Kieran Anthony Rogers v HMRC (2011) – Income tax on share transfer to employee
09 May 2011
The First Tier Tribunal recently considered the correct test to determine whether a transfer of shares to an employee was within the meaning of "emolument" - and consequently chargeable to income tax - under section 19 of the Income Tax Act 1988 (ICTA 1988).
Mr Rogers and two colleagues (together referred to as "the Team") worked together in a number of different organisations within the field of credit scoring (ie. the statistical analysis of a person's credit files). In 1988, Mr Rogers joined the Scorex group of companies, with the other members of the Team joining shortly afterwards. At this time the Scorex group, owned by Jean Michel Trousse ("JMT"), was virtually a start-up in the credit-scoring business.
The Scorex group became very successful and grew steadily during the 1990s. The Team were instrumental in this success, with Mr Rogers securing a considerable expansion in the client base through his marketing skills. During this time, the members of the Team received remuneration at the market rate, plus an additional bonus. There were also a number of discussions regarding the possibility of the members of the Team acquiring equity in the business, which led to an understanding that they would at some stage acquire shares at a price below full market value, although the exact details where left vague.
From the mid-1990s, Mr Rogers developed a drinking problem which began to affect his work. As a result, by 2001 he was playing a far less prominent role in the business. In March 2001, JMT died in a plane crash. Shortly afterwards JMT's father, who acknowledged that he knew about JMT's promise regarding the shares, arranged for a number of shares in Scorex NV to be transferred to the members of the Team at a nominal value. On 20 June 2001, Mr Rogers received 9% of the shareholding in Scorex NV with no conditions attached.
The Tribunal held that the transfer of the shares to Mr Rogers was not an emolument from his employment within the meaning of section 19 ICTA 1988, and so was not chargeable to income tax.
According to the Tribunal, the correct test to determine whether the transfer of shares to Mr Rogers constituted an emolument was whether the receipt of the shares derived from his employment. This would only be the case (as set out in the House of Lords judgment in Hochstrasser v Mayes 38 TC 673) if the employment was the active cause ("causa causans") of the transfer, and if the receipt of the shares was in the nature of a reward for past, current or future services.
The Tribunal conducted a thorough review of the case-law in this area, and set out a list of factors which could be taken into account in determining whether the receipt was derived from the employment. These were:
- whether there was a customary aspect to the receipt;
- whether the receipt was recurrent in nature;
- whether the value of the receipt was large in relation to the employee's ordinary salary;
- whether the taxpayer was paid a market rate salary;
- whether the employee had a contractual entitlement to receive the payment or benefit; and
- whether the payment was made by a person other than the employer.
However, the Tribunal then went on to state that none of these factors was determinative or even particularly helpful in the present case. Taking into account all the evidence, the Tribunal concluded that the transfer of the shares to Mr Rogers was a gratuitous transfer reflecting JMT's gratitude for the role Mr Rogers had played in building up the Scorex business in its early years, and that it did not arise from the Appellant's employment. The transfer was more in the nature of a testimonial, and the employment or office of Mr Rogers was not its active or dominant cause.
The transfer of the shares in this case took place before the enactment of the Income Tax (Earnings and Pensions Act) 2003. Since that Act has come into force, gifts of shares to employees are now usually taxable as employment income, because they are deemed to be employment-related.
However, there will continue to be cases where shares acquired by employees are not deemed to be by reason of employment, for example if the shares are acquired from a shareholder who is not connected with the employer. In this situation, the existing case-law regarding whether payments are received by reason of employment will still apply. The approach of the Tribunal in this case shows that the court will examine all the factual circumstances to determine whether the employment or office was the active cause of the payment or the provision of the asset in question.