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	United Kingdom Special Commissioners of Income Tax Decisions
You are here: BAILII >> Databases >> United Kingdom Special Commissioners of Income Tax Decisions >> Sheikh v Revenue and Customs [2005] UKSPC SPC00514 (16 December 2005) URL: http://www.bailii.org/uk/cases/UKSPC/2005/SPC00514.html Cite as: [2005] UKSPC SPC00514, [2005] UKSPC SPC514

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SPC00514

EMPLOYMENT INCOME – share option – whether assigned by oral agreement – no – appeal dismissed

THE SPECIAL COMMISSIONERS

MOHAMMED AFZAL SHEIKH Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Special Commissioner: DR JOHN F. AVERY JONES CBE

Sitting in public in London on 12 and 13 December 2005

Alun James, counsel, instructed by Thornhill Scott Limited, for the Appellant

Sam Grodzinski, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2005


 


DECISION

1. Mr Mohammed Afzal Sheikh appeals against an assessment made on 2 March 2005 to income tax for 1999-00 on income from share options of £309,986.36 (tax £123,994.54). The Appellant was represented by Mr Alun James, and the Revenue by Mr Sam Grodzinski. Both produced detailed skeleton arguments, and Mr Grodzinski written closing submissions, all of which were most helpful even though I am afraid this decision does not deal with most of them as I have decided the appeal solely on the facts.
2. The issue in this appeal is whether the Appellant is chargeable to income tax on the exercise of share options on 31 January 2000, as the Revenue contend, or on the assignment of the options by an oral agreement made in July 1999, as the Appellant contends.
3. Section 135 of the Taxes Act 1988 provides:

"(1) Subject to section 185, where a person realises a gain by the exercise, or by the assignment or release, of a right to acquire shares in a body corporate obtained by that person as a director or employee of that or any other body corporate, he shall be chargeable to tax under Schedule E on an amount equal to the amount of his gain, as computed in accordance with this section.

(2) Without prejudice to section 185, where tax may by virtue of this section become chargeable in respect of any gain which may be realised by the exercise of a right which is not capable of being exercised more than ten years after it is obtained, tax shall not be chargeable under any other provision of the Tax Acts in respect of the receipt of the right.

(3) Subject to section 136(4)—

(a) the gain realised by the exercise of any such right at any time shall be taken to be the difference between the amount that a person might reasonably expect to obtain from a sale in the open market at that time of the shares acquired and the amount or value of the consideration given whether for them or for the grant of the right; and

(b) the gain realised by the assignment or release of any such right shall be taken to be the difference between the amount or value of the consideration for the assignment or release and the amount or value of the consideration given for the grant of the right;

(a just apportionment being made of any entire consideration given for the grant of the right to acquire those shares and other shares or otherwise for the grant of the right to acquire those shares and for something besides).

…

(8) In any case where—

(a) a person has obtained any such right to acquire shares as is mentioned in sub-section (1) above ("the first right"); and

(b) as to any of the shares to which the first right relates, he omits or undertakes to omit to exercise the right or grants or undertakes to grant to another a right to acquire the shares or any interest in them; and

(c) in consideration for or otherwise in connection with that omission, grant or undertaking, he receives any benefit in money or money's worth;

he shall be treated for the purposes of this section and section 136 as realising a gain by the assignment or release of the first right, so far as it relates to the shares in question, for a consideration equal to the amount or value of the benefit referred to in paragraph (c) above.

(9) Where subsection (8) above has had effect on any occasion, nothing in that subsection affects the application of this section in relation to a gain realised on a subsequent occasion, except that on that subsequent occasion so much of the consideration given for the grant of the first right as was deducted on the first occasion shall not be deducted again."

4. There was a bundle of documents, and an agreed statement of facts as follows

(1) The appellant is Mohammed Afzal Sheikh of 242 Milby Drive, Nuneaton, CV11 6UH, tax reference WM 02 92 97 D.

(2) The Appellant commenced employment with Mobile Systems International Plc in April 1996. He was made redundant on 31 July 1999. He re-joined the same group on 4 October 1999, as an employee of Metapath Software International Ltd, to implement a new project. The project did not go ahead and his employment ceased on 31 December 1999.

(3) The Mobile Systems International Plc group merged with Metapath Software International Inc group on 2 December 1998.

(4) As an employee of Mobile Systems International Plc, the Appellant was granted share options as follows:

No. of Option Date Exercise

Shares Certificate Company Granted Price

8,000 72 Mobile Systems International Holdings Ltd 30.03.98 $6.31/£3.75

27,000 141 Mobile Systems International Holdings Ltd 30.03.98 $6.31/£3.75

15,000 G2-117 Mobile Systems International Holdings Ltd 08.09.98 $6.31

Details relating to the dates of exercise and the percentage of the number of shares which can be exercised on these dates are set out on each option certificate.

(5) On the merger mentioned in (3) the options mentioned in (4) which had not expired were rolled over and respectively became:

Effective

No. of Option Date Exercise

Shares Certificate Company Granted Price

12,687 267 Metapath Software International Inc 31.03.98 $3.98

42,821 205 Metapath Software International Inc 31.03.98 $3.98

23,790 206 Metapath Software International Inc 08.09.98 $3.98

On rollover the vesting profile remained unchanged but the number of shares increased and the exercise price decreased. The rules under which the options were granted remained unchanged.

(6) Option certificate 72 (and subsequently Certificate 267) states the options were "Approved" but they were not options issued under a UK Inland Revenue approved scheme.

(7) All the share options were granted under the Rules of the Mobile Systems International Inc Share Option Plan, dated 17 September 1997.

(8) In the rules governing the share options, rule 2.5 states :

"Options may not be transferred

Subject to the rights of an Option Holder's personal representatives to exercise an Option as provided in Rule ….., every Option shall be personal to the Eligible Employee to whom it is granted and shall not be capable of being transferred, assigned or charged. Each Option Certificate shall carry a statement to this effect."

(9) Each option certificate states the options are …"not transferable, assignable or chargeable."

(10) The Appellant contends that he agreed to exchange the share options with Mr Moquette for the provision of business assistance. The nature of any agreement between the Appellant and Mr Moquette is an issue in this appeal.

(11) The Appellant gave notice of the exercise of options using two Form of Notice of Exercise of Option, both dated 31^st January 2000, as follows:

Related Total

No. of Option Exercise

Shares Certificate Company Cost

8,722 267 Metapath Software International Inc $34,713.56/(£21,362.19)

36,873 205+206 Metapath Software International Inc $146,754.54/(£90,310.48)

(12) Two share certificates dated 31 January 2000 for 8,722 and 36,873 shares were issued initially in the name of the Appellant.

(13) Subsequently two transfer forms were completed and two share certificates dated 23 May 2000 for 8,722 and 36,873 shares were issued to Mr Moquette.

(14) In June 2000, Marconi Software International Inc ("Marconi"), a Delaware corporation, acquired Metapath Software International Inc.

(15) Mr Moqutte sold all the shares on 11 July 2000 to Marconi for US$17.50 per share.

(16) The Appellant did not declare any income in his 1999-2000 tax return, which he had prepared and filed himself, in relation to the exercise of these share options. During HMRC's enquiry into that return, one of the reasons given by the Appellant for not making such a declaration was that he had not received any income because he had agreed to transfer the whole interest in the option exercise and share ownership to Mr Moquette in return for business and financial advice and assistance. The nature of any agreement between the Appellant and Mr Moquette is an issue in this appeal.

5. I heard evidence from the Appellant and, by means of a telephone conference call from Geneva, from Mr Michael Moquette, and both of them provided written statements. It was proposed that Mr Moquette give evidence by video conference but it transpired that the Tribunal's equipment is based on the use of telephone lines and Mr Moquette's is based on the internet. In future when it is proposed to give evidence in this way I would request that it is discussed with the Tribunal staff in good time to avoid this type of problem as evidence by telephone is far less satisfactory.
6. From this evidence I find the following further facts. Where I record in this paragraph that somebody said something this should not be taken to imply that I am finding what was said as a fact; I shall make such findings later.

(1) The Appellant, who has considerable expertise in telecommunications, was working for Mobile Systems International Limited ("MSI"—as mentioned in the agreed statement of facts there was a subsequent merger with Metapath Software International Inc, but I shall refer to MSI throughout as meaning whichever was the relevant company at the time) heading a team dealing with performance engineering. MSI is a company whose software was used worldwide to plan and design mobile phone networks. In 1999 it was a substantial company with 650 employees, 13 offices and a turnover of $70 to 80m. It was not listed and in 1999 there was no market for its shares. It is relevant that the height of the "dot.com" boom was in 1999 and 2000.

(2) Mr Moquette had a banking background and was at the relevant time working in Switzerland on investments for private clients, and for IRR, an investment company. Mr Moquette had previously brought in MSI as technical adviser on a project in Belarus. The Appellant and Mr Moquette worked together on the project while the Appellant was working for MSI and Mr Moquette was, on behalf of a client of a private bank, advising SB Telecom Group, a GSM mobile telephone operator in Belarus. Much of this relationship was informal and not documented. The Appellant recognised Mr Moquette as a person having contacts with senior people in the industry and having expertise in matters that he lacked such as raising capital. Mr Moquette recognised the Appellant as a person having considerable technical expertise in the telecommunications field. During their meetings over this project they discussed in general terms the possibility of the Appellant setting up in business himself.

(3) In January 1999 the Appellant had an idea concerned with "mobile internet," an example of which is a drinks machine informing a depot that it had run out of drinks by using mobile communication. He approached Mr Moquette for assistance with setting up his own business with such matters as financing and marketing. Mr Moquette asked colleagues of his for their technical advice on the Appellant's idea, and they supported the idea. As a result of these discussions, the Appellant decided to leave MSI and arrangements were made for him to leave at the end of July 1999 on the grounds of redundancy, meaning that someone would take over his position running performance engineering, on terms that were documented in a letter from MSI of 18 June 1999.

(4) In the first week of July 1999, which the Appellant said Mr Moquette's diary confirmed was on 9 July 1999 (Mr Moquette was speaking without any papers and was not asked about the date), they met in a coffee shop near Moorgate. The Appellant described the deal they made in this way in his witness statement:

"….we shook hands and concluded our discussions agreeing that MM would take exclusive responsibility for the development of the business plan, raising the funds, for driving the key business deals and any joint ventures/acquisitions. MM would support the business with a minimum of one day a week of his time. It was agreed MM would continue until the business was successful and eventually sold. As well as the share options mentioned below MM also agreed to take a very small minority equity position in the new venture, take no salary or commissions and pay his own expenses…

It was agreed I would pay the option exercise price of £111,672 when required, which I subsequently paid by borrowing £90,000, and any upside/downside on value of the options was the compensation for the continuing business arrangement…."

The Appellant explained that he did not have the funds to be able to promise Mr Moquette a salary. His options over MSI shares were the only asset that he could offer Mr Moquette. The Appellant's evidence was that at the time the MSI shares were in his view, and he thinks were generally perceived to be, worth no more than the option exercise price. Mr Moquette was enthusiastic about the potential of the MSI shares but thought that the options were "not in the money" then. The Appellant described the deal in evidence as his exercising the options and then handing over the shares. The equity stake for Mr Moquettte was not mentioned in the note of the meeting with the Inspector on 22 September 2004, which records: "This [the options] is the only transaction between the parties either in kind or in cash and no further recognition for services rendered has either been sought or offered." The Appellant explained in evidence that he considered the options to be for Mr Moquette's services as adviser, and the equity stake for his services as director.

(5) The Appellant says that, although they hoped to do so, the deal was never put in writing; Mr Moquette said that there a short form of document, possibly in letter form, was produced a considerable time later. Nothing was produced to me. They trusted each other and were working in an environment where people knew each other and if either of them had reneged on the deal their reputation in the industry would be irreparably damaged. The Appellant's wife knew about the deal and would have carried out its terms if the Appellant had died; Mr Moquette was aware of this.

(6) Mr Moquette described the deal in a notarially executed statement dated 4 March 2004, which he thought was for the purpose of the accounts and he did not appreciate at the time was for use in a tax appeal:

"…I am an advisor to Mohammed Sheikh. During 1999 and 2000 I advised and provided business assistance and financial advice to Mohammed Sheikh who was Marketing Director at MSI in the form of sales leads, contract and negotiation advice and direction on business projects. I played a significant role in the business development activities lead by Mohammed Sheikh.

As consideration for this continuing advice, I agreed with Mr Sheikh that I would accept MSI share options as my compensation. The cost of exercising the options would be borne by Mr Sheikh. This was agreed between and the options were rightfully mine from July 1999 with the right to buy the shares, at a later stage. This is adequate consideration for providing ongoing advice, which I continue to do as part of this agreement with Mr Sheikh. I consider this agreement as binding between Mr Sheikh and myself, which Mr Sheikh has honoured.

Mr Sheikh is a valued business contact and we continue to transact business."

In evidence Mr Moquette described the deal as relating to the proceeds of the options, or to the shares at some point in the future. He was not sure that he had seen the option certificates and relied on what the Appellant told him. The second paragraph of the quotation refers to services still continuing in March 2004 as part of the July 1999 agreement. In evidence he considered that the deal was now complete.

(7) The Appellant set up a company, International Wireless Corporation Limited ("IWC"), which subsequently changed its name to V3, on 14 July 1999 (a few days after the meeting).

(8) In fact the Appellant did not leave MSI as planned on 31 July 1999 but continued to do some work for MSI as they encountered difficulties after he had left in connection with the work he had been doing. An internal memorandum of 18 October 1999 records that he was to be treated as continuing in service without a break, the severance payment that he had received being set against his salary from August onwards. I find that the possibility of this continuing service this was not in his mind in early July 1999 when the deal was made.

(9) Mr Moquette helped IWC from July 1999 with product development, market analysis, market reports, provided information memoranda and business plans of similar companies, assisted with business plans, financial plans and forecasting, cost structuring, competition and intelligence on a variety of similar companies. He helped to interpret such data and set up IWC's business model. Between January and October 2001 he helped with business development by introducing contacts. Between July and December 2000 he attracted £535,000 of investment into IWC. Between July and September 2000 he introduced and facilitated the acquisition of Audicode, a Finnish software company. Between August 1999 and October 2001 he introduced senior industry advisers and promoted IWC in senior business circles. Between March 2001 and October 2001 he initiated another round of funding. He negotiated a sale of the shares in IWC to a Spanish company in September 2001 but eventually they withdrew.

(10) The options were exercisable as follows:

(a) 12,687 shares exercisable as to 50% by 1 January 1999, 6.25% by 1 April 1999, and the same after each subsequent 3 months. Thus 62.5% were exercisable by 30 August 1999 (30 days after the original leaving date of 31 July 1999); and 75% (9,515 shares) by 31 January 2000, the actual exercise date, of which 8,722 were exercised for $34,713.56 [the number exercised seems to be the number exercisable by 1 October 1999].

(b) 42,821 shares exercisable by the same dates as in (a). Thus 62.5% were exercisable by 30 August 1999; and 75% by 31 January 2000 (32,115 shares).

(c) 23,790 shares exercisable as to 25% on 1 July 1999, 6.25% on 1 October 1999, and the same each subsequent 3 months. Thus 25% were exercisable by 31 July 1999; and 37.5% (8,921 shares) by 31 January 2000.

(d) The total options exercised in (b) and (c) was 36,873 shares for $146,754.54 [this is less than the then possible total of 41,037 shares for $163,327.26].

(e) The total exercised in (a), (b) and (c) was 41,037 shares for $181,468.10 (£111,672.67), compared to the total exercisable of 50,552 shares for $201,197.96. (I should mention that these figures are my calculations rather than agreed figures.)

(11) Following the Appellant leaving the service of MSI on 31 December 1999, he exercised options over 41,037 shares on 31 January 2000 to pay for which the Appellant borrowed £90,000 by re-mortgaging his house.

(12) The reason why the MSI shares acquired pursuant to the options were not transferred to Mr Moquette until 23 May 2000 was because, according to the Appellant, they were both busy. The delay did not give rise to concern on Mr Moquette's part.

(13) After the sale of shares in IWC to the Spanish company fell through on 11 November 2001 IWC was running out of money. By that time the "dot.com" boom was over. On 12 November 2001 it was decided to liquidate IWC.

(14) The rules of the MSI option plan include a provision that the options lapse on various events, one of which is "the date on which the Option Holder becomes bankrupt or does or attempts or omits to do anything as a result of which he is deprived of the legal or beneficial ownership of the Option."

7. Mr James, for the Appellant, contends that the deal in July 1999 is an agreement either for the assignment of the options, thus giving rise to a charge under s 135(3)(b), at that time when the shares were thought to be worth no more than the exercise price (although no figures have been agreed), or whereby the Appellant "grants or undertakes to grant to another a right to acquire the shares or any interest in them" within subs (8), with the same result.
8. Mr Grodzinski, for the Revenue, contends that there was no agreement in July 1999; or if there was an agreement it was not effective to constitute "the assignment…of a right to acquire shares" because the options were non-assignable; or that subs (8) does not apply; or if it does, the Appellant can still be taxed on the subsequent exercise of the options. His primary contention is that the Appellant is correctly charged on the exercise of the options on 31 January 2000 when the shares were worth $15 per share (although no figures have been agreed), thus giving rise to the assessment to tax under Schedule E on $11.02 per share, total $501,465.10 (£309,374.48).

Reasons for decision

9. There was clearly a deal (to use a neutral term, since whether this amounted to a contract is in dispute) of some sort made by two businessmen in July 1999 which was probably not documented, although even this is in doubt. The problem is how to categorise it legally. I start by trying to determine what were the terms of it.
10. What did the Appellant agree to do? The Appellant says in his witness statement, which I assume is a considered statement: "It was agreed I would pay the option exercise price of £111,672 when required… and any upside/downside on value of the options was the compensation for the continuing business arrangement…." Both of the parties understood the nature of an option, although neither seems to have considered the non-assignability of them, or (which is less surprising) that the options would lapse if the Appellant ceased to be the beneficial owner of them. The context of the deal when they made it on 9 July 1999 was that the options were exercisable at the latest on 30 August 1999 (30 days after his leaving MSI on 31 July 1999, as had been agreed in the letter of 18 June 1999), which was just over 7 weeks away. The Appellant considered that the value of the underlying shares was around the exercise price; Mr Moquette thought the same, that they had potential but the options were "not in the money." It must have been in both their minds that there was a question whether to exercise the options. If they were exercised, the deal involved the Appellant paying some $161,747 (£99,536.73 using the same exchange rate as at the time of exercise), based on the options then exercisable, a substantial sum that he did not have (we know that he had to borrow £90,000 to pay a slightly larger sum, $181,468 (£111,672), on 31 January 2000, the difference being caused by more options then being exercisable, although he does not seem to have exercised the maximum possible number of options). Was the deal that he paid the exercise price in any event (as suggested by the words quoted at the beginning of this paragraph) on the basis that if the value of the shares was then around the exercise price and in the euphoria of the "dot.com" boom it was expected to rise? If so, why did he describe the benefit to Mr Moquette as "any upside/downside on value of the options"? The benefit was the whole value of the shares deferred by some 7 weeks. Alternatively, if the benefit was "any upside/downside on value of the options" the Appellant cannot have agreed exercise the options in any event, in which case he was free not to exercise them on the basis that there was no value in doing so and he would then pay nothing and at the end of the 7 weeks the options would lapse. But if that is the case, why when they met to plan the future of a new business were they apparently not thinking beyond the approximately 7 week expected life of the options by looking only at the upside and downside in the value of the options?
11. Leaving on one side the question of whether there was an agreement to exercise the options in any event, did the Appellant agree to assign the options or the benefit of them and, if so, why since they would cease to exist in 7 weeks time? If he did assign them, how was it that he could continue to decide when to exercise them? Mr Moquette was clear that the Appellant could, although it may be that it was because the Appellant worked for MSI and would know more about the company. But that does not seem to be the issue. If there had been an assignment Mr Moquette would have better security if the options were exercised as soon as possible and the shares to be transferred to him immediately, but on the other hand the number of shares over which the option was exercisable was going up every 3 months, although he did not seem to be aware of this. The exercise by the Appellant at the last possible moment is what one would expect in the circumstances, but equally that is also what one would expect if there were no assignment of the options. I regard it as significant that in the period of uncertainty between his leaving MSI on 31 July 1999, which would require the options to be exercised within 30 days, and 18 October 1999, when MSI treated him as having been continuously employed, the Appellant might have lost the options through non-exercise. The Appellant showed no concern about this, perhaps not surprisingly because he did not consider that they then had any value, and there is no record of the effect on his options of his retrospective continuous employment in the internal memorandum of 18 October. If he had assigned the options only a few weeks before leaving, it is surprising that he was not more concerned about the possibility of their lapsing. It is also surprising that there was the gap between his exercising the option on 31 January 2000 and transferring the shares to Mr Moquette on 23 May 2000 if he had agreed to assign the options. I do not accept that both parties were so busy that they accepted the delay, when this was Mr Moquette's only reward for a considerable amount of work for IWC. The answer to the question posed at the beginning of the previous paragraph is that I do not know what the Appellant agreed to do.
12. What did Mr Moquette agree to do? Mr Moquette's statement, which may not have been prepared with these proceedings in mind but which was sufficiently important to be notarised, seems to confuse the services he provided to the Appellant while at MSI with the later services provided under the deal and, more surprisingly, he says that in March 2004 (over two years after the closure of IWC) that he was "providing ongoing advice, which I continue to do as part of this agreement with Mr Sheikh," although in evidence he said that he was no longer doing so. This is contrary to the Appellant's statement that "It was agreed MM would continue until the business was successful and eventually sold." Mr Moquette said in evidence that he never imagined the amount of work he would have to do, which raises doubts whether he committed himself in advance to one day a week for an indeterminate period, a fact which he does not mention. And if Mr Moquette had agreed to commit one day per week, why would he have done so without an equity stake in IWC? The Appellant considered that Mr Moquette's equity stake of 4.8% was part of the deal; Mr Moquette said that it was a later deal for which he paid either 50,000 pounds or dollars (since he did not have any papers in front of him when he made the conference call, it is not surprising that he could not remember), which Mr Moquette says he bought only subsequently in order to avoid a conflict of interest when advising investors to invest in the company. Mr Grodzinski suggested (and I agree) that by investing himself he was demonstrating his faith in the company and so the argument about conflict of interest did not stand up. I am short of evidence about the equity stake, such as how the strange figure of 4.8% was agreed, and when and how the price was arrived at. I note that the equity stake was not mentioned in the notes of the meeting with the Inspector on 22 September 2004. I do not accept the Appellant's explanation that Mr Moquette received the options as adviser, and the equity stake as director. From Mr Moquette's point of view, even though he thought highly of MSI, one would expect him to be more interested in a stake in IWC if he was spending a significant part of his time assisting it, than having the possibility of acquiring illiquid shares in MSI. Once again, the answer to the question posed at the beginning of this paragraph is that I do not know what Mr Moquette agreed to do.
13. The conflict in the evidence about documenting the deal surprises me. The Appellant said that the deal was not documented; Mr Moquette that it was documented later. This point is important because it raises the suggestion that documents exist that have not been shown to me. I quite understand two businessmen at the height of the "dot.com" boom making an informal agreement but if it was intended to create legal relations I am surprised that nothing was put in writing. I would expect that Mr Moquette with his banking background and as a person currently dealing with finance would make sure that anything intended to be legally binding was properly documented. I would also expect Mr Moquette with his background to have inspected the option certificates and to have been more aware of their terms if he thought he was making a legally binding contract. Dealing with the case as presented to me that there was no documentation relating to the deal, I regard the lack of it is an indicator against the deal being intended to be legally binding.
14. There are some further features of the deal that also point away from its being a contract. Mr Grodzinski pointed to the improbability (with which I agree) of the Appellant parting with ownership of the options and undertaking to pay the exercise price in any event (if that is what he did) in advance of Mr Moquette providing any services. Secondly, Mr Grodzinski pointed to the oddity that the deal was between the Appellant and Mr Moquette whereas the latter was providing most of the services described above to IWC (the only exception being the negotiation of the sale of shares in IWC to the Spanish company), which had not been formed at the time of the deal. One would expect that IWC would be entitled to a deduction for the payment to Mr Moquette in the form of the value of the options which the Appellant would transfer to IWC. While the deal is explicable on the basis that IWC had not then been formed, one would have expected IWC to have entered into the obligations and to receive the benefit of Mr Moquette's obligations once it was formed. It is another indicator that nobody had really addressed his mind to the question who was agreeing to do what and to whom, as surely they would have done if the deal were intended to be a legally binding contract. In the circumstances it is more likely that the deal was a gentlemen's agreement between the Appellant and Mr Moquette since the IWC could not have been a party to it.
15. In the light of all these uncertainties I am unable to find that there was any contract entered into in July 1999. At best there was a deal in the form of a gentlemen's agreement (the words recorded in a note of meeting between the Appellant and the Inspector on 22 September 2004) providing for a general understanding between the parties based on trust which later resulted in the transfer of the MSI shares to Mr Moquette in May 2000 in return for all the work that Mr Moquette had then done for the company since July 1999 and was expected to do subsequently. Mr Moquette's statement that he considered that he was still in March 2004 providing services as part of the agreement (which is contrary to the Appellant's statement) seems to me to confirm that the deal was no more than that they "agreed" that they would work together in a general sense and Mr Moquette would be paid in some way out of the options or their proceeds.
16. I therefore find that there was no assignment of the options in July 1999, and it follows that nor was there anything that fell within the words "grants or undertakes to grant to another a right to acquire the shares or any interest in them" in s 135(8), which also implies a legally binding commitment. It follows that the Appellant exercised the options on 31 January 2000 for his own benefit and is taxable under s 135 on a gain realised by the exercise.
17. In view of my findings of fact I do not need to decide on the contentions of the parties about what was the effect of an agreement to assign non-assignable options; or on the proper construction of s 135(8) and (9); or on the consequences of Mr Moquette's services being supplied to IWC rather than to the Appellant, all of which were argued. I am grateful to Mr James and Mr Grodzinski for all their arguments which raise some interesting issues, but I consider it better not to go into them as they do not arise in view of my findings of fact.
18. Accordingly I dismiss the appeal in principle.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER

RELEASE DATE: 16 December 2005

SC 3113/05

Authorities referred to in skeletons and not referred to in the decision:

Linden Garden Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85

Tom Shaw Ltd v Moss Empires (1908) 25 TLR 190

Helstan Securities Ltd v Hertfordshire CC [1978] 3 All ER 262

Reed Publishing Holdings Ltd v Kings each Investments Ltd 25 May 1983 (unreported)

In Re Turcan 40 ChD 5

Parkins v Warwick 25 TC 419

Hadlee v Comr of IR [1993] AC 524

Bruce v Hatton [1922] KB 206

Reade v Brearley (1933) 17 TC 687

Hendry v Chatsearch Ltd, The Times, 16 September 1998

Circuit Systems Ltd v Zuken-Redac UK Ltd [1999] EHWC Technology 221

Barclays Mercantile v Mawson [2005] STC 1

AZ v BY [1998] STC (SCD) 10

Bird v IRC [1988] STC 312

Don King Productions Inc v Warren [2000] Ch291