[2011] UKFTT 37 (TC)

TC00914

Appeal number: TC/2010/04619

INCOME TAX –termination payment – transfer of shares and cash payment under company incentive arrangements – were arrangements tax approved – no – had an agreement been reached with HMRC to compromise tax payable – no – appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	LARS SJUMARKEN	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	NICHOLAS ALEKSANDER (TRIBUNAL JUDGE)					HELEN FOLORUNSO				

Sitting in public at in London on 6 December 2010

The Appellant in person

Heather Leithes-Wilson, an officer of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This appeal relates to the liability of the Appellant to income tax on payments made to him on his redundancy.  The matter under appeal are amendments made to the Appellant's self-assessment for the tax year 2005/6.  The amendments were made following the issue of a closure notice under s28A Taxes Management Act 1970 ("TMA") on 6 January 2010, following an enquiry into the return and self assessment under section 9A TMA.  The original self assessment showed tax repayable of £2681.36.  The additional tax charged by the amendment was £60,517.72, so the total tax now charged is £57,836.36. 
2.	The Appellant appeared in person.  The Respondents, HMRC, were represented by Ms Leithes-Wilson.  We heard evidence from the Appellant and from Mr Derek Clague, the officer of HM Revenue and Customs that dealt with the enquiry into the Appellant's self-assessment.  We also had before us a bundle of documentary evidence.
Background Facts
3.	We find the background facts to be as follows:
4.	The Appellant was employed as a managing director at the London Branch of BNP Paribas.  He was made redundant with effect from 18 October 2005.  A letter dated 17 January 2006 from BNP Paribas to the Appellant set out the terms on which he was made redundant.  The Appellant countersigned the letter to confirm acceptance of its terms on the same date.
5.	In addition to cash payments, there were also released to the Appellant shares in BNP Paribas awarded to the Appellant under BNP Paribas's Share Incentive Plans ("SIP").  In addition, the Appellant received a payment of the cash value of units held by the Appellant under BNP Paribas's Cash Incentive Plan ("CIP").
6.	The SIP shares were valued at £144,632.48 and the CIP payment was £56,863.27.  PAYE was withheld from the total payment made to the Appellant (including the value of the SIP shares and the CIP payment) at 20%.
Issues for Determination
7.	The issues before us are:
(1)	Whether the SIP and the CIP were tax approved plans, such that the release of the shares and the cash payment are exempt from income tax and NICs; or alternatively
(2)	Whether the Appellant and HMRC had reached a binding agreement to compromise the tax due on the SIP and CIP by a telephone conversation on 3 March 2009 between the Appellant and Mr Clague of HMRC.
Tax Approved Plans
8.	The only evidence that we have that the plans were tax approved is the Appellant's statement in evidence that BNP Paribas had assured him that they were so approved, and that tax deducted in respect of the SIP and CIP were only made out of an excess of caution.
9.	In contrast, the evidence that they were not tax approved is overwhelming.
10.	First, the Appellant was unable to produce any certificates or other documents evidencing his participation in any of the plans.  Such certificates would normally indicate the nature of the plan and its tax status.
11.	Secondly, there is correspondence from HMRC's Employee Share Schemes Unit (which is the section within HMRC responsible for approving such plans) confirming to Mr Clague that BNP Paribas had not applied for approval for any plans.
12.	Thirdly, in a letter dated 26 August 2008 from the Appellant to Mr Clague, he states that the shares were released to him under the BNP Paribas Share Incentive Plan 2003 and 2004.  The rules of the 2004 SIP were included in the bundle, and it is clear that the rules are such to make them incapable of tax approval in the UK.   We consider it unlikely that the rules of the 2003 SIP would have been materially different from the rules of the 2004 SIP.  The Appellant told us in evidence that the balance of the shares and the cash payment were made under other tax approved arrangements such as the proceeds of sale arising from the exercise of options granted under an approved company share option scheme or an approved sharesave scheme.  However (i) the letter of 17 January made no reference to the exercise of any share options; and (ii) the Appellant was unable to produce any certificates or option agreements, nor did he produce payslips showing deductions of contributions for sharesave savings plans.
13.	Fourthly we are not aware of any provision in UK tax legislation for tax approved cash remuneration plans, and the Appellant was not able to point us to any such legislation. 
14.	Finally, we note that the letter of 17 January 2006 expressly states that the transfer of shares under the SIP and the CIP payments are taxable.  Although the Appellant states that the withholding of tax under PAYE by BNP Paribas was only made out of an excess of caution, the only evidence he can produce to support this (other than his report of a conversation with BNP Paribas executives) is a letter dated 2 March 2009 from  BNP Paribas to him stating that tax was withheld "as part of our standard procedures".
15.	We find that the transfer of shares to the Appellant under the SIP and the cash payment made under the CIP represented earnings liable to income tax and NICs.
Compromise Agreement
16.	On 2 December 2008, the Appellant wrote to Mr Clague quoting from the HMRC guidance on employee share incentives that awards made under share incentive plans are not taxable in the case of redundancy.  It is clear from the context that the Appellant was referring to the guidance notes issued by HMRC relating to the completion of tax returns, and the reference to share incentive plans is to approved share incentive plans.  Mr Clague replied on 21 January 2009 noting the text in the HMRC guidance, and requesting that the Appellant obtain written clarification from BNP Paribas as to why they considered that the amounts were taxable, or confirming that tax was withheld in error.
17.	On 3 March 2009, the Appellant telephoned Mr Clague.  We had before us an extensive typewritten note of that telephone conversation from the Appellant and a brief manuscript note (with a typewritten transcript) of the conversation from Mr Clague.    At the hearing, the Appellant also produced the manuscript notes that he made in advance of the call in preparation for the issues he intended to raise on the call, and his contemperaneous manuscript note of the call.  The manuscript note of the call was substantially the same as the typewritten note, and the preparatory notes were in line with the issues mentioned in the Appellant's manuscript note of the call.
18.	The Appellant's typescript note of the call is as follows:
"I called DC (Derek Clague).  Reference to his letter 21 Jan I said I welcomed that he now agreed that the SIP was tax free.  I told him of my discussion with BNPP HR the day before, to seek documentation  of why they had taxed the SIP and CIP, and where they told me they think the plans were tax qualifying (ie tax free) and that key personnel with the best knowledge of the plans had left the firm.  I explained to DC what the bank stated, that, whilst the bank could see that they had made a mistake in withholding tax, they were only willing to refer to "general policy" in writing, since they did not want to admit their mistake in writing and expose themselves to liability.  I then read the text that BNPP was prepared to put in writing back to DC, and he said he agreed that the company might suggest their mistake without saying so outright for reasons of potential liability.  We both agreed that we could not expect to get any further documentation or statement from the company, and that he (DC) had not been able to get any clarification from the company.  We discussed that this could be because the company did not want to expose its mistakes in taxation.
DC said that he accepted that the SIP was tax exempt, as he also hinted  in his 21 Jan letter; that he was prepared to conclude this way and that he was satisfied that the bank could not explain further.  He said he was less sure how to deal with the CIP, as there was less documentation regarding this plan.  He than said that because it is clear that both side are unable to get further clarification he now propose to settle by compromise.
I welcome this an reiterate my position and that the SIP was tax free and that the CIP should be treated the same, and asked what he had in mind.  DC proposed that he would accept that the SIP is tax free, and that we meet in the middle somewhere regarding the CIP.  I said that the SIP was agreed as tax free, and what does he have in mind re the CIP; is it 40%, 50% or 60%.  DC said the SIP is accepted as tax exempt, and that I should propose a portion of the CIP to be treated as taxable, and he promised "to look favourable upon that".  We then again confirmed the compromise to settle the case; that the SIP is fully tax exempt and the CIP is partially tax exempt.  The percentage to be agreed somewhere between 40 and 60%.  Deal done."
19.	The note then went on to discuss contributing any taxable amount to the Appellant's pension plan.  The note then continued:
"DC then said that it would make it easier for him procedurally if I could write him a letter to appear to re-propose the compromise agreement (he wants it to given the impression that the proposal comes from me).  DC explained that this would allow him procedurally to respond by re-accepting the proposal and issuing a closure notice if needed after a counterproposal regarding the exact percentage of the CIP to be tax exempt.  I said "but we have already agreed this", which he confirmed and reiterated that this was to ease procedure only, and that the agreement was done in its main parts.  I agreed to write a stand-alone letter to include the outline of the compromise agreement we had concluded."
20.	In contrast, Mr Clague's note of the same conversation is short.  It states as follows:
"T/p phoned re my letter dated 21 January.  Asked if I would give him a further two weeks to respond as he is awaiting a reply from company.  T/p explained that he still considers CIP to be non taxable but realises that without the proper documentation this would be difficult to prove.
I stated that hopefully the company would be able now to supply a clear description of the schemes operated"
21.	Mr Clague acknowledged in his evidence that the call was a long one.  However his practice was only to make a file note of the points raised in the call that were new.  As the bulk of the call was going over old ground (in particular the need for the Appellant to provide documentary evidence of the tax status of the plans), he did not record this in his note.  Mr Clague told us that he was in no doubt that no agreement to compromise the tax due had been reached in the course of that (or any other) call.  If it had, his invariable practice would have been to write to the taxpayer as soon as possible after the call setting out the terms of the agreement reached and the next steps to be taken.  He had not done so in this case.  Mr Clague also noted that although the Appellant might well have exhausted his ability to obtain evidence of the tax status of the plans from BNP Paribas, Mr Clague had other avenues open to him – and indeed managed to obtain confirmation subsequently from HMRC's Employee Share Schemes Unit that the plans were not tax approved.
22.	We find that no agreement had been reached for the following reasons:
(1)	The initial discussion on the call according to the Appellant's note, was to Mr Clague's "agreement" that the SIP was not taxable.  This refers back to Mr Clague's letter of 21 January.  However it is clear from that letter that the reference to SIPs being non-taxable was to tax approved SIPs, and not share incentive plans in general.  In the letter of 21 January, Mr Clague reiterates his request for documentary evidence of the tax status of the plans.  We consider (and so find) that Mr Clague's "agreement" that the SIPs were non-taxable was subject to the SIPs being tax-approved, and that Mr Clague was waiting for documentary evidence of that fact. The discussion on the call centred on the fact that SIPs are not taxable:  they only are so if they are tax-approved. We find that if an agreement had been reached on the call that the transfer of the shares under the BNP Paribas SIPs were not taxable, this was on the assumption that and was subject to the condition that the SIPs were tax-approved – which was not the case.
(2)	The "agreement" recorded in the Appellant's note left issues outstanding – in particular the percentage of the CIP that was not taxable.  For a legally binding contract to be reached as a matter of English law, all of the terms of the contract must have been agreed.  If terms remain to be finally settled, there is only an agreement "in principle", and as a matter of English law, such an agreement is not legally binding.  In this case, it is clear that the percentage of the CIP payment that was to be taxed was not agreed, and it was left to the Appellant to put a proposal to Mr Clague for consideration.  As the determination of the taxable proportion of the CIP payment would be an essential element in any compromise agreement, the fact that this was left outstanding means that no legally binding agreement had been reached.
(3)	We note that (for whatever reasons), the Appellant was asked to write to Mr Clague setting out the terms of the "agreement" as a proposal for HMRC to consider.  This suggests no legally binding agreement had been reached on the call, and that a legally binding agreement would only come into existence if and when the Appellant's written proposal was formally accepted by HMRC.
23.	There was considerable subsequent correspondence and telephone calls between the parties, but we find that none of these are of any assistance in determining whether an agreement had been reached in the course of the telephone call of 3 March.
24.	Accordingly, we dismiss the appeal, and uphold the amendments made to the Appellant's self assessment as stated in the closure notice of 6 January 2010.
25.	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.

NICHOLAS ALEKSANDER

TRIBUNAL JUDGE
RELEASE DATE: 7 January 20011