Peter Hemingway v The Commissioners for HMRC

Section 401 ITEPA provides insofar as relevant:

Section 403(1) ITEPA provides:

Section 476 ITEPA provides insofar as relevant:

Section 477 ITEPA provides insofar as relevant:

Section 472(2)(a) ITEPA provides a definition of associated person which includes:

The Appellant accepts that the Payment has been made in the course of his employment and that Broadcom purported to make the Payment in connection with the loss of the share options, for example the e mail of 22 February 2016. However, in accordance with the terms of the share option plan agreements, upon change of control his share options were cancelled for no value. The Payment was a voluntary payment unrelated to the rights that ceased to exist a month earlier.

Under his terms of employment the Appellant was entitled to participate in the Broadcom 1988 stock option plan. The takeover meant there was no longer a Broadcom stock option plan and so the Appellant lost the right set out in his employment contract to participate, see the clause 3.7(c) and 6.5 of the merger agreement, specifically the exclusion in 6.5(a) (ii):

The payment was more than a month after the two-day timescale set out in clause 3.7(c) of the merger agreement. It was therefore a payment for something different. The Employment Tribunal found the payments to be ex gratia.

Broadcom accepted that the Payment was not within section 477 ITEPA because, having initially issued a payslip on 8 February 2016 showing deduction of employer NIC, after the Appellant had objected to the deduction, Broadcom issued the amended payslip seen by the Appellant on 4 March 2016 which showed a reduced gross amount and no deduction from the payment of employer NIC. The net payment of £19,549.03 was the same. Under the Joint Election, Broadcom could deduct employer NIC “upon the occurrence of a Chargeable Event with respect to the cancellation, assignment or release of an Option”.

A chargeable event was defined in the Joint Election to include:

Broadcom therefore in not applying the Joint Election accepted section 477 did not apply.

Further the Payment, which took into account the employer NIC in reducing the Gross Payment from £40,089.63 to £35,226.15, was not commensurate with the stock option value and therefore had to be for something else being a discretionary payment for loss of the contractual right to participate in stock option plans. The Appellant did not agree to participate in the new stock option plans and left.

The reference in the payslips to “notional share gain” encompasses a loss of equity plan rights.

Accordingly, the best analysis of the tax treatment of the Payment is that it is for the loss of the right to participate in the stock option plans and so “a change in the earnings from a person's employment” within section 401(1)(c) ITEPA. As such the Appellant benefitted from the £30,000 threshold in section 403(1).

Mr Vallis noted that not only was the burden of proof on the Appellant in the Section 12 Issue but also section 401(3) ITEPA specifically provides that Chapter 3 of ITEPA does not apply to any payment or other benefit if it is chargeable to income tax apart from Chapter 3. Section 477 is in chapter 5 and therefore the Appellant has to show not only that section 401 applies but that there is no chargeable event within section 476.

Section 476 requires a payment to be ‘in connection with’ the employment-related securities option. ‘In connection’ with was a broad term and it was clearly satisfied in this case thus:

Even if the Payment is not within section 477(3)(c) it is within section 477(6) being a benefit in consideration or in connection with failing to acquire securities. For this purpose ‘failing’ need not be construed as requiring some culpability, see Catherine Rawcliffe [2013] UKFTT 111(TC):

The Employment Tribunal decision is of no assistance to this Tribunal as it was deciding a different issue, namely whether the Payment was ‘wages’ within the ERA, save that its decision includes a summary of what Broadcom thought it was doing in making the Payment.

Further, it did not matter that the payment was made a month later rather than the two days promised by the shareholder services e mail of 17 December 2015 as it was still clearly made “in connection with” the loss of the options. The merger was effective on 1 February 2016 and the payslip referencing the Payment was dated 3 February 2016, two days later even though payment was made on 4 March 2016.

We agree with HMRC that section 476 takes priority over section 401 by virtue of section 401(3).

The Appellant argued that the loss to which the compensation related was the loss of the right to participate in the 1988 plan and therefore his employment rights were varied. We accept that the point is arguable but we agree with HMRC that the Payment was intended and was most closely connected to the loss of the Appellant’s share options. Indeed, in cross examination the Appellant accepted that he would not have had the Payment had he not held the options. The fact that Broadcom made the payment later and potentially of a different amount than that originally represented as payable does not alter the position. The documents and e mails which we have seen make it clear that the Payment was made for the loss of the stock options.

It might also be said that the Appellant lost the right to participate in stock option plans generally. Whilst the arrangements were not made clear to us in evidence, the Appellant was offered alternative share options but chose not to take them up. We are not in a position to measure the equivalence of the old and new options but we find that to the extent the Appellant lost the right to participate in share options generally (rather than the 1988 plan and/or the options he held prior to the merger), that loss was due to the Appellant’s actions not the merger and resulting Payment. The Appellant’s concession that he would not have received the Payment but for holding the stock options also points to the Payment relating to the loss of the options rather than a more generic right to participate.

We do not find the deduction of the employer NIC and the operation of the Joint Election to be significant.

We therefore accept HMRC’s arguments on the Substantive Issue and find that the Payment was made ‘in connection with’ an employment-related securities option within section 476 and not for the loss of employment rights as argued by the Appellant. If necessary we would also find that section 477(3)(c) applied as the payment is within section 477(6), being a benefit in consideration or in connection with failing to acquire securities.

Section 12D TMA provides insofar as relevant;

Section 87 FA19 introduced section 12D TMA with transitional provisions in section 87(4) as follows:

The Appellant argued that the Second Closure Notice was invalid because the coming into force of section 12D retrospectively validated the Initial Closure Notice by deeming the Initial Return to have been made pursuant to a notice under section 8 TMA.

The Appellant’s grounds of appeal in the 2018 appeal did not include the argument that the Initial Return was not a return under section 8 TMA. The carve out in section 87(4) therefore does not apply because the condition in section 84(4)(b) is not satisfied. Section 12D accordingly applies to the Initial Return.

The Appellant also argued that HMRC’s subsequent processing of the Second Return showed not only that the Initial Return was still in existence but also HMRC treated the Second Return as an amendment to the still extant Initial Return. Thus:

As HMRC were still treating the Initial Tax Return as valid, section 12D(1)(c) is satisfied and so section 12D validates the Initial Return. The Initial Enquiry is therefore also valid. The Appellant’s notice of 15 February 2019 under section 711 ITEPA was therefore invalid. The repayment amendment of 29 October 2019 cannot be an amendment under section 9 ZA TMA because it was made more than 12 months after the filing date for the Initial Return. The Second Enquiry is invalid because the Initial Enquiry is still alive.

If the Second Enquiry is invalid then the Second Closure Notice is invalid and the Appellant is not liable for the tax that is subject to this appeal.

Separately, the 2019 Notice was not valid because a notice can only be issued under section 8(1) TMA:

HMRC already knew the amount of tax that was due.

HMRC objected to the Appellant’s argument on a number of grounds.

First, as the Appellant withdrew his appeal to the Upper Tribunal, the 2019 Tribunal Decision stands and this Tribunal does not have jurisdiction to consider arguments in respect of the Initial Closure Notice which was the subject of that appeal. Section 12D cannot be intended to reopen concluded appeals.

Second, section 12D does not in any event apply because ultimately HMRC did not treat the First Return as being made pursuant to a section 8 TMA notice and so section 12D(1)(c) is not met. Prior to section 12D, it was HMRC policy to treat voluntary returns as having been made pursuant to a Section 8 TMA notice provided there was no objection from the taxpayer to it being so treated. In his letter of 13 April 2018 prior to the hearing the Appellant argued that the Initial Return was voluntary, not made pursuant to Section 8 and therefore invalid. HMRC therefore applied their policy and ceased to treat the initial return as made pursuant to a Section 8 notice. Section 12D cannot therefore apply and, as pointed out by the Tribunal in the 2019 Tribunal Decision, this Tribunal does not have jurisdiction to challenge the exercise of that discretion.

Third, the disapplication of the retrospective effect of section 12D as set out in section 87(3) FA19 applies in that by virtue of the letter of 13 April 2018 one of the Appellant's grounds of appeal was that the purported return was not a return under Section 8 (section 87(3)(b)).

In any event even if, according to the Appellant, the Initial Return should take precedence over the Second Return this does not help the Appellant as the Initial Closure Notice would be valid from which the Appellant would have no right to appeal and this appeal would need to be struck out.

To the extent that the Appellant argues that the enquiry into the First Return remains on HMRC’s system, even if it has not been “unlogged”, this is irrelevant. Whether there is a valid return, enquiry and closure notice must be judged by the actions of HMRC not internal processing.

We find the Appellant’s purpose in raising this argument unclear. In the course of the hearing the point was made by Mr Farooq to the Appellant that were the Appellant to win on this point, there was nothing to stop HMRC from opening another enquiry and restarting the process all over again. The Appellant accepted the points but did not in express terms withdraw the ground of appeal and so we address his arguments.

However, HMRC produced no authority as to the interaction of section 50(10) and section 12D.

We are conscious this issue might need proper argument with a represented appellant but in our view section 50(10) TMA applies and so the Tribunal’s striking out of the Initial Appeal in the 2019 Tribunal Decision, which was ultimately not appealed (section 50(11)), is determinative of that appeal notwithstanding section 12D. To hold otherwise would invite the reopening of decided appeals.

Our determination that section 50(10) overrides section 12D is sufficient to dispose of the Section 12D Issue. However, we have considered the Appellant’s other arguments on the assumption we are wrong on the interaction of sections 50(10) and 12D.

Section 12D TMA only applies where HMRC treats the relevant return as made pursuant to a valid notice (section 12D(1)(c)). HMRC did originally so treat in accordance with its then policy but then withdrew that treatment following the Appellant’s letter of 13 April 2018. For this purpose it is irrelevant that the Appellant changed his position in his letter of 30 June 2018 as it is HMRC’s application of its policy that matters not the Appellant’s position.

For the purposes of applying section 12D(1)(c) it is appropriate to look at how HMRC ultimately applied its policy and it ultimately did not treat the relevant return as made pursuant to a valid notice. Accordingly, we agree with HMRC that Section 12D is not engaged and does not retrospectively validate the Initial Return.

We do not agree with HMRC that the conditions in section 87(4)(b) FA19 for the disapplication of the retrospective effect of section 12D have been met in that the issue of the Initial Return was not in the end one of the Appellant’s grounds of appeal.

We agree that the Appellant's letter of 13th April 2018 amounts to the submission of new grounds of appeal:

However, the Appellant changed his position when he replied to Mrs Carwardine on 30 June 2018. The position was as summarised by this Tribunal in the 2019 Tribunal Decision at [8(10)]:

In the later letter of 30 June 2018 the Appellant seeks to argue, consistent with his position in the hearing that Patel [2018] TC 06426 was wrongly decided, and that the return was nevertheless valid.

In our view therefore, the net result of the correspondence was that the Appellant was not arguing that the Initial Return was voluntary. Accordingly, it cannot be said for the purposes of section 87(4)(b) FA19 that;

In our view therefore the conditions in section 87(4) for the disapplication of the retrospective effect of section 12D are therefore not met.

We are not persuaded by the Appellant’s argument that the Initial Return was still in existence and, that being the case, the Second Closure Notice was invalid. The Appellant’s evidence for this assertion is twofold. First the Appellant points to the references by HMRC to the Initial Return remaining “logged” and second that HMRC treated the Second Return an amendment to the Initial Return.

Further, we do not attach any weight to HMRC referring to the Second Return as an amendment of a return (for example, HMRC’s letter of 29 October 2019). The Appellant did not think he was amending a return (his letter of 5 November 2019) and we find it much more likely that HMRC were simply using standard letter templates which did not suit the unusual facts of the Appellant’s tax compliance history.

Following the 2019 Tribunal Decision and as recommended by the Tribunal, the Appellant initiated a process through section 711 ITEPA to generate a fresh tax return and HMRC’s actions thereafter appear to us to be entirely in accordance with the enquiry process as set out in TMA.

Even if the Appellant has uncovered some fact about the processing of his tax matters at HMRC (the existence and significance of which we are not persuaded), we have not been shown any provision in the relevant legislation or other relevant principle that directs us to look at the internal workings of HMRC’s case management system in this manner. Indeed, to do so would create additional evidential burdens on HMRC in the most routine appeals.

We therefore reject the Appellant’s arguments on the Section 12D Issue on three grounds:

For completeness we reject HMRC’s argument that that the conditions for the disapplication of the retrospective effect of section 12D in section 87(4) FA19, specifically in section 87(4)(b), have been met in that the issue of the Initial Return was ultimately not one of the Appellant’s grounds of appeal.

For the reasons set out above we therefore dismiss the Appellant’s appeal.

Finally, we also record that at the end of the hearing Mr Vallis made an application for costs under section 29 of the Tribunal, Courts and Enforcement Act 2007 and rule 10 of the Tribunal Procedure (FTT) (Tax Chamber) Rules 2009. Under Rule 10 the Tribunal may award costs:

Mr Vallis argued that the Appellant had shown excessive zeal, conceding in the hearing that the section 12D Issue would not get him anywhere in the long run. There was no good reason why the Appellant pursued the Section 12D Issue and the hearing could have been dealt with in a single day.

For the Appellant’s part he blamed HMRC’s behaviour in the lead up to the hearing, difficulties in agreeing the paper and electronic bundles and poor presentation of the arguments on section 12D.

In the hearing we declined to make a costs award against the Appellant and now confirm that decision.

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