A special commissioner held that a charge to tax under ICTA 1988, s. 135 arose on the exercise of share options even though the shares were not sold, and that the Revenue were entitled to assess the taxpayer under TMA 1970, s. 29 because the fact that income which ought to have been self-assessed to income tax was not assessed was attributable to negligent conduct on the part of the taxpayer or his advisers within the meaning of s. 29(4). In any event, the Revenue officers could not have been reasonably expected, on the basis of the information made available to them, to be aware that income which ought to have been self-assessed to income tax was not assessed within the meaning of s. 29(5).

Facts

The taxpayer appealed against a notice of assessment for the year ending on 5 April 2001 in the sum of £490,250. The assessment was issued by the Revenue because they were of the view that the taxpayer, who was an employee of a company, had realised a gain by the exercise of a right to acquire shares and was accordingly chargeable to income tax under Sch. E.

The assessment was made out of time because the Revenue were of the view that the fact that income which ought to have been assessed to income tax had not been assessed was attributable to negligent conduct on the part of the appellant or the person acting on his behalf and that the Revenue could not have been reasonably expected, on the basis of the information made available to them, to be aware that income which ought to have been assessed had not been assessed.

The taxpayer appealed on the ground that the assessment had been made out of time. He argued that he had not been negligent and, on the basis of the information he had made available to the Revenue with his return, they would have been reasonably expected to be aware that income which ought to have been assessed had not been assessed. Later the taxpayer also argued that there was no charge to income tax where share options were exercised but where the shares were retained and not sold.

Issue

Whether a charge to tax under ICTA 1988, s. 135 arose on the exercise of share options even though the shares were not sold; and if so, whether the Revenue were entitled to assess the taxpayer under TMA 1970, s. 29(4) or (5).

Decision

The special commissioner (Dr Nuala Brice) dismissed the appeal.

ICTA 1988, s. 135

Section 135 of ICTA 1988 applied'where a person realises a gain by the exercise of a right to acquire shares'. The words of the section were clear and a gain arose on the exercise of the option even if there was no simultaneous sale of the shares acquired by the exercise. In such a case the realised gain would be more akin to the acquisition of a benefit in kind than to a pecuniary gain. The provisions of s. 135(3) reinforced that view because that subsection would be redundant if the section only applied where an option was exercised and the shares were sold at the same time. The provisions of s. 185 also tended to support that view because it dealt separately with the grant of an option, the exercise of an option and the sale of the shares in an approved scheme.

In the case of Ball (HMIT) v Phillips [1990] BTC 470 Hoffmann J stated, as a general principle, that liability to tax under the predecessor of s. 135 depended solely upon whether the conditions set out in that section had been satisfied. Those conditions were first, that the taxpayer should have acquired a right to buy shares as an employee of a body corporate; and secondly, that he should have realised a gain within the meaning of the section by the exercise of the right. In the light of that binding authority, the only conclusion was that income tax was chargeable on the exercise of the right to acquire shares even when the shares were retained and not sold (Yuill v Wilson (HMIT) (1980) 52 TC 674) and Yuill v Fletcher (HMIT) [1984] BTC 164 distinguished).

Negligent conduct

The next question was whether the fact that income which ought to have been self-assessed to income tax was not assessed was attributable to negligent conduct on the part of the taxpayer or his advisers within the meaning of TMA 1970, s. 29(4). In the context of s. 29(4), there had to be negligent conduct either by the taxpayer or by a person acting on his behalf. That meant that negligent conduct by the taxpayer's advisers would be sufficient.

Considering the facts and circumstances of the present case, a deliberate decision was made, by the taxpayer or his advisers, to submit the self-assessment return on the incorrect basis. It was known that that basis would substantially reduce the taxpayer's tax liability. The covering letter was inadequate to compensate for the incorrect return. The standards of compliance shown by the taxpayer and his advisers fell below the standards reasonably expected of the competent taxpayer and adviser and such conduct amounted to negligent conduct. The Revenue had to be entitled to assume that a professionally prepared tax return had been prepared competently. In the light of all the facts and circumstances, there was a loss of tax attributable to negligent conduct on the part of the taxpayer or his advisers within the meaning of TMA 1970, s. 29(4).

That conclusion meant that the Revenue were entitled to make an out-of-time assessment.

Aware of insufficiency of return

Accordingly, it was not necessary to consider s. 29(5) but, in any event, the Revenue should not have been objectively aware of the loss of tax. Applying the principles in Langham (HMIT) v Veltema [2004] BTC 156, the taxpayer's return and the accompanying documentation were neither accurate nor complete.

They did not unambiguously disclose any actual insufficiency in the self-assessment. The only information provided to the Revenue officers by the taxpayer and his advisers about the tax on the shares where options had been exercised and the shares not sold was contained in the paragraph in the covering letter. The information provided did not clearly alert the officers to the insufficiency of the self-assessment nor could they infer an insufficiency. It was not relevant that the officers could have made enquiries.

Langham v Veltema made it clear that s. 29(5) referred to an inspector's objective awareness but for good measure both revenue officers involved in the case gave evidence that they were not aware, and could not infer, the insufficiency of the self-assessment from the information provided. Following the judgment of the Court of Appeal in Langham v Veltema the Revenue published SP 01/06 entitled Self-assessment: Finality and Discovery and the taxpayer had argued the return complied with the statement of practice. The statement of practice did not have the force of law and it was published five years after the submission of the return at issue in this appeal. However, the taxpayer and his advisers did not comply with the guidance given.

Neither the return nor the covering letter stated that the taxpayer took a different view from the Revenue, nor did they state that the guidance given in the previous correspondence had not been followed. The point at issue was not clearly identified and the stance adopted by the taxpayer or his advisers was wholly unreasonable bearing in mind the clear words of s.135, the judgment of Hoffmann J in Ball v Phillips, the lack of any authority cited at the time to support the view taken, the known views of the Revenue, and the fact that the taxpayer's advisers knew that he was'a lone voice'.

Accordingly, the Revenue officer could not have been reasonably expected, on the basis of the information made available to him, to be aware that income which ought to have been self-assessed to income tax was not assessed within the meaning of s. 29(5).

(2008) Sp C 673.
Decision released 19 March 2008.