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L Sjumarken v HMRC

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In L Sjumarken v HMRC [2016] UKUT 568 (5 January 2017), the UT found that the fact that the taxpayer had foregone options on termination of his employment could not reduce the amount of taxable amount he had received under a compromise agreement.

Mr Sjumarken had worked for BNP as an investment banker until his employment had been terminated under the terms of a compromise agreement which provided for a cash termination payment, the release of shares under a share incentive plan (SIP) and cash under a cash incentive plan (CIP). During his employment, the appellant had been granted 3,000 long-dated share options but he had lost his entitlement to those on termination of his employment.

The first issue was whether the options should be treated as reducing the amount of Mr Sjumarken’s taxable income (as a result of the termination and CIP payments) from the compromise agreement. The UT found that the appellant had received the full amount of the agreed termination and CIP payments. ‘No part of the cash was realistically paid otherwise than as referred to in ITEPA 2003 s 401(1).’

Mr Sjumarken also contended that the receipt of the SIP shares was taxable under Chapter 5 of Part 7 and that an appropriate part of the value of the options constituted ‘consideration given for the securities acquired’ within s 479. It therefore fell to be deducted in calculating the amount of the taxable gain. The UT accepted that the release of an option could amount to consideration and it noted that ‘consideration given’ in s 470 must have its ordinary meaning; the price that the appellant gave to acquire the SIP shares. Nothing in the compromise agreement suggested that the options would be given up as consideration for the SIP shares; indeed, the appellant did not realise at the time that he was losing the options.

Read the decision.

Why it matters: The UT noted that the difficulty facing the appellant (when arguing for the deduction of the options he was foregoing) was the breadth of s 401(1) and the fact that the legislation did not contemplate this kind of deduction. As for his argument that the foregoing of the options had constituted consideration for other assets received under the compromise agreement, it was roundly rejected. ‘There are many contractual terms that are or may prove to be onerous to one or other party, but that does not necessarily mean that they constitute consideration. Whether a term does constitute consideration will be determined by what the parties agree.’

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