Chilcott & Anor v HM Revenue & Customs

Section 144A of the Income and Corporation Taxes Act 1988 imposed an additional income-tax charge where an employer was liable to account for tax on a deemed payment and the employee failed to reimburse the employer within 30 days. The charge applied even where reimbursement occurred later and the tax was ultimately paid. The provision was intended to provide a strong incentive for prompt payment and was not confined to tax-avoidance cases or cases involving tax leakage. Its clear terms could not be rewritten by implying a discretion, deleting the time limit or importing a mechanism for later cancellation. Parliamentary silence could not assist statutory construction under Pepper v Hart [1993] AC 593.

The individual appellants exercised share options granted by their employer, Evolution Group Services Ltd. They accepted that the resulting notional gains were chargeable to income tax and paid the tax due. The employer was nevertheless assessed under section 144A because the employees had not made good the employer’s PAYE liability within 30 days of the deemed payment.

The Special Commissioner dismissed the appeals on that issue. Proudman J dismissed the further appeal in the Chancery Division, in the judgment reported at [2009] EWHC 3287 (Ch). The Court of Appeal considered whether section 144A could be read purposively so that later reimbursement cancelled or mitigated the additional charge, or whether the provision was limited to avoidance or tax-leakage cases.

The appeal was dismissed. Lord Justice Lloyd gave the leading judgment. Sedley LJ agreed and added observations, and the Master of the Rolls agreed with both judgments.

1. Operation of section 144A. The statutory conditions were satisfied. The employer was treated under sections 203B to 203I, specifically section 203FB, as having made an assessable payment. It was required under section 203J(3) to account for the due tax. The employees had not made good that amount within 30 days of the deemed payment date. Section 144A therefore treated the due amount as income arising at the end of that period.
2. Effect of later payment. The charge applied according to its terms even though the employees later reimbursed the employer and the tax was ultimately paid to HMRC. The provision imposed a tax liability on specified conditions; it did not depend on a fiction that the employee had actually received the tax amount.
3. Purpose and statutory context. The essential purpose was to provide a strong incentive for prompt reimbursement where the employer could not deduct tax from an actual payment and might lack the funds to pay HMRC. The provision was not limited to avoidance cases. The potentially harsh or penal operation of the rule did not justify rewriting clear statutory language.
4. Alternative constructions. The comparison with sections 154 to 156 did not assist the appellants. Those provisions contained a net-benefit mechanism, but section 154(1)(b) excluded cases where the cost of the benefit was chargeable under another provision. Section 144A contained no equivalent cancellation or mitigation mechanism. Nor could the word shall be read as may so as to confer a discretion on the Revenue.
5. Authorities and parliamentary materials. The description of the later equivalent provision in McCarthy v McCarthy & Stone Ltd [2006] EWHC 1851 (Ch) as a penal clause was no more than dictum and overstated the position. Pepper v Hart [1993] AC 593 confirmed that the court must construe enacted words and cannot give them a meaning they cannot bear. Parliamentary silence supplied no assistance and could not properly be used to call parliamentary proceedings in question.
6. Order. The decisions of the Special Commissioner and Proudman J were upheld. Appeal dismissed.

• Court of Appeal (Civil Division): dismissed the appeal and upheld the decisions below on the construction and application of section 144A.
• High Court (Chancery Division): Proudman J dismissed the appeal from the Special Commissioner in the judgment reported at [2009] EWHC 3287 (Ch).
• Special Commissioner: Mr John Clark dismissed the appeals on the section 144A issue on 18 December 2008.