Stephen Davies v The Commissioners for HMRC

Section 144ZA of the Taxation of Chargeable Gains Act 1992 applies where its conditions in subsection (1) are met. Subsections (2) and (3) do not impose further threshold conditions. They prescribe the consequences for the two mutually exclusive classes of option identified by the statutory scheme.

An option is not outside section 144ZA merely because the grantor may satisfy the option holder’s rights by transferring shares or by making a cash payment. The extended meanings of buying and selling in section 144(6) apply. A contrary construction would leave the statutory consequences of the single-transaction treatment unexplained for options containing such a discretion and would lack a rational legislative purpose.

Stephen Davies v The Commissioners for HMRC concerned unapproved employee share options granted under Goldman Sachs’s 1999 Stock Incentive Plan. On exercise, Goldman Sachs could deliver the option shares or cash in lieu. Shares were delivered and immediately sold.

The appellant claimed capital losses on the footing that the market-value rule in section 17(1) applied and that section 144ZA did not. HMRC amended his self-assessments. The First-tier Tribunal dismissed his appeal on 17 February 2017, holding that section 144ZA disapplied the market-value rule. It had also held that section 144A did not apply, but that ruling was not challenged.

The sole issue before the Upper Tribunal was whether section 144ZA applied to an option whose grantor had discretion as to the means of satisfying the option holder’s entitlement.

1. Appeal dismissed. The First-tier Tribunal was correct that section 144ZA applied and therefore disapplied the market-value rule in section 17(1) in relation to these exercised options.

2. Section 144ZA(1) states the complete conditions for the section’s application: an exercised option must be treated under section 144(2) or (3) as part of a single transaction, and the market-value rule must apply or would apply but for section 144ZA. Those conditions were common ground.

3. Sections 144ZA(2) and (3) are operative subdivisions, not additional gateways. They address the two mutually exclusive classes into which options fall. If an option has elements of both, section 144(5), applied through section 144ZA(5), treats it as two separate options.

4. The phrase requiring an option to bind the grantor to sell or buy does not require the grantor to be bound to one and only one specified method of performance. By section 144(6), incorporated through section 144ZA(5), selling and buying include entering into a transaction other than a sale. Goldman Sachs’s discretion to transfer shares or pay cash therefore did not take the options outside section 144ZA.

5. This construction was supported by the statutory context and purpose. A contrary reading would leave section 144(2) without stated consequences for options containing a discretion as to performance. It would also introduce an irrational exclusion unsupported by the legislative history. Section 144ZA was enacted to reverse the perceived effect of Mansworth v Jelley [2002] EWCA Civ 1829 for the relevant unapproved options; the pre-legislative references to “certain” options did not identify discretionary options as excluded.

• Upper Tribunal (Tax and Chancery Chamber): dismissed the appellant’s appeal and upheld the First-tier Tribunal’s conclusion that section 144ZA of the Taxation of Chargeable Gains Act 1992 applied.

• First-tier Tribunal: on 17 February 2017 dismissed the appeal against HMRC’s amendments. It held that section 144A did not apply, but that section 144ZA did apply. Only the latter conclusion was appealed.