Charman v Revenue And Customs

Factual and Procedural Background

An appeal was brought by the Appellant against a decision of the Upper Tribunal (Tax and Chancery Chamber) dated 27 August 2020, which had allowed an appeal by the Commissioners for Her Majesty's Revenue and Customs ("HMRC") and dismissed the Appellant's appeal against a First-Tier Tribunal decision dated 20 December 2018 concerning the taxation of sums realised from the exercise of certain share options and receipt of certain shares.

The Appellant was a UK-born senior insurance executive who began discussions in 2001 with a US company about establishing a new insurance company in Bermuda. The new company commenced trading in late 2001 with the Appellant as President and CEO. His employment contract included a Share Purchase Option Agreement granting options to purchase shares vesting in three equal tranches over three years. Subsequently, the Appellant was awarded restricted shares subject to sale and dividend restrictions until 2005.

In December 2002, the company was recapitalised, becoming a subsidiary of a new holding company, with the Appellant exchanging his restricted shares for restricted shares in the holding company. In January 2003, he received a Notice of Stock Option Grant effective from October 2001, granting options over shares that were effectively in the holding company due to the recapitalisation. The First-Tier Tribunal found that the 2003 documents superseded the 2001 documents for the second and third tranches of options.

There was a stock split in June 2003 increasing the number of restricted shares and exercisable options. The Appellant was UK resident until November 2003, when he ceased to be resident. Restrictions on his restricted shares were lifted in September 2005, by which time they had significant value. In March 2008, the Appellant exercised some share options and sold the shares, realising substantial profits.

HMRC issued closure notices and discovery assessments on the sums realised, which the Appellant appealed. The First-Tier Tribunal held that the Appellant acquired a "securities option" for tax purposes when each tranche vested, not when granted, resulting in tax liability for the first two tranches but not the third. It also held that the Appellant acquired the restricted shares "as a director or employee" and was taxable when restrictions lifted.

HMRC appealed the FTT's conclusion regarding the third tranche, contending acquisition occurred at grant, while the Appellant appealed on the restricted shares issue, arguing acquisition was as a shareholder, not employee. The Upper Tribunal allowed HMRC's appeal and dismissed the Appellant's appeal. The Appellant was granted permission to appeal to the court on both issues.

Legal Issues Presented

1. Whether the Appellant acquired "a right to acquire shares" when the share options were granted or when they vested for the purposes of Chapter 5 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).
2. Whether the Appellant acquired the restricted shares "as a director or employee" of the company for the purposes of Chapter 2 of Part 7 of ITEPA, thereby triggering income tax liability when restrictions on the shares were lifted.

Arguments of the Parties

Appellant's Arguments

• The Appellant contended that the "right to acquire shares" must be immediately exercisable to constitute acquisition for tax purposes and that the options were acquired when they vested, not when granted.
• Regarding the restricted shares, the Appellant argued that he acquired these shares in his capacity as a shareholder, not by reason of his employment, thus disputing the tax charge under Chapter 2 of Part 7 of ITEPA.

HMRC's Arguments

• HMRC contended that the right to acquire securities existed at the time the options were granted, regardless of vesting conditions, and that tax liability arises from acquisition at grant.
• HMRC argued that the restricted shares were acquired "as a director or employee" for tax purposes because the shares were awarded due to employment, and the share-for-share exchange did not break the employment nexus.
• HMRC relied on statutory interpretation of ITEPA provisions and supporting case law to support their position.

Table of Precedents Cited

Court's Reasoning and Analysis

The court analysed the statutory provisions of ITEPA, focusing on the definition of "securities option" as a "right to acquire securities" and the timing of acquisition for tax purposes. The court rejected the Appellant's argument that the right must be immediately exercisable, explaining that the right need only be a contractual or legal right to acquire shares, even if exercisability is deferred or contingent.

The court emphasised the legislative purpose of Part 7 ITEPA, which reflects a balance between encouraging employee share ownership and preventing tax avoidance through deferral of tax liability. It noted that the legislation imposes tax liability on chargeable events rather than on acquisition, consistent with a "wait and see" approach.

The court reviewed relevant case law, including Abbott v Philbin, which established that taxation arises from the value of the right to acquire shares rather than immediate exercisability, and RFC 2012 plc, which distinguished contingent rights from vested rights for tax purposes. It concluded that the Appellant acquired the securities option at grant, not vesting.

Regarding the second issue, the court considered whether the restricted shares were acquired "as a director or employee." It affirmed the First-Tier Tribunal's factual findings that the shares were acquired by reason of employment, noting that the share-for-share exchange did not sever the employment nexus. The court applied the legal test that the benefit must be enabled by reason of employment, not necessarily solely caused by it.

The court rejected the Appellant's contention that the First-Tier Tribunal applied an incorrect "but for" test or misunderstood the source test. It held that the tribunal's approach was consistent with established law and that the ultimate cause of the benefit was the Appellant's employment.

Holding and Implications

The court DISMISSED the Appellant's appeal on both issues, thereby affirming the Upper Tribunal's decision.

The holding confirms that for tax purposes under ITEPA, a "right to acquire shares" is acquired at the time of grant of share options, even if exercisability is contingent or deferred, and that restricted shares obtained through employment-related arrangements are taxable as employment income when restrictions lift, regardless of subsequent residency status.

The decision has the direct effect of upholding HMRC's assessments and does not establish new precedent beyond affirming the application of existing statutory interpretation and legal tests to the facts of this case.