition of securities pursuant to the employment-related securities option and section 478 ITEPA provides that the “taxable amount” is “the amount of any gain realised less the total of any deductible amounts”.

21. Section 480 sets out the deductible amounts, including:

(2)(a) any consideration given for the acquisition of the employment-related securities option

(5)(a) any amount that constituted earnings from the employment under Chapter 1 of Part 3 (earnings) in respect of the acquisition of the employment –related securities option (other than an amount of exempt income)

22. Section 421A(3) ITEPA provides that the consideration referred to at s 480(2) (a) above does not include the performance of duties in connection with the employment.

23. Section 474(1) ITEPA exempts from the charge to tax employees who were non resident and not ordinarily resident at the time the option was awarded, but does not provide exemptions for employees who were resident when the option was awarded but no longer resident at the time the option was exercised. Section 476(1) ITEPA provides that in relation to an employment-related securities option, the taxable amount counts as employment income of the employee for the relevant tax year.

24. The predecessor to ITEPA was The Income and Corporation Taxes Act 1988. Section 135 as amended provided for the award of a share option to be tax free but for a charge on the gain realised on the exercise of the option.