Tax tribunal criticises HMRC's guidance in Catherine Rawcliffe v HMRC
This case1 is of interest not so much for the underlying legal issue which was determined but rather for the unusually strong criticism from the First-tier Tribunal ('FTT') of HMRC's published guidance on approved company securities option plans.
The taxpayer, who was employed by ACI Ltd, was granted four options to acquire stock in ACI Inc (ACI Ltd's US parent). The options were not part of an approved company share option plan. They had to be exercised within one month of her ceasing to be employed by ACI Ltd, and could not be exercised where such exercise would violate securities regulations. After the taxpayer was made redundant, ACI Inc informed her that the options were suspended and could not be exercised as it had not complied with its Securities and Exchange Commission reporting obligations. She accepted ACI Inc's offer of a cash payment in full and final settlement of her vested options.
ACI Ltd operated PAYE on the payment and deducted basic rate tax. HMRC amended the taxpayer's self-assessment for the relevant year on the ground that it understated her taxable income by the amount of the payment she had received. She appealed against the amendment and presented her case in person before the FTT.
The parties' arguments
The taxpayer initially based her case on a public law argument, contending that as the payment effectively produced the same outcome as would have been the case if she had exercised the options, it should be treated for tax purposes in the same way. She argued that this contention was supported by HMRC's relevant guidance ('Approved Company Securities Option Plans' dated 18 January 2008), on which she had relied. This guidance stated that a person receiving an option under an approved share option plan would not be taxed when exercising the option where specified conditions were satisfied. The guidance then stated that, where an option is not within the rules of an approved plan when granted or executed, income tax is payable on any gain made by exercise within three years of the date of grant unless the exercise is upon leaving the company because of redundancy (among other reasons). The taxpayer accepted that her options were not part of an approved plan and that she had not exercised the options, but she contended that had she exercised the options, the gain would, according to HMRC's own guidance, have been excluded from the charge because of her redundancy.
HMRC contended that whatever the guidance said, the letter of the law was clear, and the position was as follows:
- the option was an option to which chapter 5, Income Tax (Earnings and Pensions) Act 2003 ('ITEPA') applied (see section 471 ITEPA);
- a chargeable event had occurred when the taxpayer received the payment (see section 477(3) and (6) ITEPA); and
- the payment was a 'benefit in connection with the employment-related securities option' (see section 477(3)(c) ITEPA) as it had been received in consideration for or otherwise in connection with failing to acquire securities pursuant to the employment-related securities option (see section 477(6)(a) ITEPA 2003).
The taxpayer responded to HMRC's contentions as follows:
- the payment was not to be regarded as a benefit for the purposes of ITEPA as she had not failed to acquire the securities that were the subject matter of the options. Any failure was on the part her employers, particularly ACI Inc, whereas she had taken every available step to secure the exercise of her option rights; and
- Wilcock v Eve2 was authority for the contention that the payment was not an emolument as it was not received 'in respect of' or 'by reason of' her employment.
The FTT's decision
The FTT described the guidance as being 'as illiterate and as potentially misleading as any official publication that we have come across'. The FTT accepted that the taxpayer had been misled by it but did not accept she would or could have done anything different if the guidance had been clearer, as she had been in a 'take it or leave it' position in relation to the payment. Even if the FTT had some form of public law jurisdiction, it would not have been inclined to find against HMRC on this issue as the wording used in other parts of the guidance supported HMRC's position.
The FTT also rejected the taxpayer's reliance on Wilcock v Eve, as that case had been superseded by section 477 ITEPA. The question was whether the payment received by her was 'in connection with failing … to acquire securities pursuant to the employment-related securities option' (see section 477(6) ITEPA). The FTT decided that it was as the failing can be attributable to the act or inaction of the employee, employer or any other person.
Although the taxpayer's arguments seem doomed from the outset, this case is of particular interest for the following reasons:
- the FTT used exceptionally strong language in criticising HMRC's guidance, and took the unusual step of pointing the taxpayer in the direction of the Revenue Adjudicator;
- the FTT expressed a doubt as to whether it had jurisdiction to entertain a judicial review application, but then proceeded to examine HMRC's guidance as if such a jurisdiction existed. The strict legal position was only considered after the public law question had been disposed of;3
- although the public law issue was academic given that the FTT found against the taxpayer on this point, that might not have been the case if the criteria spelt out by the Supreme Court in the Gaines-Cooper case4 had applied (i.e. that HMRC must treat a taxpayer as HMRC specify in their guidance – even if this does not reflect the law - where the guidance, when read as a whole, is clear and unambiguous, and has been relied upon by the taxpayer);5 and
- it is important for taxpayers to seek early legal advice where a public law point might be in issue. A judicial review application must be made in the appropriate forum (the High Court or Upper Tribunal) within a strict timeline - 'promptly … and … in any case within 3 months after the grounds to make the claim first arose'.6 Where a taxpayer's appeal raises issues that fall within the jurisdiction of the FTT, such as his liability to tax and public law issues which should be determined by way of judicial review, such as whether he as a legitimate expectation that HMRC will follow their own published guidance, a 'protective' application for judicial review ought to be made and a decision taken as to whether that application or the statutory appeal route should be given priority.
1  UK FTT 111 (TC).
2  STC 18.
3 This is particularly interesting as the eminent former Acting President of the Tax Chamber of the FTT presided over this case.
4 R (Davies and another) v HMRC; R (Gaines-Cooper) v HMRC  UKSC 47.
5 Perhaps perversely, HMRC are more likely to succeed in a judicial review application where their guidance is poorly drafted.
6 Civil Procedure Rules, Part 54, rule 54.5(1).