Smith v Revenue & Customs [2009] UKFTT 210 (TC)

FTT-Tax
Smith v Revenue & Customs
[2009] UKFTT 210 (TC) · 2009-08-13
[1][2009] UKFTT 210 (TC) TC00163 Appeal number INCOME TAX – Schedule E – benefits in kind – employee shareholdings – disposal of shares by employee to employer for a consideration which exceeded market value – whether shares acquired in pursuance of a right or opportunity available to employee by reason of his employment – no – whether on the disposal of the shares the payment of a consideration which exceeded market value constituted the provision of a benefit provided by reason of his employment - yes – appeal dismissed – ICTA 1988 Ss 162(1)(b), 162(6)(b) and 154 FIRST-TIER TRIBUNAL TAX JOHN PATRICK SMITH Appellant - and - THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS Respondents JUDGE: DR A N BRICE Sitting in public in London on 23 July 2009 Rupert Baldry, instructed by Wiggin Osborne Fullerlove Solicitors, for the Appellant David Craig, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents © CROWN COPYRIGHT 2009 DECISION The appeal Mr John Patrick Smith (the Appellant) appeals against a closure notice issued by the Commissioners for Her Majesty's Revenue and Customs (the Revenue) on 10 October 2006. The closure notice amended the Appellant's tax return for the year ending on 5 April 2003 by including an amount of £1,533,391. The Revenue were of the view that that amount was to be treated as emoluments of the Appellant's employment and chargeable to tax under Schedule E because the Appellant had disposed of shares to his employer for a consideration which exceeded market value and, in the view of the Revenue, had acquired the shares in pursuance of a right or opportunity available to him by reason of his employment. The legislation in outline[2]Part V (sections 131 to 207) of the Income and Corporation Taxes Act 1988 (the 1988 Act) contains provisions relating to the Schedule E charge. Chapter II (sections 153 to 168G) contains provisions applicable to higher paid employees and directors. Sections 154 to 165 contain provisions relating to benefits in kind and sections 166 to 168G contain some interpretative provisions for Chapter II.[3]Section 154 is a general charging provision and provides that, where a person is employed and by reason of his employment there is provided for him any benefit to which the section applies, there is to be treated as the emoluments of the employment, chargeable to income tax under Schedule E, an amount equal to the cash equivalent of the benefit. The benefits to which the section applies exclude any benefit chargeable under section 162. Section 162 applies to employee shareholdings and provides that, where an employee acquires shares in pursuance of a right or opportunity available to him by reason of his employment, and subsequently disposes of them for a consideration which exceeds the then market value of the shares (that is, the market value at the date of the disposal) the amount of the excess is treated as emoluments of his employment and chargeable to tax under Schedule E. Section 168 provides that any provision mentioned in Chapter II which is made for an employee by his employer is deemed to be made for him by reason of his employment. The issues[4]In 1998 the Appellant became employed by a company called Sensormatic Electronics Corporation (Sensormatic) and was later awarded options to purchase shares in that company. Sensormatic agreed that, if there were to be a change in control of Sensormatic, the Appellant would, for a limited period, have the right to sell any Sensormatic shares he held to Sensormatic at the price paid on the change in control. In 2001 a subsidiary of Tyco International Limited (Tyco) offered to purchase Sensormatic by way of a share for share exchange. Just before the exchange the Appellant exercised all his share options and so held shares in Sensormatic. He then commenced employment with Tyco and, on the share for share exchange, exchanged all his Sensormatic shares for shares in Tyco which were then valued at $47.245 each. In June 2002, when the price of Tyco shares was $17.269 each, the Appellant exercised his right under the change in control agreement and called upon Tyco to purchase his Tyco shares at the price paid on the change in control, namely $47.245. The Appellant thus disposed of his Tyco shares to his employer Tyco at a price which exceeded market value at the date of the disposal and the amount of the excess was £1,533,391.[5]The Revenue's main argument was that section 162 of the 1988 Act applied because the Appellant had acquired his Tyco shares in pursuance of a right or opportunity available to him by reason of his employment and so the amount of the consideration he received in excess of market value was to be treated as emoluments of his employment and chargeable to tax under Schedule E. The Appellant argued that he had not acquired his Tyco shares in pursuance of a right or opportunity available by reason of his employment but had acquired them on the occasion of the share for share exchange with Sensormatic under a general offer open to all shareholders. The Revenue argued in the alternative that, if section 162 did not apply, then section 154 did because Tyco, who was then the Appellant's employer, had provided the Appellant with a benefit by purchasing his shares at a price that was more than the value of the shares.[6]Thus the issues for determination in the appeal were:(1) whether the Tyco shares had been acquired by the Appellant in pursuance of a right or opportunity available to him by reason of his employment within the meaning of section 162 (the section 162 issue); or, if not,(2) whether the difference between the price paid by Tyco for the Tyco shares and their market value was a benefit within the meaning of section 154 (the section 154 issue). The facts[7]There was a bundle of documents which contained a statement of facts not in dispute. Oral evidence was given by the Appellant on his own behalf.[8]From this evidence I find the following facts. 1998 - the Appellant's employment with Sensormatic[9]At all material times the Appellant was resident and ordinarily resident in the United Kingdom for tax purposes. On 14 September 1998 the Appellant entered into a a contract of employment with Sensormatic, a Delaware corporation having its principal place of business in Florida. The contract of employment (clause 2) provided for the payment of a salary and bonus to the Appellant and participation by the Appellant in a number of benefit plans one of which was a stock incentive plan.[10]The stated purpose of the stock incentive plan was to attract, retain and motivate officers, key employees and directors of Sensormatic by providing them with incentives for making significant contributions to the growth and profitability of that company. The plan stated that it was designed to accomplish that goal by offering stock options and other incentive awards thereby providing participants with a proprietary interest in the growth, profitability and success of the company. Only officers, key employees and directors who were also officers or employees were eligible to receive awards of stock options under the plan.[11]Normally. stock options became exercisable in three equal annual instalments commencing on the first anniversary of the date of the grant of the option and the options expired ten years after the date of the grant.[12]On 21 October 1998 Sensormatic sent a memorandum to the Appellant. The memorandum informed the Appellant that Sensormatic had updated the provision of benefits and protection in the event of a change in control and attached a copy of an agreement which was referred to at the hearing as the change in control agreement. The memorandum contained the following paragraph:
"Under the Agreement, upon the occurrence of a change in control (as defined in Section 5 of the Agreement) all stock options become fully exercisable. In addition, in the case of the acquisition of 50% or more of the Company's voting securities, or a merger or certain other events which result in the elimination of the Common Stock or a cessation of trading of the Common Stock in a nationally recognised market, you may require the Company to purchase your options or stock at the highest price per share paid in connection with the change in control, less, in the case of unexercised options, the exercise price."
[13]The change in control agreement sent on 21 October 1998 was dated 14 September 1998 and was between Sensormatic and the Appellant (called the Executive). Under the agreement the Appellant was to be provided with certain benefits if there were a change in the control of Sensormatic. A change in control was defined at clause 5(a) as including a merger or share exchange. Clause 6(a)(i) provided that, in the event of a change in control, all stock options issued by Sensormatic to the Appellant should become fully exercisable immediately whether or not they had in fact vested and become exercisable. Clause 6(a)(ii) provided that, if there were a change in control effected through an exchange offer, the Appellant had the right, exercisable by written notice given at any time during the 13-month period immediately following the change in control, to require Sensormatic to purchase:
"(2) any or all the Sensormatic Common Stock held by the Executive at or immediately prior to the date of such Change in Control … and/or (without duplication) any shares or other securities issued upon conversion of or in exchange for any such shares of Common Stock pursuant to any such reorganisation event ("
Conversion Shares"), at a purchase price equal to the aggregate Fair Market Value of such shares (or, in the case of any Conversion Shares issued upon conversion of or in exchange for Common Stock, the Fair Market Value of the shares of Common Stock which were converted into or exchanged for such Conversion Shares) … For purposes of this Section 6(a)(ii), the "Fair Market Value" of a share of Sensormatic Common Stock means the highest fair market value per share of Sensormatic Common Stock of the consideration paid in any transaction by any Person who effects such Change in Control, in connection therewith, whether through open market purchases, Tender Offers, Reorganisation Events, private transactions or otherwise."[14]Thus the change in control agreement provided that, for the period of thirteen months after a change in control, the Appellant could exercise all his stock options immediately, whether they had vested or not, and could call upon Sensormatic to purchase his Sensormatic shares, or any shares issued in exchange for them, at the price paid on the change in control. 2001 – The merger agreement with Tyco[15]On 3 August 2001 Tyco Acquisition Corporation XXIV (NV) (Tyco Acquisition), a wholly owned subsidiary of Tyco, entered into an agreement and plan of merger with Sensormatic (the merger agreement). Tyco Acquisition's obligations under the merger agreement were guaranteed by Tyco. Section 1.04 of the merger agreement provided that, at the effective time, Sensormatic "shall be merged with and into" Tyco Acquisition, the separate corporate existence of Sensormatic should cease and Tyco Acquisition should continue as the surviving corporation of the merger. The effective time was defined in section 1.05 of the merger agreement as the date on which the filing of the relevant documents was completed and that date was expected to be on 13 November 2001. Section 5.13 applied to employee benefits and section 5.13(d) provided that the surviving corporation would honour all the terms and benefits of Sensormatic's employee plans and the change in control agreement.[16]On 23 August 2001, in accordance with the terms of the merger agreement, Tyco Acquisition made an offer to exchange a fraction of a common share of Tyco for each share of common stock of Sensormatic. The Sensormatic board of directors unanimously recommended that Sensormatic common stockholders accept the offer and tender their shares pursuant to the offer. The offer prospectus stated that, after the offer was completed, Sensormatic would merge with and into Tyco Acquisition and that, as a result of the offer and merger, Sensormatic would become a wholly owned subsidiary of Tyco.[17]On 20 September 2001 Sensormatic wrote to all its stock option participants and said that the acquisition of Sensormatic by the stock-for-stock transaction with Tyco would constitute a change in control of Sensormatic and all unvested stock options would become vested. The effective date would be determined after regulatory approvals had been received and Tyco had accepted a majority of Sensormatic's stock. Once the acquisition was complete the options to purchase shares of Sensormatic would be converted to options to purchase shares of Tyco. The Appellant acquires shares in Sensormatic[18]On 8 October 2001 the Appellant held 8,861 shares in the restricted stock of Sensormatic. On the same date he wrote to Sensormatic and said that he elected to exercise his options to purchase shares in the common stock of Sensormatic and elected to pay for such shares by delivery of a promissory note in accordance with the company's stock purchase loan plan. (Under the loan plan Sensormatic could make loans, or guarantee the repayment of bank loans, to enable the exercise of options to purchase common stock of Sensormatic.) The options referred to by the Appellant were: Option number of shares Price Expiration date: 50,000 $ 5.38 10/22/08 10,000 $10.63 1/15/09 25,000 $12.50 10/1/09 50,000 $17.38 10/23/10[19]Under the accelerated vesting provisions of clause 6(a)(i) of the change in control agreement options which were not exercisable at the date of the change in control became fully exercisable. Thus most of the Appellant's options were exercised early under the change in control agreement. On 8 October 2001 the Appellant was registered as the owner of 135,000 shares of the common stock of Sensormatic[20]I accept the oral evidence of the Appellant that, when he exercised his options, he intended immediately to convert his Sensormatic shares to Tyco shares.[21]On 8 October 2001 the market price of each Sensormatic share was $23.95 and so the total market price of the 135,000 shares acquired by the Appellant was $3,233,250. The price paid for the shares by the Appellant on the exercise of his options was £1,556,800 and so the Appellant made a gain on the exercise of the options of $1,676,450. That gain was taxed under Schedule E under the provisions of section 135 of the 1988 Act. The Appellant's employment with Tyco[22]On 9 October 2001 Tyco Fire and Security Services Division of Tyco made a formal offer of employment to the Appellant. The offer contained a number of terms of which one was:
" .. by acceptance of this offer you are specifically and irrevocably waiving all rights and benefits of any and all previous Employment Agreements and/or Change in Control Agreements entered into between yourself and the Sensormatic Electronics Corporation, to the extent that they are in existence and survived the Change in Control."
[23]The formal offer of employment was accepted and signed by the Appellant who thus became employed by Tyco. I accept the oral evidence of the Appellant that he was assured by Tyco verbally at the time that he was not waiving his rights in clause 6(a)(ii) of the change in control agreement and that he would not have signed the offer of employment letter without these verbal assurances. The Appellant exchanges his Sensormatic shares for shares in Tyco[24]On 11 October 2001 under the merger agreement Tyco accepted all the shares in Sensormatic offered for exchange and the merger took place. On the same day the Appellant disposed of all his Sensormatic shares (being 135,000 shares in the common stock and 8,861 shares in the restricted stock) to Tyco and received 0.5819 of a Tyco share for each of his Sensormatic shares. He thus received 74,649 shares in Tyco. At the time immediately before exchange the price of each Tyco share was $47.245. Thus immediately after the exchange the Appellant had the right, under clause 6(a)(ii) of the change in control agreement, exercisable by written notice given at any time during the 13-month period immediately following the change in control, to require Sensormatic to purchase his shares in Tyco for $47,245 each.[25]By 13 November 2001 filing of the relevant merger documents had been completed and the regulatory approvals had been received and so the merger became effective on that date. 2002 – the Appellant disposes of his Tyco shares[26]In January 2002 the Appellant was considering whether to exercise his right to call upon Sensormatic to purchase his Tyco shares under the provisions of clause 6(a)(ii) of the change in control agreement. When he had signed his letter of employment with Tyco the Appellant had received verbal assurances that Tyco would honour those provisions but he also knew that one of his colleagues had asked for, and received, a written specific confirmation that Tyco would honour the provisions of clause 6(a)(ii) of the change in control agreement. Accordingly, the Appellant wrote to Tyco and asked Tyco to confirm that it would honour the provisions in the change in control agreement so that, for the period of thirteen months after the change in control, the Appellant could call upon Tyco to purchase any shares issued in exchange for his Sensormatic shares, at the price paid on the change in control.[27]On 2 February 2002 Tyco confirmed that it would honour the provisions of paragraph 6(a)(ii) of the change in control agreement in accordance with section 5.13 of the merger agreement. (It seems that after the merger Sensormatic became a subsidiary of Tyco and Tyco preferred to honour the obligations, which had been preserved under the terms of the merger agreement, rather than have former Sensormatic employees exercising their options against Sensormatic. It also seems that there was some doubt as to whether Sensormatic, as a subsidiary of Tyco, could hold shares in Tyco).[28]On 5 June 2002 the Appellant wrote to Tyco and referred to the provisions of paragraph 6(a)(ii) of the change in control agreement. He requested Sensormatic or Tyco to purchase his 74,649 shares of Tyco stock, representing shares of Sensormatic which he held at the time of the change in control, at the agreed price of £47.245 per Tyco share.. That was considerably in excess of the then market value of Tyco shares which in June 2002 was $17.269 per share. Thus the Appellant sold each Tyco share to Tyco at nearly $30.00 above market value and the total amount of the excess above market value was £1,533.391. That is the amount at issue in the appeal. Reasons for decision[29]The closure notice under appeal was issued because the Revenue were of the view that the amount of £1,533,391 was to be treated as emoluments of the Appellant's employment and chargeable to tax under Schedule E because the Appellant had disposed of his Tyco shares to his employer for a consideration which exceeded market value and had acquired the shares in pursuance of a right or opportunity available to him by reason of his employment within the meaning of section 162. At the hearing the Revenue argued, in the alternative, that the difference between the price which Tyco paid the Appellant for his Tyco shares and their market value on that date was a benefit within the meaning of section 154.[30]Both sections 162 and 154 appear in Chapter II of Part V of the 1988 Act which contains the statutory code relating to the chargeability to tax of benefits received by higher paid employees. Section 154 is the general charging provision and section 162 contains specific provisions relating to employee shareholdings. As both sections have to be considered within the framework of the legislation within which they appear, it is convenient to consider first whether the amount of £1,533,391 is chargeable under the general provisions in section 154 and then to consider the more specific provisions of section 162. Section 154[31]At the relevant time the relevant parts of section 154 and 156 provided:
"154 General charging provisions (1) … where in any year a person is employed in employment to which this Chapter applies and- (a) by reason of his employment there is provided for him, or for others being members of his family or household, any benefit to which this section applies; and (b) the cost of providing the benefit is not (apart from this section) chargeable to tax as his income, there is to be treated as the emoluments of the employment, and accordingly chargeable to income tax under Schedule E, an amount equal to the cash equivalent of the benefit. (2) The benefits to which this section applies are … benefits and facilities of whatever nature … excluding however-… (b) any benefit chargeable under section …162. (3) For the purposes of this section …. the persons providing the benefit are those at whose cost the provision is made. 156 Cash equivalents of benefits charged under section 154 (1) The cash equivalent of any benefit chargeable to tax under section 154 is an amount equal to the cost of the benefit, less so much (if any) of it as is made good by the employee to those providing the benefit."
[32]Sections 166 to 168G contain general supplementary provisions and section 168 contains provisions about the interpretation of Chapter II. Section 168(3) provides "168 (3) For the purposes of this Chapter-(a) … and(b) all such provision as is mentioned in this Chapter which is made for an employee … by his employer are deemed to be … made for him … by reason of his employment … ."[33]The section 154 issue is whether the difference between the price paid by Tyco for the Tyco shares and their market value on that date was a benefit within the meaning of section 154. The arguments of the parties raised three questions, namely:(1) Was there a benefit to which section 154 applies?(2) If so, was the benefit provided by reason of the Appellant's employment?(3) Can a payment of cash be a benefit? (1) Was there a benefit to which section 154 applies?[34]For the Appellant Mr Baldry argued that, on disposing of his shares to Tyco, the Appellant was exercising a right which he had had since 1998 to dispose of any conversion shares at their price on a change in control and the obligation to pay such price had been assumed by Tyco. On the exercise of that right the Appellant received that to which he was already entitled and so no additional benefit had been provided, relying on Mairs v Haughey (1992) 66 TC 271 For the Revenue Mr Craig argued that the benefits to which section 154 applied were defined in section 154(2) as "benefits or facilities of whatsoever nature". That definition was very wide and. and included the benefit of selling an asset for more than market value. The Appellant had received the benefit of selling his Tyco shares at a price which exceeded market value and that was a benefit within the meaning of section 154(2).[35]One of the issues in Mairs v Haughey (1992) was whether a payment made to an employee was a benefit to which section 154 applied. A company was privatised and a non-statutory enhanced redundancy scheme was discontinued. The new company offered employment to an employee on the basis that a payment would be made to him from funds provided by a government department. The payment was to be calculated by reference to a fraction of the amount that the employee would have received under the redundancy scheme if he had then been declared redundant. It was argued that the payments were not benefits because they were made in return for the surrender of a contingent right to receive a payment under the redundancy scheme.[36]The Court of Appeal in Northern Ireland held that the employee did not receive a benefit within the meaning of section 154. Hutton LCJ at 314F stated:
"Therefore I consider that the [employee] did not receive a "benefit" within the meaning of s 154 where the money received was paid to him, by way of fair valuation, in consideration of his surrender of his right to receive a larger sum in the event of the contingency of redundancy occurring."
[37]Both MacDermott J at 326B and Nicholson J at 334I found that the employee had surrendered a right which was worth at least the amount he had received. At 326D MacDermott LJ adopted the views of the Special Commissioner which were:
"Section 154 brings benefits into charge. All kinds of benefits are covered, but whatever they are, they must still be capable of being described as "benefits"
. The legislation is aimed at profits (in a broad sense) which escape taxation under the mainstream Schedule E provisions for one reason or another. It is not aimed at receipts resulting from fair bargains."[38]The argument that the payment was a taxable benefit under section 154 was not pursued in the House of Lords.[39]Thus, when deciding whether a payment is a benefit to which section 154 applies, it is necessary to bear in mind not only the very wide provisions of 154(2), which includes within the definition "benefits and facilities of whatever nature", but also the principle in Mairs v Haughey that a payment made by way of fair valuation, resulting from a fair bargain, in consideration of the surrender of a right to receive a larger sum (worth at least the amount of the payment) in the event of a contingency is not a benefit within the meaning of section 154.[40]Applying those principles to the facts of the present appeal, the benefit which is sought to be taxed is the payment by Tyco to the Appellant of the difference between the (higher) price paid by Tyco when the Appellant disposed of his Tyco shares and the (lower) market price on that date. The payment was made because Tyco had agreed, on the occasion of the merger with Sensormatic, who was the Appellant's previous employer, to honour all the terms and benefits of Sensormatic's employee plans and the change in control agreement. The provisions in the change in control agreement were described in the memorandum of 21 October 1998 as "the provision of benefits and protection" and there was a clear intention to give a gratuitous benefit to each employee. If provided by Sensormatic, the payment would, in my view, have been a benefit to which section 154 applies. When provided by Tyco it remained a benefit within the meaning of section 154(2).[41]The facts in this appeal can be distinguished from the facts in Mairs v Haughey. In this appeal the payment made by Tyco was not a payment made by way of fair valuation resulting from a fair bargain with the Appellant. There was no negotiation at arm's length between the Appellant and Tyco and the Appellant did not surrender any rights at all let alone a right which was worth the amount he received. Rather he remained fully entitled to exercise, and did exercise, the right, which had been freely given, to call upon his employer (originally Sensormatic and then Tyco) to pay him a price for his shares in excess of market value.[43]Accordingly, the benefit is one to which section 154 applies. (2) Was a benefit provided to the Appellant by reason of his employment?[44]Mr Baldry for the Appellant argued that the Appellant had not been provided with any benefit by reason of his employment with Tyco because the benefit had been provided under the terms of clause 6(a)(ii) of the change in control agreement entered into between Sensormatic and the Appellant. He cited A bbott v Philbin [1961] AC 362 as authority for the principle that, in the absence of any statutory provision, a benefit accrued on the grant of an option and not on the date of its exercise. The right given by clause 6(a)(ii) of the change in control agreement was a right to sell shares for a specified period at a particular price and that was a put option. The value of that option could have been taxed when it was granted but that had not been done; it could not be taxed when it was exercised. For the Revenue Mr Craig relied upon section 168(3) which provided that a benefit provided by an employer to an employee was deemed to be provided by reason of the employment; in this appeal the benefit had been provided by Tyco who was the Appellant's employer. He also relied upon Wicks v Firth (1981) 56 TC 318 for the principles that the fact of employment must be one cause of the benefit but need not be the only cause and that the correct question was "what is it that enables the person concerned to enjoy the benefit?"[45]In Abbott v Philbin (1961) an employee was granted in 1954 an option to purchase shares in a company at a stated price and exercised the option and purchased the shares in 1956 when the market price was higher. The legislation then in force was the Income Tax Act 1952 which provided that tax under Schedule E was charged on employees "in respect of "all salaries, fees, wages, perquisites or profits whatsoever" arising from the employment. (Thus tax was then charged only on emoluments and not benefits). The employee was assessed to tax on the difference between the option price and the market price as being an emolument received by virtue of his employment.[46]The House of Lords held that the employee should be assessed when the option was granted, and not when it was exercised, since the taxable receipt lay in the acquisition of the option and it was its value at that date which represented the perquisite of the employment. At 365 Viscount Simonds said that the words "perquisites or profits whatsoever" denoted money or that which could be turned to pecuniary account and at 367 that the difference between the price paid on the (grant of) the option and the market price (when the option was exercised) did not arise from the employment but was due to numerous factors which had no relation to the employment whereas the value of the option when granted was nothing else that a reward for services rendered or an incentive to future services. At 379 Lord Radcliffe said that the advantage which arose on the exercise of the option was an advantage which accrued to the employee as the holder of a legal right which he had obtained in an earlier year; the profit came from the exploitation of that right and was not a profit of the service.[47]Since Abbott v Philbin the income tax legislation has been amended. Section 131 of the 1988 Act still provides that tax under Schedule E shall be chargeable on the full amount of emoluments and that the expression "emoluments" includes "all salaries, fees, wages, perquisites or profits whatsoever" but also specifically provides that that shall be "except as is provided to the contrary by any provision of the Tax Acts". Sections 154 to 168G of the 1988 Act now contain additional provisions which tax benefits in kind and section 135 charges tax under Schedule E on any gains realised on the exercise of a share option granted by an employer to an employee. (Also, under the capital gains tax legislation there is now a charge to tax on any gain realised on the later disposal of shares acquired as a result of the exercise of a share option.)[48]In view of the changes in the income tax legislation since 1961, particularly the enactment of what is now sections 154 to 168G of the 1988 Act, I conclude that the correct approach is first to apply the words of the current legislation, as clarified by the relevant authorities, and only to apply the principles in Abbott v Philbin to the extent that there is nothing to the contrary in the current legislation. .[49]Wicks v Firth (1981) concerned the predecessor of section 154, namely section 61 of the Finance Act 1976. The trustees of a fund provided by an employer made awards to the children of employees to help with their further education. One of the issues was whether the benefits were provided by reason of the employment. The Court of Appeal held that that the benefits were provided at the cost of the employer within the meaning of what is now section 154(3) and that, as a result of what is now section 168(3), the benefits were deemed to be provided by reason of the employment.[50]At 331G Goulding J (in the High Court) said that, as a result of what is now section 154 with section 168(3), a benefit came within the provisions if it was provided by the employer or, if provided by someone else, was provided by reason of the employment. In the Court of Appeal this principle was approved by Lord Denning at 338H At 342I, Oliver LJ held that, if a benefit were provided by someone other than the employer, the employment did not have to be the only reason for the provision of the benefit so long as it was one reason and at 344D he held that there was no necessity for an intention on the part of the employer to remunerate the employee for the performance of his duties. He continued:
"One is directed to see whether the benefit is provided by reason of the employment and in the context of these provisions that, in my judgment, involves no more than asking the question "what is it that enables the person concerned to enjoy the benefit?" without the necessity for too sophisticated an analysis of the operative reasons why that person may have been prompted to apply for the benefit or to avail himself of it."
[51]However, at 344F he added that that question was academic in that case because the benefit had been provided by the employer and so the deeming provision in what is now section 168(3) applied. This view was also adopted by the House of Lords and at 363B Lord Templeman referred to the predecessors of section 154(3) and 168(3) and held that, if a benefit had been provided at the cost of an employer, then it was deemed to be made by reason of the employment.[52]Thus Wicks v Firth is authority for the principles that a benefit provided for an employee by an employer or at the cost of the employer is deemed to be provided by reason of his employment and that if a benefit is provided by someone other than the employer the employment does not have to be the only reason for the provision of the benefit so long as it is one reason and there is no necessity for an intention on the part of the employer to remunerate the employee for the performance of his duties.[53]Applying those principles to the facts of the present appeal the benefit is the payment by Tyco of an advantageous price for the Appellant's shares. That was a benefit and, at the time it was provided, Tyco was the Appellant's employer and the benefit was provided at the cost of Tyco who was the Appellant's employer. The provision of the benefit is therefore deemed by section 168(3) to be made for the Appellant by reason of his employment.[54]I now return to apply the principle in Abbott v Philbin to the extent that there is nothing contrary in the current legislation as clarified by the authorities. The Appellant relies upon the principle that, in the absence of any statutory provision, a benefit accrues on the grant of an option and not on the date of its exercise and argued that the right given by clause 6(a)(ii) of the change in control agreement was a right to sell shares for a specified period at a particular price and that was a put option; the value of that option could have been taxed when it was granted but that had not been done; it could not be taxed when it was exercised.[55]In deciding whether the principle in Abbott v Philbin has been modified by section 154, assistance can be gained from Mairs v Haughey (1992). There it was decided that, if the payment in that case had been a benefit, it was not made by reason of the employment within the meaning of section 154(1)(a) because what enabled the employee to enjoy the benefit was the surrender of his rights under the redundancy scheme and not the employment.[56]However, the facts in Mairs v Haughey can be distinguished from the facts in this appeal. In that case the payments were not provided by the employer but by a government department. At 309I Hutton LJ said that the deeming provision in section 168(3) had no application there because the payments were not provided by the employer. In this appeal the benefit was provided by the employer and so section 168(3) does apply. It is not therefore necessary to consider whether the benefit was otherwise provided by reason of the employment or to ask what was it that enabled the Appellant to enjoy the benefit. The argument that the benefit was provided under the terms of clause 6(a)(ii) of the change in control agreement which had the nature of an option, and not by reason of the employment, is hypothetical and does not arise.[57]Accordingly, the benefit was provided to the Appellant by reason of his employment. (3) Can a payment of cash be a benefit?[58]Although Mr Baldry argued that it would be unusual for a payment of cash to be a benefit, as such a payment was usually an emolument, nevertheless it is clear from Wicks v Firth at 338G and Mairs v Haughey at 313E and 313I that a payment of cash can be a benefit. Section 154 - conclusion[59]The conclusion is that a benefit to which section 154 applied was provided to the Appellant by reason of his employment and that a payment of cash can be a benefit.[60]However, section 154(2)(b) provides that the benefits to which section 154 applies exclude any benefit chargeable under section 162. Before reaching a final decision it is therefore necessary to consider whether the benefit in this appeal is chargeable under section 162. If it is then section 154 does not apply; if it is not then section 154 does apply. Section 162[61]The section 162 issue is whether the shares were acquired by the Appellant in pursuance of a right or opportunity available to him by reason of his employment within the meaning of section 162. Section 162 applies to employee shareholdings and subsections 162(1) and (6) provide:
"162(1) Where after 6 April 1976 - (a) a person employed … in employment to which this Chapter applies (the employee) .. acquires shares in a company (whether the employing company or not); and (b) the shares are acquired … in pursuance of a right or opportunity available to the employee by reason of his employment, section 160(1) … applies. "(6) Where … shares are acquired … as mentioned in subsection (1) above, and- (a) the shares are subsequently disposed of … and (b) the disposal is for a consideration which exceeds the then market value of the shares, then for the year in which the disposal is effected the amount of the excess is treated as emoluments of the employee's employment and accordingly chargeable to income tax under Schedule E."
[62]Sections 166 to 168G contain general supplementary provisions and section 168 contains provisions about the interpretation of Chapter II. Subsections 168(3) and (6) provide "168 (3) For the purposes of this Chapter-(a) …(b) all such provision as is mentioned in this Chapter which is made for an employee … by his employer are deemed to be … made for him … by reason of his employment … (6) For the purposes of this Chapter- … (b) a car made available to an employee … by his employer is deemed to be made available to him .. by reason of his employment … ."[63]For the Appellant Mr Baldry argued that, although the Appellant had acquired his Sensormatic shares by reason of his employment by Sensormatic, he had already paid tax on that benefit. He had not acquired his Tyco shares by reason of his employment with Tyco but pursuant to the merger agreement under which Tyco made a general offer to all Sensormatic shareholders to exchange shares in Tyco for shares in Sensormatic. It was because the Appellant held shares in Sensormatic that he became entitled to shares in Tyco on the merger.[64]For the Revenue Mr Craig argued that section 162(1)(a) applied where an employee acquired shares in any company whether the employing company or not. The test of whether the Appellant had acquired his Tyco shares "in pursuance of a right or opportunity available by reason of his employment" was a wider test than "by reason of employment". The Appellant's employment with Sensormatic furnished him with the opportunity to acquire his Tyco shares and all his Tyco shares had been acquired by reason of that opportunity. That view was reinforced by the provisions of section 168(3)(b) because the Appellant had been provided with the right or opportunity to acquire the shares and that was capable of being a provision within the meaning of that section. The subsection specifically referred to all provision mentioned in Chapter II and that included section 162.[65]In reply Mr Baldry argued that section 168(3)(b) had no application to section 162. Section 168(3) applied to "all such provision as is mentioned in Chapter II" and so only applied where benefits were "provided" to an employee. An example of a section which referred to a "provision" was section 154 and section 168(3) would apply to that section. However, other sections in Chapter II imposed a charge where something was "made available". One example was section 157 which imposed a charge where a car was made available to an employee. The existence of a specific deeming provision in section 168(6) applicable to cars supported the view that section 168(3) did not apply to cases where benefits were "made available". Returning to section 162, that section only applied where shares were acquired in pursuance of a right or opportunity "available" by reason of employment and that was a question of fact; there was nothing which deemed a share to have been so acquired simply because the share was acquired from the employer.[66]In considering the arguments of the parties it is relevant that, unlike section 154 which considers only the disposal of the Tyco shares, section 162 considers the circumstances of their acquisition . Section 162(6) is the charging provision and applies where shares are disposed of for a consideration which exceeds market value. In this appeal the shares disposed of for a consideration in excess of market value were the Appellant's Tyco shares. However the charging provision only applies if "the shares" (that is the Appellant's Tyco shares) were acquired as mentioned in section 162(1), namely in pursuance of a right or opportunity available to the Appellant by reason of his employment. So the question is whether the Appellant acquired his Tyco shares in pursuance of a right or opportunity available to him by reason of his employment.[67]Section 162(1)(a) only applies where a person is employed and section 162(1)(b) only applies to an acquisition by reason of his employment. The question then arises as to whether the employment mentioned in section 162(1)(a) has to be the same employment, by the same employer, as that mentioned in section 162(1)(b). In my view the reference to "his employment" in section 162(1)(b) is clearly linked to the earlier reference at the beginning of section 162(1)(a) to a person being "employed in employment to which this Chapter applies". If that is right then the section applies when an employed person acquires shares by reason of that employment, that is, employment by the same employer. So the question is whether the Appellant acquired his Tyco shares in pursuance of a right or opportunity available to him by reason of his employment with Tyco.[68]The Revenue argued that the Appellant's employment with Sensormatic furnished him with the opportunity to acquire his Tyco shares and all his Tyco shares had been acquired by reason of that opportunity. From the facts as found it is clear that the Appellant acquired his Sensormatic shares by reason of his employment with Sensormatic. He had been granted options to purchase shares in Sensormatic by reason of his employment with Sensormatic and he exercised the right to acquire his Sensormatic shares pursuant to those options; also, he exercised some of the options early under the provisions of clause 6(a)(i) of the change in control agreement which was entered into by reason of his employment with Sensormatic. Thus he acquired all his Sensormatic shares when he was employed by Sensormatic and in pursuance of a right or opportunity available by reason of his employment by Sensormatic. Further, the Appellant accepted that he exercised all his options with the intention of immediately converting his Sensormatic shares into Tyco shares and the exercise of his options put him in the position of being able to exchange his Sensormatic shares for Tyco shares and thus acquire his Tyco shares on the merger.[69]However, the question is whether the Appellant acquired his Tyco shares in pursuance of a right or opportunity available to him by reason of his employment with Tyco and I conclude that he did not. He became employed by Tyco on 9 October 2001 and he acquired his Tyco shares on 11 October 2001. His right or opportunity to acquire the Tyco shares was available to him in pursuance of the general offer and because he held Sensormatic shares and not because he was employed by Tyco. The same right or opportunity was available to all Sensormatic shareholders to exchange Sensormatic shares for Tyco shares. The exchange of shares was a fair bargain at a fair valuation and in the exchange the Appellant surrendered Sensormatic shares which were worth the same as the Tyco shares he received.[70]I accept that the phrase "in pursuance of a right or opportunity available to the employee by reason of his employment" is a wider test than "by reason of employment" and I also accept that the Appellant's employment with Sensormatic furnished him with the opportunity to acquire his Sensormatic shares, which he then exchanged for his Tyco shares. However, he did not acquire his Tyco shares when he was employed by Sensormatic, but when he was employed by Tyco and he did not acquire his Tyco shares in pursuance of a right or opportunity available to him by reason of his employment with Tyco.[71]I have considered whether section 168(3) applies so as to deem the acquisition by the Appellant of his Tyco shares to be by reason of his employment with Tyco.. Section 168(3)(b) applies to "all such provision as is mentioned in this Chapter which is made for an employee … by his employer". The "provision" mentioned is the provision of a benefit and the benefit provided under section 162 is that mentioned in section 162(6)(b), namely the payment of a consideration in excess of market value on the disposal of certain shares. The relevant shares are defined in section 162(1)(b) as shares that were acquired by reason of the employment (namely the employment with Tyco). Section 168(3) says that if such provision is made by an employer it is deemed to be made by reason of the employment.[72]The difficulty is that no benefit was "provided" by Tyco when the Appellant acquired his Tyco shares. Applying the principle in Mairs v Haughey the acquisition of the shares was a fair bargain at a fair valuation and in the exchange the Appellant surrendered shares which were worth the same as those he received. As no benefit was provided by Tyco to the Appellant when he acquired his Tyco shares there was no "provision" within the meaning of section 168(3) at the time of the acquisition and so the acquisition of the shares were not deemed to by made by reason of his employment with Tyco.[73]I conclude that his Tyco shares were not acquired by the Appellant in pursuance of a right or opportunity available to him by reason of his employment with Tyco within the meaning of section 162. Because therefore, in my view, the benefit (of the payment of a consideration which exceeds market value) is not chargeable under section 162 it is not excluded by section 154(2)(b) from being a benefit chargeable under section 154. Accordingly, it remains chargeable under section 154. Decision[74]My decisions on the issues for determination in the appeal are: (1) that the Tyco shares were not acquired by the Appellant in pursuance of a right or opportunity available to him by reason of his employment with Tyco within the meaning of section 162; but. (1) that, when the Appellant disposed of his Tyco shares to Tyco, the difference between the price paid by Tyco for the shares and their market value was a benefit within the meaning of section 154..[75]The benefit is therefore chargeable under section 154 and the appeal is dismissed. Right of appeal to Upper Tribunal[76]Section 11 of the Tribunals, Courts and Enforcement Act 2007 provides that any party to a case has a right of appeal to the Upper Tribunal on any point of law arising from a decision of the First-tier Tribunal. The right may be exercised only with permission which may be given by the First-tier Tribunal or the Upper Tribunal. Rule 39(2) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 SI 2009 No. 273 provides that a person seeking permission to appeal must make a written application to the Tribunal for permission to appeal which application must be received by the Tribunal no later then fifty-six days after the date that the Tribunal sends full written reasons for the Decision. Rule 29(5) provides that an application for permission to appeal must identity the decision of the Tribunal to which it relates, identify the alleged error or errors in the decision and state the result the party making the application is seeking.[77]This document contains the full written reasons for the Decision. NUALA BRICE TRIBUNAL JUDGE RELEASE DATE: 13 August 2009 SC 3224/2008 05.08.09 John Patrick Smith. yth