Special Commissioners

Employee v R & C Commrs

Exercise of share options

The Appellant was an employee of a Company which operated a number of share option schemes, both approved and unapproved, for employees of itself and subsidiary companies. These schemes were dealt with by the Revenue at its Shares and Securities Unit in Somerset House. The Appellant was allocated a number of options in an unapproved scheme both when he joined Company Ltd and also during his employment. The options were exercised at various times. When the Appellant exercised options while he was an employee of the Company he sold the shares on the same day and received the proceeds of sale.

The Appellant's employment with the Company ceased. One of the terms of the share option scheme was that options had to be exercised within ninety days of the end of the employment. The Appellant exercised his remaining options. Some of the shares were retained after the end of the tax year.

The shares retained were the shares in question in this case — whether there was a charge to tax on the exercise of share options even though the shares were not sold.

It was decided that a charge to tax arose on the exercise of share options even though the shares were not sold. The words of the section were clear. In addition, the out-of-time Revenue assessment could stand as the Revenue could not reasonably be expected to be aware of income which ought to have been self-assessed was not assessed due to negligent conduct of the taxpayer.

It is worth noting that the view that the charge to tax arose on the sale of shares and not the exercise of the share option appears to have been expressed by a “lone voice”.

For further information, see page 38.

Bower & Anor (executors of Bower dec'd) v R & C Commrs

Inheritance Tax — nominal value on retained rights

This was a valuation appeal in relation to what value should be placed on the reserved rights to a life annuity under a policy taken out by the deceased. At the time of taking out the policy, it had been issued to the trustees of a trust. As the policy had been taken out 5 months before she died, it was within the period of 3 years of the gift of the balance of the rights under the policy, there was a chargeable transfer for Inheritance Tax purposes of the amount of the gift.

The only point in dispute was what value should be attributed to the reserved rights held by Mrs. Bower to the life annuity.

The Special Commissioner held that the value placed by the Revenue was wrong and the determined figure was closer to that contended by the deceased's executors. The key issue in the decision was that due to the age of the person taking out the policy (90 yrs), was there any potential buyer of the annuity for a figure above the Revenue's nominal amount of £250. The Special Commissioner was of the view that for someone like him who was “fairly risk averse” that the resultant risk/reward ratio would seem to have been extraordinarily attractive.

For further information, see page 40.

Vinton & Anor (executors of Dugan-Chapman) v R & C Commrs

Business property relief

The deceased was allotted one million shares in a company two days before her death.

The deceased's spouse predeceased her. She was entitled to an interest in 80% of the residue of his estate. It was agreed that shares in the company formed part of the residue.

When she died there was a charge to inheritance tax as if she had, immediately before her death made a transfer of value. The value transferred was equal to the value of her estate at that time. Her estate included shares in the company. If her shares in the company were “relevant business property” then the value transferred as a result of her death would be reduced, as would the IHT payable.

One of the conditions was contained in the relevant legislation which was that for property to be relevant business property it must be owned by the transferor throughout the two years immediately preceding the transfer. The result of this provision on its own was that any property acquired by the deceased two days prior to her death could not have qualified for BPR. However, the condition would be treated as satisfied in circumstances where property was replacement property, i.e. it had to be identified with other shares previously owned by the person.

It was held that business property relief was not available in respect of the shares allotted to the deceased two days before her death. The basis for the decision was that the documents evidencing the allotment of the one million shares to the deceased did not evidence a reorganization, so that the one million shares could not be identified with any of the deceased's pre-existing shares with the result that business property relief was not available.

For further information, see page 41.

Uyar & Ors v R & C Commrs

Production of documents

In January 2007, enquiries were opened into the taxpayers' returns and documents and information sought. In March 2007, the taxpayers' advisers sent HMRC certain books and records. On receipt of notices served on taxpayers, they appealed on the basis that the information requested had already been supplied, and the balance of the information was not reasonably necessary in examining the Tax Return.

The Special Commissioners rejected the taxpayers' appeal. It was found that, with the exception of specific matters, the production of the documents and the furnishing of the accounts and particulars specified in the three Notices were reasonably required by the relevant officer of HMRC for the purposes mentioned in the notices.

It is interesting to note from the decision that the taxpayer does not have to produce the same information twice.

For further information, see page 42.

Emms v R & C Commrs

Expenses incurred exclusively and necessarily

The dispute concerned whether the cost of additional food, nutritional supplements and medicines incurred by the taxpayer was deductible from his income earned as a professional rugby union prop forward.

Taxpayer's argument: expenditure on additional food, nutritional supplements and medicines was incurred to maintain the required level of physical fitness for his employment as a professional rugby union prop forward.

Revenue's argument: the expenditure did not qualify as a deduction from earnings because it was not incurred exclusively and necessarily in the performance of his employment duties.

The appeal was dismissed as it was found that the taxpayer's expenditure on additional food, nutritional supplements and medicines for the relevant tax years was not incurred exclusively and necessarily in the performance of his duties of employment.

The basis for the decision was that the expenditure was governed by the requirements of a balanced diet and healthy living which secured enduring health benefits for the taxpayer as well as enabling him to perform his employment duties, i.e. duality of purpose.

For further information, see page 43.

Braithwaite v R & C Commrs

IP — Royalty payment

The taxpayer invented a dry powder inhaler. The IP in respect of the inhaler was vested in a company. The taxpayer owned 25% of the company. The company assigned the IP rights to another company. The taxpayer was also a party to the deed. The taxpayer was also employed by the second company. The deed provided that the royalty payments were based on sales of the inhaler.

Later, the deed was amended and the payment to the taxpayer was in respect of his services. The taxpayer declared that the income from the IP was to be held in trust from himself and his spouse in equal shares. The taxpayer and his spouse returned the income in their tax return. Revenue issued assessments in respect of the income being belonging to the taxpayer only.

The Special Commissioner decided that royalty payments belonged to the taxpayer alone and not to his wife. The key issue in the decision was that the payment had been made for the taxpayer's services.

For further information, see page 44.

Collins v R & C Commrs

Anti-avoidance — shams

The taxpayer sold shares and realised a considerable gain. A tax adviser arranged for the taxpayer to acquire a capital redemption contract creating a capital loss to offset the capital gain arising on the share disposals — he acquired for the amount of the gain (£2.4m) an endowment trust policy and the adviser arranged for this to be exchanged before the end of the tax year for a capital redemption contract.

It was HMRC's assertion that the taxpayer never truly acquired the endowment trust policy and thus that he could not have disposed of it or made a loss on that disposal. The onus of proof was on the taxpayer to show that HMRC were wrong.

The Special Commissioners found that the taxpayer brought before the Tribunal no cogent evidence that the policy was owned by him before the time of the assignment agreement.

The Special Commissioners considered the position if they were too heavy handed in the approach, i.e. if the taxpayer had acquired and assigned the Endowment Policy. In this case they found

• the value of the Capital Redemption Policy was almost £2.4m and accordingly that very little loss would have arisen, and
• it could not be said that these transactions gave rise to a real loss constituting a loss on a disposal within the meaning of the Act.

For further information, see page 45.