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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Price & Ors v Revenue & Customs [2013] UKFTT 297 (TC) (30 April 2013) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2013/TC02703.html Cite as: [2013] UKFTT 297 (TC) |
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[2013] UKFTT 297 (TC)
TC02703
Appeal number: TC/2012/0946, 8686, 5795
CGT –artificial scheme to create allowable loss – non commercial exercise of options – ss17 and 144 TCGA; s144ZA – whether disapplied by s 144ZB – whether a “securities option” within Ch 5 Pt 7 ITEPA .
S 149AA TCGA- whether deed poll an arrangement for conversion of shares- whether employment related securities.
Ch 5 Pt 7 ITEPA: whether option acquired by reason of employment of another person; whether retrospective addition to s 420(8) has effect.
Income Tax – s 574 TA 88 – CGT loss available against income –whether qualifying trading company- whether sale of shares bargain at arm’s length.
FIRST-TIER TRIBUNAL
TAX CHAMBER
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(1) STEVEN PRICE (2) JOHN MYERS (3) JAMES LUCAS |
Appellants |
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- and - |
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THE COMMISSIONERS FOR HER MAJESTY’S |
Respondents |
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REVENUE & CUSTOMS |
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TRIBUNAL: |
JUDGE CHARLES HELLIER |
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SHAHWAR SADEQUE |
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Sitting in public at Bedford Square WC1B 3DN on 10, 11, 12 and 13 December 2012
David Ewart QC and Zizhen Yang instructed by NT Advisors Ltd for the Appellants
Timothy Brennan QC and Nicola Shaw QC instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2013
DECISION
2. The scheme was organised by NT Advisors. They collected together batches of individuals who wished to use the scheme, and ran a ‘round’ of the scheme for each batch. It was likely that 10 to 20 rounds took place. The appeals before us were by participants in the first two rounds of the scheme. Mr. Myers was one of the participants in Round 1, and, if the scheme works, made a loss of £6 million available to set against his other taxable income. Mr. Price and Mr. Lucas were two of the participants in Round 2, and, if the scheme works, made allowable losses of £300,000 and £1.5 million respectively.
3. The Round 1 scheme included the following steps. First, Mr. Myers had assigned to him an option to acquire shares in Stony Heating Ltd ("SHL"). He exercised the option and paid some £6 million. SHL issued the shares to him. A few days later he sold the shares for £552. It is said that the effect of the options provisions in sections 144 to 144ZD TCGA is that for CGT purposes his allowable expenditure available for deduction in computing his gain or loss on the disposal of the SHL shares (his “CGT base cost”) was £6 million and that therefore he made a capital loss of just under £6 million on their sale. Then it is said that, because SHL was a qualifying trading company, section 574 translates that capital loss into an income loss available for offset against other taxable income.
4. The same steps were followed in relation to Round 2. But with an additional tweak. On the same day as the shares were acquired in SHL they were made the subject of a deed poll executed by SHL which it is said made them “convertible securities” for the purposes of Chapter 3 of Part 7 ITEPA 2003, and thus subject to the regime in section 149AA TCGA. The application of section 149AA is said to have the effect that (even if sections 144 to 144ZD do not have the effect claimed for them in the preceding paragraph) the CGT base cost of the shares was the amount paid for them namely some £330,000 by Mr. Price and £1.5 million by Mr. Lucas. They too sold their shares shortly after acquisition for an almost negligible amount and claim capital losses of just less than the subscription amounts. These capital losses they say are translated into income losses by virtue of section 574 TA 88.
5. When considering the legislation in the following parts of this decision, we use as tokens the figures applicable to Mr Myers –the £6m and the £552 – but the discussion is applicable to the other two appellants.
6. The magic of the scheme was to ensure that, in the round, the participants did not make the kind of economic loss which one would normally associate with acquiring shares for £6m and disposing of the them for £552. After the preplanned steps of the scheme had taken place each participant owed his subscription price for the SHL shares (the £6m) to a discretionary trust of which he was the principal beneficiary, and whose assets consisted mainly of that debt. Thus the principle economic effect of the scheme for Mr Myers was to leave him as the beneficiary of a trust to which he owed £6m: and the effect of the scheme was a flow of £6m of value from his net assets into that trust. This was achieved with the help of a series of loans and share redemptions and subscriptions in which monies moved from Hambros Bank through the participating entities and back to Hambros.
(1) The appellants’ arguments in relation to the option provisions rely on section 144ZA TCGA applying. If it applies the CGT base cost of the SHL shares acquired on the exercise of an option will be the exercise price of the option (£6 million). But section 144ZA applies only if among other things the following conditions are satisfied:
(a) the option was a "securities option" within chapter 5 Part 7 ITEPA. It would be such if it was:
(x) provided to a person by reason of his or another’s employment (HMRC say it was not), and
(y) not subject to a retrospective anti-avoidance provision in Finance Act 2006 which came into force in relation to options acquired on or after 2 December 2004 (HMRC say it was). (The announcement that these retrospective clauses would be included in FA 2006 appears to have been the trigger for the additional convertible feature in Round 2); and
(b) the exercise price exceeded the value of the shares acquired.
(2) Section 574 translates a CGT loss into an income loss only if:
(a) SHL was a "qualifying company". That is dependent upon whether the activities of SHL and its subsidiaries taken as a whole were trading: HMRC say they were not because of the vast amounts of money moving around within SHL as part of the scheme; and
(b) the disposal of the shares was pursuant to a bargain at arms length for full consideration: HMRC say it was not.
(3) In relation to Round 2, the taxpayers’ argument for a loss depends also on section 149AA which provides that the CGT base cost of employee related convertible securities is the actual amount paid for them . Two issues arise:
(a) whether the SHL shares were convertible securities within section 149AA - the taxpayers arguing that they were because the deed poll declared them to be convertible into promissory notes;
(b) whether the provisions of section 149AA, if they apply, take precedence over the options provisions in sections 144 to 144ZD if those provisions have the effect for which HMRC contend.
Our Findings of Fact.
(1) £1 class A ordinary shares which were held by Mr. Forster (we did not see the memorandum and articles applying before 16 March, but presume that the shares issued to Mr Forster on 15 March became class A ordinary shares),
(2) £1 class B shares which could be issued for no less than £10,002 per share, had an entitlement to a set dividend of LIBOR plus 1%, and were redeemable at £1 per share at the option of the holder by notice given 12 months or more after their issue (if and when the company had sufficient surplus so to do); and
(3) 1p Preference shares which were redeemable at the option of the holder at £10,000 each. Once notice to redeem had been given the company was required to redeem the shares forthwith if it had sufficient funds in its share premium account, and, if not, to do so as soon as it had such funds.
17. It was the B shares which were the subject of the options and which, having been subscribed for some £6 million (in the case of Mr. Myers) were then sold for a comparatively negligible amount, creating the losses claimed by the scheme.
19. For Round 1 the following events took place:
(1) On 15 March 2006:
Mr. Myers established the John Myers life interest trust and appointed SG Hambros Trust Company (Channel Islands) as the trustee.. The trust was established under Jersey law and provided that Mr. Myers would be the principal beneficiary for his life. The trustees had power to appoint to other specified beneficiaries (mainly relatives) both during and after Mr. Myers’ life. The trustees had power to borrow.
(2) On 16 March 2006:
(a) By a call option agreement between SHL and Plumbing, SHL granted three options to Plumbing, each to subscribe for 10,000 B shares in SHL at variously £10,002, £10,200, and £10,020 per share. The SHL shares eventually acquired by Mr Myers were the subject of that one of those agreements which provided for an exercise price of £10,002 per share.
(b) NT Advisors wrote to Mark Jenner in relation to the options “that we understand you are to be offered by” Plumbing, and offering to pay him £300 for each assignment of options to one of their clients
(c) Plumbing offered the options to Mark Jenner. The offer was in the following terms: "The Board have ... decided ... to offer you the opportunity to acquire one of the Options .... This letter is, therefore, a formal offer to you in respect of that decision and is made by the Board because of your office with [Plumbing]..the assignment price will be £1.00 per option…you are permitted to assign any option to any person nominated by you. Any such person would have to enter into an agreement with us and also pay £1.00 per assignment.". The letter was signed by Mr. Forster.
(d) In Mark Jenner then replied on the same day to Plumbing saying "I would like to direct you such that the [options] be assigned (in part) to the individuals set out in the attached list ... I hereby confirm that I am directing the Board to make the assignments as detailed on the attached list ...".
(e) [Oddly, in view of (b) to (d), it appears that on the preceding day, 15 March, Plumbing had written (p647) to Mr Myers explaining that it had decided to offer Mark Jenner the options but he had decided that “he wishes you to receive the option rights…that we had originally assigned to him.”.]
(f) Mr Myers and Plumbing entered into an assignment agreement under which, in consideration for £1, Plumbing assigned to Mr Myers options over 600 shares derived from the option agreement Plumbing had made with SHL.
(g) Mr. Myers transferred £30,000 to the trustees of his life interest trust.
(h) A company called Europoint, whose shares were held on charitable trusts by SG Hambros Trust Company (Channel Islands) Limited, and which was the beneficial owner of all the shares in a company called Gioventura, subscribed £26.30 for 2,630 1p Preference shares in SHL.
(3) On 17 March 2006:
(a) Europoint gave notice to SHL to redeem its Preference shares requiring payment to be made to Hambros bank;
(b) SHL faxed Hambros requiring them to pay £26,300,000 to Europoint’s account with Hambros conditionally on the receipt into SHL’s account of the monies from Round 1 individuals subscribing for SHL shares;
(c) Hambros bank and Gioventura entered into a loan facility under which Hambros would lend £26,300,000 to Gioventura. The facility agreement required Europoint to guarantee the loan, and in particular to give a charge over ‘the Redeemable Preference Shares of [SHL] held by Europoint’;
(d) Europoint gave a guarantee to Hambros Bank of a loan facility for £26,300,000 between Hambros bank and Gioventura. Europoint's guarantee was secured over its Preference shares in SHL and the proceeds of redemption of those shares which were required to be paid to an account with Hambros but could be used to subscribe for additional shares in Europoint so long as paid into an account at Hambros charged to Hambros. (The loan to Gioventura by Hambros would indirectly provide the funds for the share subscription by the Round 1 participants. Those funds would enable the redemption of the Preference shares.)
(e) SG Hambros lent £26,300,000 to Gioventura under the facility;
(f) Gioventura lent £26,300,000 to the life interest trusts of the Round 1 participants including £6 million to Mr. Myers’ trustees. The loan agreement specified that the loan could be used to lend money to Mr Myers to acquire B shares in SHL. It provided that after Mr Myers had used the monies to subscribe for B shares in SHL, the interest on the loan would reduce to 0.001% pa payable on redemption, and that the loan would be repayable in 79 years time.
Thus Gioventura made what to our minds was a remarkably uncommercial loan – advancing £6m in the sure expectation that its only return would be something insignificantly over £6m in 79 years time. In other words advancing £6m for consideration worth, as was later agreed between the parties, £1,500.
This loan was the key to ensuring that the material economic affect of the transactions was that Mr Myers effectively settled an obligation to pay £6m on the trusts of his trust, for as soon as he used the money deriving from the loan to pay SHL the trustee’s obligation to repay Gioventura was almost wholly emasculated.
(g) Mr. Myers’ trustees lent £6 million to Mr. Myers;
(h) Mr. Myers gave notice to SHL to exercise the option assigned to him over shares in SHL, and paid £6,001,200 (=£10,002 x 600) to SHL for 600 B shares.
(i) SHL, on receipt of the combined subscription monies from the Round 1 participants, paid £26,300,000 to Europoint in redemption of the 2,630 preference shares Europoint had subscribed on the previous day;
(j) Europoint paid £26,300,000 to Gioventura in subscription for 2 shares in Gioventura;
(k) Gioventura repaid the £26,300,000 borrowed from SG Hambros; and
(l) the terms of the loan by Gioventura to Mr. Myers’ life interest trust became altered as a result of his subscription for the shares in SHL so that it was a repayable after 79 years with interest at the rate of 0.001% per annum.
(4) On 19 March 2006:
SHL issued 600 B shares to Mr. Myers.
(5) On 20 March 2006:
(a) Matthew Jenner, as attorney for Mr. Myer's issued to persons he thought might be interested invitations to tender for Mr Myer’s 600 B shares.
(b) As a result, on the same day the shares (for which Mr. Myers had paid £6,001,200 were sold to Scott Clark for £552 (9.2p per share).
(6) On 4 December 2006:
the trustees of Mr. Myers’ trust agreed with Gioventura that they would pay £1500 in settlement of the £6 million loan;
(7) On 5 December 2006:
the trustees of Mr. Myers trust waved £5,998,375 of the £6 million loan made to Mr. Myers.
(1) Mr Myers was entitled to 600 shares in SHL;
(2) Mr Myers owed £6,000,000 to his life interest trust;
(3) That trust owed £6,000,000 to Gioventura, on deferred low interest terms (soon to be converted into £1500);
(4) Europoint had 2 more shares in its subsidiary Gioventura;
(5) Europoint no longer had the Preference shares in SHL; and
(6) SHL had a few thousand pounds more.
21. All the money movements took place through accounts with SG Hambros.
22. The letters from Plumbing to Mr Jenner and Mr Myers are keen (in our view overly keen) to stress that the SHL options were being made available to Mr Jenner by reason of his employment.
Round 2 (Mr Price and Mr Lucas).
23. The steps in the Round 2 were similar to those in Round 1 save (1) that they involved different amounts of money, (2) that they took place on different dates – with the days between 29 March 2006 and 5 April 2006 corresponding to the days between 15 March and 20 March; (3) that, on the day before all the money moved, SHL executed a deed poll allowing the holders of the B shares to convert them into £1 promissory notes on certain terms; and (4) although both Mr. Price’s and Mr. Lucas’ trusts both settled the loans from Gioventura with a small payment, only Mr. Lucas's trust waved the loan it had made to him.
General findings.
29. The delegation to Mr Jenner and the escrow arrangements mean in our view that there can be attributed to the arrangement constituted by any particular document an understanding of the effects and course of the arrangement as a whole. Thus for example in making payment under the option Mr Myers should be treated as knowing and intending that the making of that payment would result in the redemption of the Preference shares, the transfer of the monies to Gioventura, and the virtual extinction of his trust’s liability under the loan from Gioventura.
Dr Masters
Mr. Forster
The participants
The tenders for the shares.
36. We make our findings of fact in relation to the tenders for the shares later in this decision.
The market value of the B shares acquired.
Loans by SHL to Bathrooms.
38. When the participants subscribed for the B shares in SHL they paid slightly more than the related amounts which SHL used to redeem the Preference shares held by Europoint. Thus Mr. Myers paid £6,001,200 and the related Europoint shares were redeemed for £6 million. This left SHL with a modest cash surplus. Taking all the Rounds of the scheme together these surpluses totalled some £57,800. The accounts of SHL show that these monies had been lent to Bathrooms. The related accounts of Bathrooms did not break down the figure therein for creditors, but the increase in creditors in the 12 months in which the transactions took place was not inconsistent with the loan of £57,800 having been made to it by SHL.
The results the schemes were intended to deliver.
41. The appellant contends as follows:
(1) Section 144ZA TCGA 1992 applies to the exercise of each appellant's option. Accordingly, for CGT purposes the cost to each appellant of acquiring the B shares was the exercise price, that is the amount of consideration which, under the terms of his option, was payable by him as a result of the exercise the option (sections 144ZA (2)(b), (4) and (4A) (b) TCGA 1992). The result is unaffected by section 144ZB. That section does not apply by reason of section 144ZB (2)(a) TCGA 1992 since each of the options was a "securities option" (as defined in section 420(8) ITEPA 2003) and one to which Chapter 5 Part 7 ITEPA 2003 applies (under section 471(1) and (3) ITEPA 2003).
(2) Further or alternatively, in relation to Round 2, the B shares acquired by each of Messrs Price and Lucas were both "employment related securities" (as defined in subsections 421B(1), (3) and (8) ITEPA 2003 and for the purposes of section 149AA(1) TCGA 1992) and were "convertible securities" (as defined in section 436 TA 2003 and for the purposes of section 149AA(1) TCGA 1992). Accordingly for CGT purposes the consideration for the acquisition of those shares in each case is taken to be equal to the actual amount given for them.
(3) Consequently each appellant suffered an allowable loss for CGT purposes on disposing of the B shares that he had previously acquired on exercising his option.
(4) Since SHL was a "qualifying trading company" (as defined in section 576 (4) TA 88) for the purposes of section 574 TA 88 each appellant can set the allowable loss against his taxable income.
Discussion
43. Mr Ewart cautioned us against too liberal an approach to the CGT options provisions. He said that they were a precise mechanical code like the insurance provisions in Mayes v HMRC [2011] STC 1269 and not open to broad purposive construction. They applied in non commercial and non arm’s length situations and their object was not to tax an economic gain but to prescribe a defined result.
Options and non arm’s length transactions
17 (1) Subject to the provisions of this Act, a person’s acquisition or disposal of an asset shall, for the purposes of this Act be deemed to be for a consideration equal to the market value of the asset-
(a) where he acquires or, as the case may be, disposes of the asset otherwise by way of a bargain made at arm’s length, and in particular…
(b) where he acquires or, as the case may be, disposes of the asset wholly or partly for a consideration which cannot be valued, or in connection with his own or another’s loss of office or employment or diminution in emoluments or otherwise in consideration for or recognition of his or another’s services or past services in any office or employment…
47. The relevant parts of sections 144 to 144ZA TCGA provide:
144 (1) Without prejudice to section 21, the grant of an option ... is the disposal of an asset (namely the option) but subject to the following provisions of this section as to treating the grant an option as part of a larger transaction.
...
(3)The exercise of an option by the person for the time being entitled to exercise it shall not constitute the disposal of an asset by that person, but, if an option is exercised, then the acquisition of the option (whether directly from the grantor or not) and the transaction entered into by the person exercising the option in exercise of his rights under the option shall be treated as a single transaction and accordingly -
(a) if the option binds the grantor to sell, the cost of acquiring the option shall be part of the cost of acquiring what is so, and ...
144ZA(1) Subject to section 144ZB, this section applies where --
(a) an option is exercised, so that by virtue of section 144(2) or (3) the grant or acquisition of the option and the transaction resulting from its exercise are treated as a single transaction, and
(b) section 17(1) ("the market value rule") applies, or would apply but for this section, in relation to
(i) the grant of the option,
(ii) the acquisition of the option (whether directly from the grantor or not) by the person exercising, or
(iii)the transaction resulting from its exercise.
(2) If the option binds the grant or to sell -
...
(b) The market value rule does not apply for determining the cost to the person exercising option of acquiring what is sold, except, where the rule applies for determining the costs of acquiring the option, to that extent (in accordance with section 144(3)(a)).
...
(4) To the extent that, by virtue of this section, the market value rule does not apply for determining an amount of value, the amount of value to be taken into account is (subject to section 119A [increase in expenditure by reference to tax charge in relation to employment related securities]) the exercise price.
(4A) In subsection (4) "exercise price", in relation to an option, means the amount or value of the consideration which, under the terms of the option is -
...
(b) payable (if the option binds the grantor to sell),
as a result of the exercise of the option (and does not include the amount or value of any consideration for the acquisition of the option (whether directly from the grant or not)).
50. Mansworth v Jelley [2003] STC 53 CA, (and in the High Court [2002] STC 1013), concerned the operation of the predecessors of section 17 and section 144 in the context of an option granted to an employee. At each stage it was held that the transaction to which section 17 should be applied was the grant of the option and its exercise taken as a whole, and that that transaction was not only not a bargain at arm’s length but also one by reason of employment. As a result the acquisition cost of the shares was to be treated as at market value at the time of exercise. It was to some extent in response to this decision that sections 144ZA to ZD were added to TCGA.
“The formula of words connotes more than a transaction: it connotes a transaction between two parties with separate and distinct interests who have each agreed terms (actually or inferentially) with a mind solely to his own respective interests.
(1) Bathrooms (Mr Forter’s business) received additional cash for lending its business to the scheme;
(2) Plumbing received a few pounds for executing a few documents which affected it very little;
(3) SHL received a surplus on each Round (£1,200 in relation to Mr Myers) from its participation;
(4) SHL’s director Dr Masters, obtained the ability to enable his clients to participate in the scheme;
(5) Hambros made arrangement fees in respect of each of the (very short term) loans it made;
(6) Gioventura made what on its own would be regarded as a non commercial loan to the trustees but did so in the sure expectation that it would receive an amount equivalent to the loan in the form of share subscriptions from Europoint, and, as a result of its participation, it benefitted from the few thousand pound which each set of trustees paid to settle outstanding liability on the loans it had made to them (£1,500 in Mr Myers’ case).
(7) Mr Mark Jenner received £300 for each direction he made;
(8) Europoint owned Gioventura. The participation of Europoint and Gioventura secured for Gioventura the benefit described above, and for Europoint the added value of its subsidiary;
(9) The trustees were entitled to remuneration as trustees;
(10) Each participant obtained in respect of his outlay (£6m), the benefit of the trusts of which he was a beneficiary, and, in return for the expense of the sums which ended up in the pockets of all the above, obtained the ability to present himself a having obtained an allowable loss.
57. Thus if one regards the whole scheme as a bargain, it was at arm’s length, and if one considers Mr Myers’ payment to SHL of £6m it too was at arm’s length having regard to the benefits that payment created, in particular the value in his trust.
58. There was no evidence that the other participants in the scheme were contractually bound to play their part, or that Mr Myers knew precisely when and what each of them would do. But it would be wholly unrealistic to regard the receipt of the benefit under the trust as not being part of the transaction under which he subscribed for the shares, or to regard him as simply laying out £6m for some practically worthless shares.
38(1) Except as otherwise expressly provided, the sums allowable as a deduction from the consideration in the computation of the gain accruing to a person on the disposal of an asset shall be restricted to-
(a) the amount or value of the consideration in money or money’s worth given by him or on his behalf wholly or exclusively for the acquisition of the asset, together with the incidental costs to him of the acquisition… .
61. The question is thus what amount was given “wholly and exclusively” for the SHL shares by the participants? In the “single transaction” to which section 144 requires attention Mr Myers paid £1 for the option and £6m odd when exercising the option, but he did so pursuant to a single scheme under which as a result of his payment he was to be a beneficiary of a trust endowed with assets available to benefit him (and his relatives) of £6m. It is not realistic in our view to regard him as paying £6m in the expectation or with the object that all he would get was the virtually worthless shares in SHL. In the context of the scheme he was not giving £6m wholly or exclusively for the SHL shares. The most that he could be said to be giving for them was their £600 redemption value; the rest of the £6,001,200 was given for the benefits arising under the trust and the fees of the other parties to the scheme in giving him the chance of claiming an allowable loss.
62. Mr Ewart says that in Barclays Mercantile Finance v Mawson [2005]AC 684 (“BMBF”) the House of Lords recognised that in determining whether expenditure had been “incurred on” equipment the question to be asked was whether that expenditure had been incurred to acquire the machinery or plant [39], not what had happened to the money paid. The object of section 38 (Mr Ewart made the same point in relation to 149AA) is to give a deduction for the amount the taxpayer gives to acquire the asset; what happens to the monies thereafter is not relevant. He says that in Tower MCashback LLP v HMRC [2011] AC 457 where a scheme operating in relation to equivalent statutory provisions was held not to have succeeded, the distinction made with BMBF was that although there had been a loan to the taxpayer “there was not in any meaningful sense an incurring of expenditure of the borrowed money in the acquisition…It went in a loop…the borrowed money did not go to [the taxpayer] even temporarily;”([from 75 and 77]). By contrast Mr Ewart says Messrs Myers, Price and Lucas did receive the money and did spend it.
63. It seems to us that whilst the analysis in BMBF indicates that £6m may not be treated as given for the redemption of the Preference Shares by SHL, it does not answer the question of whether in fact the £6m was given for something else as well as the shares. In BMBF there was no analogue of the competing benefit of the trust in this scheme. Whilst the money passed into, and out of, Mr Myers account, and he remained liable for borrowing incurred to be able to use that money, he cannot be said to have given it wholly and exclusively for those shares.
“ the amount of the consideration which under the terms of the option is-
…(b) payable
as a result of the exercise of the option”.
A Securities Option to which Chapter 5 applies.
71. Sections 144ZB -144ZC provide:
144ZB(1) This section applies where-
(a) section 144ZA would apply but for this section in relation to an option, and
(b) the exercise of the option is non commercial (see section 144ZC)
(2) But this section does not apply if-
(a) the option is a securities option within the meaning of Chapter 5 of Part 7 of ITEPA 2003 (see section 420(8) of that Act) to which that Chapter applies or would, apart from section 474 of that Act, apply (see section 471 of that Act), or…
(3) Where this section applies, neither section 144ZA nor the following provisions of this section 144 shall apply in relation to the option-
…and (b) in subsection (3), the words from “ and accordingly” to the end of that subsection;
but subsection (4) or (5) below shall instead have effect (subject to subsection (6) below).
…
(5) If the option binds the grantor to sell-
(a) the consideration for the sale, and
(b) the cost to the person exercising the option of acquiring what is sold,
shall be deemed for the purposes of tax in respect of chargeable gains to be the market value, at the time the option is exercised, of what is sold…
144ZC (1)…(2) For the purposes of section 144ZB, the exercise of an option which binds the grantor to sell is non-commercial if the exercise price for the option is greater than the open market price of what is sold.
(3) In this section “exercise price” [has the same meaning as in 144ZA(4A)]
(a) Section 471 ITEPA
75. Section 471 ITEPA 2003 provides:
471 (1) This Chapter applies to a securities option acquired by a person where the right or opportunity to acquire the securities option is available by reason of the employment that person or any other person.
(2) For the purposes of subsection (1) "employment" includes a former prospective employment.
(3) A right or opportunity to acquire a securities option made available by a person's employer, or a person connected with a person's employer, is to be regarded for the purposes of subsection (1) as available by reason of an employment of that person unless --
(a) the person by whom the right or opportunity is made available is an individual, and
(b) the right opportunity is made available in the normal course of the domestic family or personal relationships of that person…
(5) In this chapter --
"the acquisition", in relation to an employment related securities option means the acquisition of the employment-related securities option pursuant to the right or opportunity available by reason of the employment,
"employment" means the employment by reason of which the right or opportunity to acquire the employment-related securities option is available ("the employee" and "the employer" being construed accordingly) and
"employment related securities option" means a securities option to which this Chapter applies.
76. HMRC say that Mr Myers should not be treated as acquiring the option by reason of employment.
A Right or Opportunity Acquired by reason of employment.
78. Mr Ewart says that in this way subsection (3) concludes the issue. The opportunity to acquire the option became available by reason of Mark Jenner’s employment. My Myers acquired the options in circumstances where the right to acquire it became available by reason of its having been available to Mr Jenner, and therefore in circumstances in which it became available by reason of Mr Jenner’s employment.
81. We start by noting that Mr Myers never obtained a “right” to acquire the options. The most that can be said is that he was offered the opportunity to acquire them. There are however several possible descriptions of that opportunity:
(i) it was the opportunity which had been offered to Mr Jenner, (if in a closely timetabled operation such as this it can be said that there was first offered an opportunity to Mr Jenner which he had not already renounced, and we note in this regard the letter of 15 March from which it appears that Mr Jenner had decided to transmit the right before it was offered.);
(ii) it was the opportunity which Mr Jenner made available to Mr Myers, and aose by virtue of Mr Jenner’s direction;
(iii) it was the opportunity afforded to Mr Myers for the purposes of the scheme; being created by SHP and transmitted to him through the acts of Plumbing and Mr Jenner in pursuance of the scheme.
82. Ignoring for the moment the provisions of subsection (3), and taking subsection (1) on its own, the opportunity could only be said to have been available to Mr Myers by reason of employment if (i) is the proper description of it for the purposes of these provisions. But we do not believe it is a realistic view of the facts for those purposes; and, even if it were, it would not in our view be correct to say that the “reason” for that opportunity was Mr Jenner’s directorship; that directorship was a step in the scheme but not the reason for granting the opportunity. If you ask “why was the opportunity granted?” the answer is “for the scheme”, not because Mr Jenner was a director. The statements made in the letter from Plumbing cannot change that.
88. In this case we have rejected the description of Mr Myers’ opportunity as being the same as that available to Mr Jenner or the reason for that availability. None of the other possible descriptions of that opportunity permit the conclusion that it was available by reason of an employment.
(b) Section 420(8).
90. Section 420(8) ITEPA 2003 includes the following definition:
"securities option" means a right to acquire securities other than a right to acquire securities which is acquired pursuant to a right or opportunity made available under arrangements the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions ...
91. The italicised words were inserted by an amendment made by section 92 FA 2006 which provided: --
“(5) This section has effect in relation to options acquired on or after 2nd of December 2004; but subsection (4) also has effect in relation to an option acquired before that date where something is done on or after that date as part of the arrangements under which it was made available.".
93. HMRC said that the acquisition of the option to acquire the SHL shares was clearly part of an arrangement the main purpose of which was the avoidance of tax. There is no dispute that that was the main purpose. Thus they say the options are not securities options. That conclusion, by reason of section 92(5), they say applies both to Mr Myers and the other two appellants.
(1) the italicised words should be construed as not applying to the options since they do not fall within the mischief targeted by their insertion;
(2) applying the italicised provisions would cause unjustified interference with the appellants' property rights;
(3) legislation should not fit by accident; and
(4) that, in relation to the Round 1 option, the inserted provisions cannot apply retrospectively.
We consider these arguments in turn. The first three apply to all the appellants; the last only to Mr Myers. In our discussion of the first three issues below we do not consider the retrospectivity point.
95. (1) Construction by reference to the mischief addressed
98. We accept that such materials can be aids to construction, and that their use for that purpose is not dependent on some ambiguity; and also that, if there is found in Explanatory Notes a clear assurance by the executive to Parliament about the meaning of a clause, or the circumstances in which a power will not be used, that assurance may in principle be admitted against the executive (reflecting the decision in Pepper v Hart [1993] AC 593); although it is not permissible to treat the wishes and desires of the Government about the scope of the statutory language as reflecting the will of Parliament. The object is to see what is the intention expressed by the words enacted.
99. Mr Brennan says that if Mr Myers had intended to use the loss partly against his employment income then even Mr Ewart’s added words would not have saved him even though the scheme was not promulgated by his employer; if he used the loss partly against employment income and partly against, say, interest income would the words treat only part of the options as not being securities options? He says that the later parts of the CGT options code are intimately linked with the income tax code for options, and parliament must have intended the inserted provisions to apply for the purposes of that code too.
(2) Applying the italicised provisions would cause unjustified interference with the appellants' property rights.
“So far as it is possible to do so, primary legislation ... must be read and given effect in a way which is compatible with the Convention rights."
“80. According to the court’s well established case law, an interference, including one resulting from a measure to secure the payment of taxes, must strike a "fair balance" between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights. The concern to achieve this balance is reflected in the structure of Article 1 as a whole, including the second paragraph: there must therefore be a reasonable relationship of proportionality between the means employed and the aims pursued.”
(3) Legislation should not fit by accident.
106. Mr Ewart quotes Bennion on Statutory Interpretation (fifth edition) section 169:
“Where facts arise that were not forseen by Parliament, but which the words of the enactment accidentally fit, it may be necessary to depart from the literal meaning of the words in order to give effect to the imputed intention.”
(4) Retrospectivity: that, in relation to the Round 1 options, the inserted provisions cannot apply retrospectively.
108. In Secretary of State for Social Security v Tunnicliffe [1991] 2 All ER 712 at 724 Staughton LJ said:
“In my judgement the true principle is that Parliament is presumed not to have intended to alter the law applicable to past events and transactions in a manner which is unfair to those concerned in them, unless a contrary intention appears.”
109. Mr Ewart says that the inserted provisions bear unfairly on Mr Myers since the acquisition of the option fell outside the ambit of the warning given by the Paymaster General in 2004 that retrospective legislation would be introduced to counter avoidance of tax and NIC on employment income.
111. However there remains the question of whether the retrospective change was in contravention of Mr Myers’ Convention Rights.
112. In R(on the application of the Federation Tour Operators and others) v HM Treasury [2008] SDC 547 Burnton J said:
[104] Although a literal meaning [of article 1] would suggest that legislative provisions for the payment of taxes are outside the ambit of [the article], the jurisprudence of the European Court of Human Rights establishes they are not: they are subject to the rights of natural and legal persons concerned by the first paragraph. It follows that such laws must also satisfy the requirement of proportionality between legitimate aim and means … It is for the government to demonstrate that a measure that engages [the article] satisfies the requirement of proportionality …
[154] The hurdle for the claimants on [article 1] is very high. They must demonstrate that the decision to increase [Air Passenger Duty] with effect from October 2007 without any concession in relation to bookings made before the announcement of the increase was "devoid of any reasonable foundation". While that decision is open to criticism ... and with a retrospective effect, and it may have been adhered to under a mistaken view of the difficulties exempting tour operators existing bookings, it is impossible to conclude that the measure was devoid of reasonable foundation.
114. R(on the application of Huitson) v HMRC [2011] STC 1860 concerned a retrospective amendment of a double tax relief provision. The claimant had challenged the lawfulness of HMRC's enforcement of the amendment as being in violation of his rights under Article 1. The claimant had used a tax avoidance scheme which took advantage of a double tax agreement between the UK and the Isle of Man. The retrospective amendment of the double tax provision rendered the scheme ineffectual by depriving it of its potential tax advantages.
115. The Court of appeal summarised the judgment of Kenneth Parker J in the High Court:
[37] The crunch question was whether, on Convention principles, the retrospective effect of section 58 imposed an unreasonable burden on the claimant and thereby fails to strike a fair balance between the various interests involved ... the judge concluded that the challenged legislation, even though retrospective, did strike a fair balance: it was proportionate and compatible with [article 1].
Round 2: convertible securities
(a) Does section 149AA apply?
127. Section 149AA TCGA provides:
(1) Where an individual has acquired an asset consisting of employment related securities which are-
(b) convertible securities or an interest in convertible securities,
the consideration for the acquisition shall ( subject to section 119A [not relevant here]) be taken to be equal to the aggregate of the actual amount or value given for the employment related securities and [any amount taxed as earnings].
(4) In this section “employment related securities” has the same meaning as in Chapter 3 of [Part 7 ITEPA].
131. Section 436 ITEPA defines convertible securities for this purpose:
For the purpose of this Chapter securities are convertible securities if-
(a) they confer on the holder an entitlement (whether immediate or deferred and whether conditional or unconditional) to convert them into securities of a different description,
(b) a contract, agreement arrangement or condition authorises or requires the grant of such an entitlement to the holder if certain circumstances arise, or do not arise, or
(c) a contract, agreement arrangement or condition makes provision for the conversion of the securities (otherwise than by the holder) into securities of a different description.
133. So far as is relevant the Deed Poll executed on 3 April 2006 by SHL provided:
“ A Holder may request that he ... be granted the right to convert each and every of the Shares held by him into a one year promissory note ("the Note") having a face value equal to the par value of the relevant share (i.e. £1). This right is referred to as the "Conversion Entitlement". ...
"If the company receives such a request, the company hereby undertakes to grant the Conversion Entitlement within 30 days of receipt of the request. The Conversion Entitlement will be granted by way of a letter addressed to the Holder ... which letter will set out the details of the Conversion Entitlement, including the fact that the conversion will be contingent on the matters set out below. ...
"At any time after receiving the above-mentioned letter, the Holder ... may exercise the Conversion Entitlement by giving 30 days (exercise) notice to the Company in writing, subject to the paragraph below.
"As will be set out in the above-mentioned letter, the conversion of the Shares into Notes will be conditional on a majority (75%) of the holders (if any) of the Preference Shares ... consenting to the conversion during the 30 days exercise notice period".
(1) that the deed poll was not a contract, agreement or arrangement within section 436(b). It was a document made solely by SHL: SHL could not make an arrangement with itself;
(2) section 436(b) speaks of "the grant of ... an entitlement ... if certain circumstances arise"; by contrast they say that what SHL bound itself to grant was a contingent entitlement because the right to convert was contingent upon the consent of the 75% of the Preference Shareholders. They say that there is a difference between the contingent grant of an entitlement (potentially within section 436 (a)) and the grant of a contingent entitlement (not within section 436 (a));
(3) that a right conditional upon the consent of the preference shareholders, a right dependent upon someone else's whim, is not the type of condition with which (a) is concerned: what is required is an objective condition;
(4) that the B shares were redeemable at £1: the conversion right was illusory.
136. We address each of those arguments in the correspondingly numbered sections which follow.
(1) "Arrangement"
(2) Contingent entitlement or contingent grant
"a[n] arrangement… authorises or requires the grant of an entitlement (whether immediate or deferred and whether conditional or unconditional) to the holder if certain circumstances arise.
an entitlement (whether ... conditional or unconditional).
(3) A Condition
(4) An Illusory right
151. We conclude that the right was not wholly illusory.
Conclusion on section 436
(b) The Application of section 149AA
153. If we are wrong and the SHL B shares fell within section 436, the question arises as to what acquisition cost is specified by the section. If this section did apply the base cost of Mr Price’s and Mr Lucas’ SHL shares would be the actual amount or value “given for” the securities. Mr Brennan argued that this was not the analogue of Mr Myer’s £6,001,200, but realistically only £1,200: either because that would be the net amount left behind in SHL after the expected redemption of the Preference Shares, or because the £6m was in fact given for the benefit under the trust.
(c) Section 149AA or the option rules?
156. If the SHL shares were convertible securities within section 149AA that section would require the consideration for their acquisition to be equal to the actual amount of the consideration given for to those shares. If that amount is the amount actually paid by the participator to SHL (the analogue of Mr. Myers’ £6 million), then this may give a different result from that which applies under sections 144 to 144ZD. If that is the case which provision should prevail?
Transmutation into an income loss.
161. Section 574 TA 88 provides:
(1) where an individual who has subscribed for shares in a qualifying trading company incurs an allowable loss (for capital gains tax purposes) on the disposal of the shares of any year of assessment, he may, by notice given within 12 months from 31 January next following that year make a claim for income tax relief on --
(a) so much of his income for that year as is equal to the amount of the loss ...
(b) so much of his income to the last preceding year is equal to the amount ...
but relief shall not be given [twice]..
(3) For the purposes of this section -
(a)an individual subscribes to shares if they are issued to him by the company for consideration of money or money's worth ...
(1) Sections 573 and 574 not apply unless the disposal is -
by way of bargain made arm's-length for full consideration ...
163. As a result, in the context of this scheme, two conditions arise for consideration:
(1) was SHL a "qualifying trading company"; and
(2) was the disposal of the SHL shares pursuant to the tender arrangements a bargain made at arm's length for full consideration?
164. We consider these under the corresponding numbered headings below.
(1) A Qualifying Company
167. SHL would be the parent company of trading group if:
(1) Bathrooms was a "qualifying subsidiary. It is not disputed that it was; and
(2) if all the activities of the business of SHL and Bathrooms were "taken together" and "regarded as one business", no substantial part of it would consist in activities carried on otherwise than in the course of trade (section 293(3A)(c) and (3B)(b)).
170. Although the sums of money which passed through SHL were substantial, its activities in relation to it were not: it occupied little time or effort. Although a legal mind may be needed to understand the relevant documents considerable effort is also needed for selling plumbing supplies. The profit made by SHL (£1200 in the case of Mr. Myers) was not insubstantial by comparison with the annual profits of Bathrooms' business, but we accept that that profit was used for the purposes of that business on being lent to Bathrooms; we accept that making that profit was for the purposes of the trade even thought it accrued from participation on the scheme.
172. We conclude that SHL was a qualifying trading company.
(2) The Tender Mechanism: was the disposal of the SHL shares pursuant to the tender arrangements a bargain made at arm's length for full consideration?
Round 1 (Mr Myers)
174. In pursuit of these aims Mr Jenner gave advance warning to between 7 and 9 colleagues, acquaintances and friends that he would be inviting them to tender for some shares. On 20 March he sent them an Invitation to Tender Document which sought offers for Mr Myers’ SHL shares. The document explained the nature of the rights attaching to the shares and gave some detail of the financial situation of the company. It did not describe the dividend rights on the shares but indicated that interest earned on the money representing their nominal value would be sufficient to pay “interest” on them. The document set a deadline of 6pm on the same day, 20 March, for the submission of offers. Acceptance would be communicated by 9.30am on 21 March.
Round 2 (Messrs Lucas and Price)
179. Agreements were made with Tomas Wanless and Trevor Clark (Scott Clark’s father) for the sale of Mr Price’s and Mr Lucas’ shares at 92p per share.
Discussion
188. We conclude that the sales were by bargains at arms length
Summary
190. We find (using Mr Myers’ figures, and save as noted as appropriately modified for the other two appellants) :
(1) That the SHL shares were acquired in a bargain at arm’s length (paras 49-59). Section 144A does not apply. The acquisition cost was £600 (paras 60-63).
(2) But, if we are wrong, then section 144ZB applies because:
(a) The options were not available by reason of the employment of a person (paras 77-88);
(b) The options were not securities options within section 420(8) because of the words inserted into that provision by FA 2006 (paras 89-125).
(3) Thus subject to the effect of s 149AA in relation to the 2nd and 3rd appellants, the CGT loss which arose under the option provisions to Mr Myers, and, is limited to the difference between the base cost of £600 and £552.
(4) Section 149AA takes precedence over the option rules (paras 155-159) but
the SHL shares were not convertible securities (para151) and were not employment related (para 129)
(5) Section 574 applies to make any capital loss available against income because:
(a) SHL was a qualifying trading company (paras164-171);
(b) the sale of the SHL shares was at arm’s length (paras 179-187).
But such loss is limited to the difference between the CGT base cost, as determined above, and the sale price.
Conclusions
Right of Appeal