The case of Moore vs HMRC (TC0886) focused on an arrangement involving restricted stock units (RSUs) connected to the 2007 sale of a UK company, Wombat Financial Software Inc to the NYSE Euronext, part of the New York Stock Exchange. As part of the deal Wombat’s de facto CEO, Danny Moore, continued to provide services to the buyer.
Tribunal Judge Anne Scott had her work cut out. Moore amended and revised his grounds of appeal on several occasions before the case was heard and during a video hearing conducted in November 2022. She was also presented with over 2,000 pages of documents.
RSUs are equivalent to phantom share options, and are particularly popular in the United States. They effectively give holders the right to increases in the value of underlying shares without any downside risk if the stock price goes down.
Incentive scheme
HMRC claimed that the RSUs were granted as part of an incentive scheme to encourage employee retention. As such, when the rights vested, income tax and national insurance contributions became due rather than capital gains tax and, under section 421A ITEPA, no deduction was available for consideration relating to the performance of employment duties.
Moore disagreed and appealed to the tribunal claiming that he was entitled to a deduction equal to $10m of RSUs received, though both parties agreed that if the appeal was successful the value could be agreed as a separate exercise.
He additionally claimed that even though his receipt was disproportionate to that of other shareholders, his RSUs were granted in consideration for shares that he previously held in Wombat.
He also initially claimed that he had provided consideration by ensuring that the deal was completed but withdrew that argument on the third day of the hearing.
Sale process
In brief, Moore was dissatisfied by how his position was left when Wombat was sold. He had joined in a relatively junior capacity. When the founder CEO took a backseat, however, Moore took on many of his duties, but not the CEO role.
He and the CFO were heavily involved in the negotiations on the prospective sale to NYSE Euronext. But as the deal reached its final stages, Moore felt that he was being short-changed. He insisted on changes that effectively carved out approximately $25m to benefit employees from a sale price of $225m. It was suggested that he would benefit to the tune of approximately $10m with rights conditionally vesting over three years.
Moore, who was periodically vague or contradictory in his responses, took the view that the RSUs created to facilitate these arrangements could be deducted as consideration on the ultimate sale of any underlying shares received.
Red flag
He probably didn’t help himself by submitting and then amending tax returns, which generally acts like a red flag for HMRC inspectors. However, they did not enquire into or amend the return for 2007/08, the year covering the transaction. Moore’s capital gains tax computation included the value of the RSUs with discounts for uncertainty regarding their value and also taper relief.
The challenges came in the following two years when Moore claimed deductions from income, combining the provisions of sections 421A and 480 ITEPA, which permit adjustments for consideration on a just and reasonable basis but specifically exclude anything relating to the performance of employment duties.
Moore’s advisers challenge HMRC relying on a decision in the Rangers case RFC 2012 plc vs Advocate General for Scotland [2017] UKSC 45.
As a result, his tax returns for 2008/09 and 2009/10 each included significant deductions representing the discounted value of the RFUs from employment income based on notional amounts that effectively reversed part of the tax deduction at source correctly applied by his employer.
HMRC challenged the assertions, taking the view that no consideration was paid for the RSUs and reversed a total of $9m of deductions across the two years.
The judge explained that she had considerable experience of mergers and acquisitions and expressed some doubts regarding Moore’s conduct and claims, especially the way that they kept changing.
All a charade
Because the RSUs were given to many employees, but not to other shareholders, she remained unconvinced by assertions that the two parties’ intentions were not accurately represented in sale documentation that was “all a charade”. She concluded that the payments did arise by reason of employment and had been correctly taxed. She did, however, grant Moore a right to appeal.
The 31-page report suggests that the appeal was somewhat speculative. But the case raises some interesting questions about how the self assessment tax system operates in grey areas, where taxpayers can amend and change returns to achieve a desired outcome, for example unilaterally creating a notional deduction against employment income for “consideration”, although such decisions will be open to challenge.
