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Taxpayer not careless in share options case

16 July 2015. Published by Robert Waterson, Partner

In Alistair Norman v HMRC1, the First-tier Tribunal ("FTT") found that a taxpayer who wrongly recorded gains made after exercising a share option granted by his employer as capital, rather than income, was not "careless" for the purposes of paragraph 1(1), Schedule 24, Finance Act 2007.

As the taxpayer had not appealed the penalty, HMRC undertook to cancel the penalty.


In 2008, Alistair Norman ("the taxpayer") was employed by a company called QlikTech ("Qlik"). He was experienced in marketing software and under his contract of employment received a basic salary, a bonus and a car allowance. By separate letter, Qlik confirmed that the taxpayer was entitled to stock options. If the taxpayer served for 5 years, he would be entitled to exercise options over 15,000 shares in Qlik's parent company. If he left before that time, he would receive a proportion of the 15,000 referable to time in service.

The taxpayer was informed that the stock options were "part of [his] package" but did not "form any part of any contractual terms and conditions of employment". 

The taxpayer resigned in 2011 and exercised his stock options over 6,536 shares and immediately sold them for a profit. The only information he received regarding his exercise of the stock options was a transaction record prepared by Citigroup Global Markets Inc who acted as agent in the share transaction. He received no additional P45 from Qlik, or any other notice of a payment from which tax was deducted. Qlik did however file a P14 form with HMRC which aggregated the share option with his basic salary.

When the taxpayer's accountants completed his self-assessment tax return, they included the share transaction in the "gains qualifying for entrepreneurs’ relief" and "gains of the year before losses" boxes. HMRC noticed the disparity in the forms over a year later and wrote to indicate that they were undertaking a "compliance check" into the taxpayer's affairs.

In correspondence, the taxpayer argued that the shares were not income from his employment because the right to acquire them was not a term in his employment contract. HMRC rejected this argument and issued a discovery assessment, pursuant to section 29, Taxes Management Act 1970 ("TMA"), and a penalty assessment for carelessly submitting an inaccurate tax return, pursuant to paragraph 13, Schedule 24, Finance Act 2007.

The taxpayer appealed the assessment and, following an internal review, the matter was transmitted to the FTT for determination.

FTT's decision

In the view of the FTT, the taxpayer's analysis and understanding of the correct tax treatment of the shares he had received from Qlik was incorrect. The FTT concluded that the stock options which had been granted to the taxpayer were granted by reason of his employment and that gain had been realised on the exercise of the stock options and ought therefore to have been subject to tax as employment income.

With regard to the discovery assessment, the taxpayer argued that HMRC was out of time to raise the assessment and that HMRC had not "discovered" a loss of tax within the meaning of section 29 TMA. The FTT rejected these arguments. In this case the HMRC officer had the P14 and the tax return and noted that there was a substantial difference between them, on that basis the FTT accepted that the officer carrying out the compliance check made a discovery within the meaning of section 29(1) TMA and upheld the assessment.

The FTT considered whether the tax loss had been brought about carelessly, so as to justify the penalty assessment which HMRC had issued to the taxpayer. The oft repeated test is found in Colin Moore v Revenue and Customs Commissioners2, where it is expressed as follows:

The test to be applied, in my view, is to consider what a reasonable taxpayer, exercising reasonable diligence in the completion and submission of the return, would have done.

In completing his return, the taxpayer looked only at his P45, which showed his salary only and the Citigroup record of the sale. HMRC was of the view that the omission of the gain from the employment pages of the taxpayer's return was careless. The FTT did not agree. It found that it was reasonable for the taxpayer andhis accountants to complete the return in the way it had been completed - the FTT observed that Box 1 on the return contained the instruction “enter the total from your P45 or P60” – which was what the taxpayer had done.


The decision is lengthy, and, as is often the case with lengthy tribunal decisions, a great deal turns on the facts, however, this case does act as a further indicator of the pragmatic approach the FTT is prepared to take when considering whether a taxpayer or his adviser has been "careless".

The FTT accepted that it was reasonable for the taxpayer's accountants to come to the view that the gain did not come from, or by reason of, an employment, because it was not included in the taxpayer's contract of employment. This is a somewhat surprising finding given that the FTT concluded that the accountant's view was wrong as a matter of law. The FTT appears to have been influenced more by the fact that the only information available was the Citigroup transaction and that all the relevant sums were recorded on the return, albeit not all in the correct place.

The introduction of the self-assessment system led to a considerable shift in responsibility from the Revenue to the taxpayer which can have the effect of placing an unrealistic expectation of knowledge and understanding on the shoulders of individuals which has often led HMRC to view the word "careless" as synonymous with "mistaken". In this case the FTT was prepared to accept that the taxpayer was not careless in his mistake but as the FTT observed, the point is often "finely balanced" and therefore taxpayers (and representatives) who are in any doubt should consider obtaining specialist advice.

Please click here to read the full judgment.

[1] [2015] UKFTT 0303 (TC).

[2] [2011] UKUT 239 (TCC).

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