SPC00597

Payments for the release of share options - payments chargeable under section 135 TA 88 - application of PAYE regulations - whether obligation to deduct tax under existing law prior to its amendment by section 67 FA 98 - held: no - payments made after Budget announcement but prior to enactment of amending legislation - whether obligation to account for tax imposed by section 67 FA 98 and SI 1998/1891 - held: yes - did the obligation to account for tax mean that the tax treated as paid by employees - held - no.

THE SPECIAL COMMISSIONERS

	(1) Rosalind Clifton, (2) Paul Harrington, 

Appellants

(3) Stephen Kennedy, (4) Amanda Mc Rae (Née Antoinette), (5) Executors   of Anthony William Mudd (Deceased)

	- and -

Respondents

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	

		Special Commissioner: 	Charles Hellier

Sitting in public in London on 13 and 14 December 2006

John Tallon QC instructed by Wallace LLP for the Appellant
Ingrid Simler QC  instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	The Appellants are, or in the case of Mr Mudd represent, former employees of Demon Internet Ltd (“Demon”). On 30 April 1998 they all received cash payments for the cancellation of share options. Those payments gave rise to emoluments chargeable under Schedule E equal to the full amount of each payment. The payments were made gross without deduction of PAYE.
2.	The Respondents sought to recover PAYE from Demon. Demon appealed against the determination that PAYE was due and the Special Commissioners (Malcolm Gammie QC and Dr David Williams) in Demon Internet Ltd v D. Young Spc 449, 2005 STC (SCD) 249, allowed its appeal. None of the Appellants were a party to that appeal. Miss Simler who appeared before me for the Respondents also represented the Revenue in that case.
3.	The Respondents did not appeal against that decision. But they amended the Appellants’ self assessment returns so as to recover the tax on the payments from Demon. The Appellants appeal against those amendments on the basis that the tax should have been paid by Demon and so was not assessable on them. They were not parties to the Demon decision and so are not bound by it.
4.	In Demon the Revenue contended:
(i)	that under the law applicable prior to its amendment following the 1998 Budget, Demon was under an obligation to deduct and account for PAYE (the Old Law argument);
(ii)	that in any event the changes to the law following the 1998 Budget meant that Demon was liable to deduct and account for PAYE (the New Law argument).
5.	Both those contentions were rejected in Demon. Both were advanced before me by Mr Tallon although his approach to some of these elements of the arguments differed from those put by HMRC in Demon. The Respondents through Miss Simler advance many of the arguments put by the appellants in Demon.
The Facts
6.	There was an agreed statement of facts and a bundle of relevant documents. I heard oral evidence from Clifford Martin Stanford who was the managing director of Demon Internet until its sale to Scottish Power Telecommunications Ltd in April 1998. This evidence clarified a number of issues which had been at large before the Special Commissioners in Demon. I find the following facts relevant to the issues in this appeal:
(1)	The first four Appellants and Mr Mudd (the Employees) were formerly employed by Demon Internet Limited.
(2)	In or about March 1996, Demon set up the Demon Internet Limited Executive Share Option Scheme (“the Scheme”). Paragraph 2.3 of the Rules of the Scheme was as follows:
“The Directors shall grant options by resolution. As soon as practicable thereafter the Directors shall issue in respect of each option granted as aforesaid an Option Certificate given under seal. The date of issuing such certificates shall be taken for all purposes of the Scheme as the Date of Grant in respect of the relevant Option. No payment to the Company shall be required on the grant of an Option. The Option Certificate shall be in such form as the Directors shall from time to time determine and shall specify the number of shares comprised in the Option, the Date of Grant, the Option Price and any Exercise Condition.”
(3)	At various times between March 1996 and March 1998 the Appellants were granted options for no payment to acquire the number of shares in Demon set out in the table at (8) below at an Option Price of £20 per share.
(4)	A contract for sale of the entire existing share capital of Demon to Scottish Power Telecommunications Limited (“SP”) was entered into on 30 April 1998 and completed on the same day at a price per share of £41.20p (to the nearest penny).
(5)	On 1 and 2 April 1998 Demon entered into conditional agreements with the Appellants for the release of their rights under the share options previously granted to them in return for a payment equating to £21.20p per share. 
(6)	On 30 April 1998 pursuant to the agreements with the Appellants cash payments were made to them for cancellation of their share options. Their receipts are set out in the table at (8) below.
(7)	The cash cancellation payments were made to the Appellants gross without deduction of tax. 
(8)	

	No. of Shares	Amount Received
£	
First Appellant Ronald Clifton	2,100	44,520.00	
Second Appellant Paul Harrington	1,091	23,129.20	
Third Appellant Stephen Kennedy	1,600	22,920.00	
Fourth Appellant Amanda McRae	2,123	45,007.60	
Mr Mudd	26,667	565,340.40	

7.	There was evidence as to what was told to employees about their liability or otherwise to pay tax on the payments received, about the advice received by Demon as to its liability to deduct or account for tax, and as to how the relevant people at Demon acted on that advice. These issues however seem irrelevant to the questions I have to decide. I have therefore made no findings in respect of them.
8.	It was common ground between the parties that: 
(i)	none of the Appellants realised any gain for the purposes of section 135 TA 1988 (“Gains by directors and employees from share options”) until 30 April 1998; and
(ii)	the entirety of the payment made to each of the Appellants represented an amount chargeable to tax under Schedule E by reason of section 135 TA 1988.	
Glossary
9.	
the PAYE provisions	sections 203 - 207 TA 88
	
the PAYE Regulations	the Income Tax (employments) Regulations 1993 SI 1993/774	
		
the Notional Payment Regulations	the Income Tax (Employments) Notional Payments) Regulations 1994 SU 1884/1212	
		
the Amendment Regulations	the Income Tax (Employments) Notional Payments) (Amendment) Regulations 1998 SI 1998/1891	
Brief History	of the legislative provisions
10.		Although, as I shall explain later, by 1984 gains arising from shares acquired by reason of employment were taxable in accordance with a statutory code, the House of Lords, in IRC v Herd [1993] STC 436 held that the PAYE Regulations did not bite on payments representing such gains. 
11.	By 1997 some non-cash perquisites of employment had been brought within the scope of PAYE. The Notional Payment Regulations made provision for the deduction of tax in respect of such benefits (generally from later cash payments) and for accounting for the tax to the Revenue. These provisions however did not encompass profits from the release of employment related share options.
12.	On 23 March 1998 in the 1998 Budget the Chancellor announced proposed changes which were intended to bring payments gains on the release or exercise of share options, and further perquisites within the scope of PAYE. New sections were introduced by section 67 FA 98 which enabled PAYE to apply to these benefits. Section 67 envisaged regulations to deal with the period between 6 April 1988 and the date the Act received Royal Assent 31 July 1998. These were the Amendment Regulations which came into force on 4 August 1998.
The Old Law Argument
13.	Section 135 of the 1988 Act, so far as relevant to this appeal, provides:
“(1) …where a person realises a gain by the … 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 …. 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…
(3) … (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 …
(4) For the purposes of subsection (3) above, neither the consideration given for the grant of the right nor any such entire consideration as is mentioned in that subsection shall be taken to include the performance of any duties in or in connection with the office or employment by reason of which the right was granted .
(5) Where such a right as is mentioned in subsection (1) above is obtained as mentioned therein and is capable of being exercised later than ten years after it is obtained, and the receipt of the right is chargeable to tax under any other provision of the Tax Acts, then-
(a) the amount so charged shall be deducted from any amount which is chargeable under subsection (1) above by reference to the gain realised by the exercise, assignment or release of that right …”

14.	A charge to income tax under Schedule E thus arises on any gain made by an employee or director on the release of an option to acquire shares in a company.
15.	The amount chargeable to tax under Schedule E is the amount of the gain which is the difference between the amount paid for the assignment or release and the consideration given for the original grant of the right. In the circumstances of this appeal the amount of the gain was equal to the consideration received for the release: there was nothing to deduct.
16.	Income tax on employment earnings is generally collected by deduction at source under the PAYE provisions and the PAYE Regulations. The provisions apply to all payments of income assessable to income tax under Schedule E that fall within the scope of the PAYE Regulations.
17.	Section 203 TA 88 provides:
“(1) On the making of any payment of, or on account of, any income assessable to income tax under Schedule E, income tax shall, subject to and in accordance with regulations made by the Board under this section, be deducted or repaid by the person making the payment…”
(2) The Board shall make regulations with respect to the assessments’ charge,  collection and recovery of income tax in respect of all income assessable thereto under Schedule E, and those regulations may, in particular, include provisions:
(a)	for requiring any person making any payment of, or on account of, any such income, to make deduction… of income tax… and for rendering persons who are required to make deduction…accountable to… the Board…
(b)	for the collection and recovery… of income tax in respect of any income in respect of which any such income tax has not been deducted…”
18.	Regulation 6 of the PAYE Regulations deals with the requirement to deduct. It provides that an employer making a payment of emoluments is required to deduct tax in accordance with Regulation 6(1) of the PAYE Regulations (and Regulation 14 which deals with calculation and making of deductions and repayments). Regulation 6(1) provides:
“Subject to the conditions specified in paragraph (2) every employer, on making any payment of emoluments to any employee during any year, shall deduct or repay tax in accordance with these Regulations by reference to the appropriate code.”
19.	Regulation 2(1) defines:
“emoluments” as “the full amount of any income to be taken into account in assessing liability under Schedule E…” (in other words, the full amount chargeable to tax under Schedule E)
“employer” as “any person paying emoluments”; and
“employee” as “any person in receipt of emoluments”.”
20.	It follows that a person paying an emolument is an “employer” within the ambit of the PAYE Regulations.
21.	Regulation 40 of the PAYE Regulations obliges an employer to pay all amounts of tax deductible from emoluments paid by the employer whether or not deductions are in fact made, within 14 days of the end of every income tax month. The month for PAYE purposes starts on the 6th day of each calendar month (Regulations 2(1) and 40(1) of the PAYE Regulations). Regulation 40 is set out later.
22.	Regulation 49 of the PAYE Regulations provides that where an amount of tax has not been paid under the PAYE regime, the relevant Inspector may determine the amount due to the best of his judgment, and serve a notice of his determination on the employer under Regulation 49(1) and (2) of the PAYE Regulations who thereby becomes liable for the amount in question. It was against such a notice that Demon appealed in Demon..
23.	The operation of the PAYE Regulations on payments similar to payments which might be caught by section 135 ICTA was considered in CIR v Herd 66 TC 29. The House of Lords held that amounts charged to income tax under section 79 FA 72 and section 67 FA 67 were not subject to the PAYE Regulations. Lord Mackay LC gave the only reasoned speech. It therefore be for the individual to pay his or her own income tax through the normal assessment mechanism on such payments.
24.	The Special Commissioners in Demon at paragraphs 52 to 58 held that PAYE did not apply to the payments made by Demon under the law in force prior to the effects of the Budget 1998. The Respondents support their analysis in this appeal. The Appellants say that the reasoning which led Lord Mackay to conclude that PAYE did not apply to the payments in Herd is not applicable in this case inter alia because the problems and complications alluded to by Lord Mackay were in the context of a payment only part of which was assessable, and that in the instant case that is not the position since the whole of each payment is assessable. 
25.	Section 79 FA 72, so far as relevant to the taxpayer in Herd, provided that the excess of the market value of shares acquired by reason of employment (which I shall call “employee shares”) when they were disposed of over their market value on acquisition was to be traded as earned income. Section 67 provided that where employee shares were disposed of for a consideration exceeding market value then the excess was to be treated as emoluments. Mr Herd had acquired employee shares for market value (which was £1) and disposed of them for £380,000 (which was in excess of their market value at the time of disposal of £211,300. He was assessed to tax on £211,299 + £168,700 = £379,999. Mr Herd argued PAYE should have been deducted.
26.	The Special Commissioners in Demon described the progress of IRC v Herd thus:
“53. Before the Special Commissioner, Mr O'Brien, the Revenue argued that Parliament could not have intended the PAYE Regulations to apply to either of the charging provisions relevant to that payment, namely s67 of the Finance Act 1976 and s79 of the Finance Act 1972 'because of their inappropriateness'. This was because s 79 could apply both to transactions involving payments and those not involving payments, and it would follow that PAYE would apply in some of these cases but not others. With regard to s 67 of the 1976 Act, there could be doubt about the scope of the provision. The Special Commissioner recorded those arguments briefly and accepted them without further analysis.
54. The Crown appealed to the Extra Division of the Inner House of the Court of Session (see [1992] STC 264). The main argument for the Revenue at that stage was that the sums in question were capital and therefore could not be subject to the PAYE Regulations. After close argument, and with an express indication by Lord McClusky that he found the issue to be one of real difficulty, a majority of their Lordships found in favour of the taxpayer on the deduction issue, Lord McClusky accepting the reasons given by Lord Coulsfield. His view was that the question turned ultimately on the proper interpretation of the definition of the word 'emoluments', a point not in dispute in this case. Lord Sutherland found the question 'passing strange' and took the view that the sums were capital and therefore not emoluments and so not subject to deduction of tax.
55. The Crown again appealed, but only on the application of the PAYE Regulations. The case was heard by the House of Lords with Lord Mackay of Clashfern LC presiding. The others of their Lordships agreed with his opinion. Lord Mackay set out the relevant charging and collection provisions and then declined to decide the case on the wider ground of the scope of those provisions. He rested his opinion instead on a narrower ground (see [1993] STC 436 at 442-443).”
27.	I should now set out the relevant parts of Lord Mackay’s opinion:
“In both of the statutory provisions relied on as creating liability, the liability to tax under Sch E is not attracted by the amount paid but as in this case to part only of the amount paid. The charging mechanism is not one which treats the whole payment made in this case as an emolument and then preserves a right to claim a deduction by way of allowance. Indeed in this case each payment is subject to two different sections which provide the basis for two different charges under Sch E on sums which in total are less than the total of the payments…. It is true that the deduction in this case is small but the ascertainment of its amount involving as it does questions of the market value of shares which are not publicly quoted could involve considerable calculation and perhaps even more important substantial judgments on matters of opinion. Neither the empowering provisions of the 1970 Act nor the deduction regulations themselves include an obligation on the payer to deduct tax from a payment only part of which is assessable to income tax under Sch E. Where the provision is as detailed as that, if the intention had been to impose an obligation to make a deduction from a payment which was in part to be treated as income… I would have expected this to be expressly provided for and even more important, some machinery set up for distinguishing in the single payment between the amount to be subject to deduction and the balance.
“Although I found the argument for the taxpayer attractive and cogently argued, I have reached the conclusion ultimately that to give effect to it would be to extend the scope of the provisions for deduction of tax under Sch E to situations for which they were not intended and in respect of which there is no machinery for determining in respect of a single payment at the time the payment is made the amount of it which is to be subject to the deduction arrangements.
“…There is no provision that I have been able to find which contemplates a question what the amount of emoluments involved in a particular payment: rather the whole scheme appears to me to proceed or the assumption that all the payments in question are payments of emoluments and that any deductions are in respect of allowances to be made in computing the tax liability consequent upon the payments…
“…but it is right that I should emphasise that my view applies only where a particular payment is to be treated only in part as assessable to income tax under Schedule E. It would not prevent a payer being under an obligation to deduct tax where it was clear that there were two or more payments made together some of which were emoluments under Schedule E which others were not.”
“The reasons which I have given differ considerably from the reasons given by Lord Sutherland in the Court of Session for reaching the same view and I would not be prepared to affirm his analysis of the transaction into a capital transaction completed at the time of payment followed by a statutory treatment of certain parts of the payment as income for tax purposes. The reasoning of the majority only takes one the distance of saying that part of the payment was to be treated as emoluments under Sch E but for the reasons I have given this does not appear to me to be sufficient to sustain the taxpayer's argument and to have obliged the employers to deduct income tax under the 1973 regulations on making the payment which even on the majority's view was in part only so assessable.”
28.	The Special Commissioners in Demon commented:
“56. While Lord Mackay did not rest his decision on the income/capital issue (not an issue in this case), he did rest it on potential complexities of deducting tax from payments made for share options that Mr Aaronson contends are equally present in this case.
“57. We agree with Mr Aaronson that there are similar complexities of application under s 135 as under the sections at issue in Herd. There are a number of complexities that might arise in the operation of s 135 as a whole, and they are such as to invite the same approach as that adopted by Lord Mackay in Herd. Miss Simler argued that there was no such complexity in this case. Here there was no consideration for the grant of the option. So no deduction was necessary under s 135(3)(b) for that reason. There was a payment in cash and no other benefit. So there was no need to consider the provisions in s 135 dealing with payments in kind. And the payment was less than ten years after the grant, so no complication arose from s 135(5).
“58. However, that is to argue from the coincidental specific facts of this case to the general rule.  In this case there were no complications, but we follow the opinion of the House of Lords in Herd that the PAYE Regulations cannot be applied on the basis that they should be operated where there are no problems but ignored where there are complications.  This would suggest that there is a requirement in these circumstances for employers to consider the terms of the section and determine whether the amount paid is taxable in its entirety or only in part, with the result that PAYE may apply in some cases but not others.  Those were among the reasons put forward by the Revenue to the Special Commissioner in Herd and accepted by him.  We agree with those arguments.  The PAYE Regulations must either apply to all cases falling within s 135 or to none.  We do not think that it can depend upon how easy it is to calculate the gain under that section and whether the deduction to be made in calculating that gain is £1 or nothing.  In our view the PAYE Regulations did not apply to these payments in the absence of specific statutory provision and, as we have previously found, the changes that were being made to deal with this did not operate at the time the payments were made to the Demon employees.”
29.	Mr Tallon noted that earlier on in his speech, having referred to section 79 Lord Mackay said “If those payments were payments of emoluments… I would conclude that the requirement to deduct applied even if in other situations sub-section (4) might be triggered where no such payment occurred”. He says that Lord Mackay is not ruling every payment within section 79 out of court for PAYE, and is not worried about a semantic distinction between a “payment” and the taxable amount of the emoluments. He says that what worries Lord Mackay was that only part of the particular payment was taxable. In his concluding paragraphs Lord Mackay emphasises that his view “applies only where a particular payment is to be treated only in part as assessable.”
30.	Mr Tallon says that the following principles can be extracted from Lord Mackay’s speech in Herd:
(i)	PAYE can only be operated where there is a payment of, or on account of, emoluments;
(ii)	Where there is such a payment, it is no bar to the operation of PAYE that there may be circumstances where the relevant charging provisions apply other than on a payment of cash;
(iii)	PAYE cannot be operated where part only of a payment is chargeable to tax under Schedule E unless the charging mechanism of the relevant provision operates either:
(a)	to treat the whole payment as a payment of emoluments whilst preserving a right to a deduction under other appropriate statutory provisions (e.g. section 153 TA 1988 (Payments in respect of expenses)); or
(b)	to provide expressly that the part so chargeable is to be treated as a payment of, or an account of, emoluments (with appropriate machinery where necessary in cases of difficulty for distinguishing in the single payment the amount to be subject to deduction and the balance).
(iv)	The liability to tax under Schedule E in the case of a charge under Finance Act 1972 could never be attracted by the whole of a payment made (where there was a payment), and the charging mechanism of section 79 did not contain features of the kind referred to in (iii)(a) or (b) above.
31.	Applying those principles in the circumstances of these appeals, the Appellants submit that the charging mechanism of section 135 TA 1988 created liability was such as to attract liability to tax under Schedule E on the whole amount paid with the result that  section 203 and the PAYE Regulations in relation to deduction of tax were fully engaged.
32.	Miss Simler takes issue with paragraph (iii) of this summary, she says that, section 135(1) does not operate in either of the ways listed. Section 135 she says treats a gain realised by the exercise, assignment or release of a right to acquire shares (a share option) as an amount chargeable to tax under Schedule E. It does not treat the event whereby the gain is realised as a payment of, or on account of, emoluments. For example, she says, the gain may (and in most instances involving share options does) derive from the exercise of the option - i.e. by virtue of the acquisition of shares at a price below their market value - which is a transaction effected by an exchange of assets. The gain is not derived from the charging mechanism of section 135.
33.	Miss Simler says that the PAYE Regulations must either apply to all cases falling within section 135 or to none. It cannot depend on how easy it is to calculate the gain under that section. In the absence of specific statutory provisions, (which were not in force at the time of the cash cancellation payments) the PAYE Regulations did not apply to the payments.
34.	She says that conclusion accords with information in the public domain before and at the time of the introduction of the measure that became section 67 Finance Act 1998. She gives the examples of: the Inland Revenue letter to Share Scheme Lawyers Group dated 23 May 1995; the explanatory note to clause 67 of Finance bill; and the associated Budget Day Press Release 53/98 made on 17 March 1998.
35.	I accept that the words of section 135 refer to a “gain” rather than a payment and deem that gain to be assessable rather than deeming it to be emoluments, but I do not think that is conclusive: Lord Mackay appears to take a broader view at 64I - 65A, and the charging provisions of section 131 broadly assimilate to emoluments anything chargeable under Schedule E.
36.	However, it seems to me that Lord Mackay was influenced by the nature of a particular payment. If the nature of the payment was such that it was simply all taxable as income then the PAYE Regulations applied; if it was such that the amount which was assessable could or might vary, or needed calculation or the possession of additional information then in his view the PAYE Regulations did not apply to it. I agree that this is not wholly clear: but although parts of his speech give the impression of looking at a particular payment and asking whether is it actually all income, the overall impression conveyed to me is that he is saying that if the nature of the payment is such as to give rise to an enquiry as to  how much is income then it is not a payment to which the PAYE regulation applied. Even at the end of his speech, when he says that his view applies only where a particular payment is treated only in part as assessable income, I read him as referring to a payment of a particular nature, and the distinction he is drawing is that between such a payment and one which in fact comprises two payments of differing natures. I conclude that if the nature of a payment for the release of an option is such that additional information is needed before the taxable amount can be calculated that meant that the PAYE Regulations were not applicable to it even though it might be the case that there was in fact no deduction.
37.	For these reasons I agree with the Special Commissioners in Demon that no liability to deduct from the release payments or to account arose under the law prior to the changes resulting from the Budget in 1998.
The New Law Argument
38.	Section 67(1) FA 1998 inserted a new section 203FB into the Taxes Act 1988. Sub-sections 203FB(1) and  (3) provided:
“(1) This section applies where an event occurs by virtue of which an amount is assessable on any person (“the relevant person”) by virtue of section 135, 140A(4) or 140D.
“(3) If that event is the assignment or release of a right to acquire shares, sections 203 to 203F shall have effect, subject to subsection 7 below:
(a) insofar as the consideration for the assignment or release takes the form of a payment, as if so much of that payment as does not exceed the amount assessable by virtue of section 135 were a payment of assessable income of the relevant person; and
(b) insofar as that consideration consists in the provision of an asset, as if the provision of that asset were the provision:
	(i)  to the relevant person; and
(ii) in respect of the office or employment by reason of which he was granted the right,
of assessable income in the form of that asset.”
39.	The effect of paragraph (3)(a) was to make that part of the amount of the payment for a release which was assessable under section 135 a “payment of assessable income”.
40.	By identifying that net amount as a “payment”, and by making it “assessable income” this provision triggered the operation of the PAYE provisions in relation to the person making the payment. Thus once section 203FB was in force any person making a payment for a release of an option would have to comply with the obligations under the PAYE regulations made under section 203.
41.	FA 98 received Royal Assent on 31 July 1998. Sub-sections 67(2) and (3) made provision relating to the period between 6 April 1988 and 31 July 1998:
“(2) The preceding provisions of this section have effect in relation to events occurring on or after 6 April 1998 and shall be deemed, in accordance with sub-section (3) below, to have come into force on that date.
 (3) This section shall not be taken to have changed -
(a) the amounts which were deductible by any person under section 203 of the Taxes Act 1988 at any time on or before the day on which this Act is passed; or
(b) the amounts which should have been accounted for to the Board under section 203J(3) of that Act at any time on or before the fifth of the month following that in which this Act is passed;
but the amounts which (but for this sub-section) would have been deductible, or would have been amounts for which any person should have accounted, shall be deducted or accounted for in accordance with any such provision as may be made by regulations under section 203 of the Taxes Act 1988.”
42.	There are provisions identical to these in sub-sections (2) and (3) of section 66 FA 1998 which brings into the PAYE regime the enhancing of the value of an asset, and very similar language in sub-sections (4) and (5) of section 68 which performs a similar function in relation to vouchers and credit tokens. I also note that other sub-sections of section 203FB deal with the acquisition of shares by an employee.
43.	The effect of section 67 is this:
(i)	sub-section 67(1) inserts the new section 203FB.  Of particular relevance in section 203FB is that section 203(3)(a) deems (all or part) of a release payment to be a payment of assessable income;
(ii)	sub-section 67(2) specifies when section 67(1) is to come into force. It says that 67(1) is deemed to have come into force on 6 April 1998, but that deeming is subject to the effect of section 67(3);
(iii)	leaving aside for the moment the effect of section 67(3) and the words concerning section 67(3) in sub-section (2), you are bidden by section 67(1) and (2) to deem a payment within section 203FB(3)(a) to have been in whole or part an emolument. In this deemed world the consequence of such a payment would have been a right and obligation of the employer to deduct from that payment and account for the deduction to the Revenue in accordance with the extant PAYE regulations;
(iv) 	thus, absent the words in sub-section (2) referring to sub-section (3), sub-section (2) would retrospectively have created a deemed liability to deduct and account for PAYE;
(v)	sub-section (3) changes this. It says, in paragraphs (a) and (b), that there shall not be any change in the liability to deduct and account. Thus it removes the retrospective creation of any liability;
(vi)	then the tailpiece of sub-section (3) takes effect: it relates to the amounts which but for that sub-section would have been deductible or accountable. What are those amounts? They are the amounts which paragraphs (3)(a) and (b) have removed from the retrospective effect. These are the amounts which, were it not for the sub-section (3) would have been deductible and accountable.
(v)	then it makes provision for dealing with those amounts. I shall return to that later.
44.	Thus, the effect is not in fact to create a retrospective liability to deduct or account but to consider what would have been the case if these had been imposed such a retrospective liability and obligation to deduct or account, and to deal with the amounts which would have arisen if that had been the case.
45.	The effect of the tailpiece section 67(3) does not depend upon there having been a real retrospective liability: it deals with a make belief world in which such a liability existed and extracts from that make belief world the amounts which would have been deductible and accountable. It then says that these amounts shall be dealt with in accordance with Regulations to be promulgated.
46.	Because the operation of the tailpiece to section 67(3) is not dependent on the creation or existence of an actual liability to deduct or account, the question of whether there was or was not such an actual liability is irrelevant to its operation.
47.	A question arises as to whether the “amounts for which any person should have accounted” (which are to be dealt with by regulations) in the tailpiece of section 67(3) refers back only to the amounts referred to in the preceding paragraph (b) - namely the amounts which the retrospective provisions of section 67(2) would otherwise have been required to be accounted for to the Board under section 203J(3) - or whether it also refers to any obligation to account which arose: either (i) in connection with any obligation to deduct within (a); or (ii) as a result of section 203J(3). I need therefore to divert briefly to explain section 203J(3).
48.	Section 203J deals with the obligation of an employer under the PAYE regime when he makes a “notional payment”. That is a payment defined by section 203J(2):
“(2) For the purposes of this section -
(a) a notional payment is a payment treated as made by virtue of any sections 203B, 203C and 203F to 203I, other than a payment whose amount is determined in accordance with section 203B(3)(a) or 203C(3)(a).”
(e.g. something which is not an actual payment but which the Act requires to be treated as such). Sub-section 203J(1) provides that the obligation to deduct tax has effect, not as an obligation to deduct from the notional payment, but as an obligation to deduct in accordance with the PAYE regulations from a later real payment to the employee. Sub-section (3) then provides:
“Where, by reason of an insufficiency of payments actually made, the employer is unable to deduct the amount (or the full amount) of the income tax as required by virtue of sub-section (1) above, the obligation to deduct income tax shall have effect as an obligation on the employer to account to the Board at such times as may be prescribed by PAYE regulations, for an amount of income tax equal to the amount of income tax he is required, but is unable, to deduct.”
49.	In other words: if the employer cannot deduct the tax properly attributable to the benefit represented by the notional payment, the obligation to pay the tax still falls on him: he is required to account even though he cannot deduct.
50.	Miss Simler argues that there is a clear correspondence in section 67(3) between the “amounts which were deductible” in paragraph (a) and the “amounts which would have been deductible” in the tailpiece, and between “the amounts which should have been accounted for” in paragraph (b) and “the amounts for which any person should have accounted” in the tailpiece; and that therefore power is given to make provision for accounting in the Amendment Regulation only for things falling within section 203J.
51.	I am not persuaded. It seems to me that the words of the tailpiece are written more generally. They appear to me to be written so that the regulations they envisage can provide in relation to any deemed payment both for matters relating to deduction and for matters relating to accounting.
52.	If an employer is required to deduct PAYE from a payment then the effect of regulation 40 of the PAYE regulations is to require him to account to HMRC for the amount deducted. Thus were it not for paragraph (a), not only would amounts have been retrospectively deductible, but also the employer would have been liable to account in respect of those amounts.
53.	The language of the tailpiece to my mind is designed to deal with both the deduction which would have been applicable but for paragraph (a) and also the accounting for amounts which would have had to have been accounted for but for this paragraph. There would be little sense in enabling regulations to be promulgated which enable or require a deduction without also making provision for accounting for what was to be deductible: otherwise amounts would have become deductible but not have to have been accounted for to the Revenue. I do not therefore regard the language of the tailpiece confining the power to promulgate regulations relating to accounting simply to accounting arising under section 203J(3).
54.	But that leaves open the question as to whether the power given is sufficiently wide to permit regulations that provide for an accounting obligation where they do not also provide a prospect of deduction to finance the accounting. It seems to me however that the tailpiece does provide such a power. That is because: (a) the language used is “deducted or accounted”, and (b) because the principle that there can be accounting without the opportunity to deduct is already part of the recognised statutory structure in 203J(3).
The Envisaged Amendment Regulations
55.	The tailpiece to section 67(3) envisages regulations to deal with the amounts which absent sub-section (3) would have been deductible or accountable. Those regulations were the Amendment Regulations. They came into force on 4 August 1998 (3 days after the Act received Royal Assent.
56.	 These regulations amended the Notional Payments Regulations. Regulation 6 of the Amendment Regulations excepts from the deduction regime and the section 203J(3) accounting regime, payments within a new regulation 8A. Regulation 8A deals with notional payments in the period between the Budget and Royal Asset (6 April 1998 to 31 July 1998) which are treated as such because of the retrospectivity of sections 65 to 69 FA 1998. Regulation 8A provides:
“8A (1) This regulation applies to any notional payment falling within section 203B (payment by intermediary), section 203C (employee of non-UK employer), section 203F (readily convertible assets), section 203FA (enhancing the value of an asset), section 203FB (gains from share options), section 203G (vouchers and credit-tokens), section 203H (credit-tokens) or section 203I (cash vouchers), where the notional payment -
(a) is made in the period beginning on 6 April 1998 and ending on 31 July 1998, and
(b) is a notional payment in respect of which the employer would, but for section 65(7), 66(3), 67(3), 68(5) or 69(6) of the Finance Act 1998, have been liable to deduct an amount of income tax in accordance with regulation 7, or to account for an amount of income tax in accordance with regulation 8.
(2)  The employer shall be liable to account to the Board, not later than the date specified in paragraph (3) below, for an amount of income tax in respect of the notional payments referred to in paragraph (1) above equal to the amount which he would have been liable to deduct in accordance with regulation 7 or for which he would have been liable to account in accordance with regulation 8.
(3)  The date specified is the 19th August 1998.”
57.	The intention of this seems clear. If, for example, an employer had in the period 6 April to 31 July enhanced the value of an asset so as to trigger section 203FA, then although no deduction is permitted the employer is liable to account to the Revenue by 19 August 1998 for the amount he would have been liable to deduct but for the limitation (this time in section 66(3)) on the retrospectivity of the obligation to deduct.
58.	Thus, so long as I am right that the effect of the tailpiece of section 67(3) (which mirrors that of section 66(3) permits the regulations to deal with “accounting” generally and not only to amounts within section 203J(3)), this new regulation 8A will have imposed an obligation on the employee to account for tax without being able to deduct it from the employee. (The ability to deduct from later payments actually made to the employee is disapplied by the effect of regulation 6 of the Amendment Regulations).
59.	It was not immediately clear to me why regulation 8A should not apply to payment on the release of an option:
(i)	section 203FB(3)(a) provides that where such a payment is made, the part representing the sum taxable under section 135, is to be treated as a payment of assessable income;
(ii) 	section 203J provides that a “notional payment is a payment treated as made by virtue of sections 203B, 203C, and 203F to 203I”. That list of sections includes 203FB(3)(a).;
(iii)	the Notional Payments Regulations define “notional payment” as having the meaning in section 203J,
thus the release payment would fall within regulation 8A if it is “treated as made by virtue of” section 20FB(3)(a).
60.	But because a release payment is an actual payment rather than a notional payment, it appears that it was considered that it did not fall within section 203J(2)(a) because it was not “treated” as made by virtue of section 203FB(3): because it was actually made. Whatever the reason, however, the Amendment Regulations introduce a specific regulation to deal with release payments. That is regulation 80ZA. Either because regulation 8A is not applicable for the reasons just outlined, or because the specific must be taken to override the general, it must be regulation 80ZA  which has effect for the purposes of section 67(3) in relation to release payments. It provides:
“80ZA-(1) This regulation applies where-

(a) the consideration for the assignment or release of a right to acquire shares takes the form of a payment,
(b) the payment is made in the period beginning on 6th April 1998 and ending on 31st July 1998,
(c) so much of that payment ("the relevant amount") as does not exceed the amount assessable by virtue of section 135 of the 1988 Act is treated, in accordance with section 203FB(3)(a) of that Act, as a payment of assessable income of the relevant person, and
(d) the employer would, but for section 67(3) of the Finance Act 1998, have accordingly been liable to deduct an amount of income tax in accordance with these Regulations in respect of the relevant amount.
(2) Regulation 40 shall have effect as if the relevant amount was an amount of emoluments paid by the employer in the income tax month ending on 5th August 1998.”
61.	The effect of regulation 80ZA appears to me to be this. First, it imposes no right or obligation to deduct. Second, it has effect in relation to the amount (the relevant amount) by reference to which there would, absent section 67(3), have been a retrospective obligation to deduct, and third, it requires Regulation 40 to have effect as if the relevant amount was an amount of emoluments paid in the month ending 5 August 1998. Regulation 40 provides:
“40-(1) Subject to regulations 41 and 48(11), the employer shall pay the amount specified in paragraph (2) to the collector within 14 days of the end of every income tax month.
(2) The amount specified in this paragraph shall be determined by the formula-
(A+B) - (C+D)
where-
A is all amounts of tax which the employer was liable under these Regulations to deduct from emoluments paid by him in that income tax month…”
62.	As the Special Commissioners in Demon noted, it can be seen that reg 40 does not itself impose an obligation to deduct. That must be imposed by some other regulation to which reg 40 then attaches an obligation to account. It is the effect of regulation 40 that reg 80ZA is said to modify, not those other regulations.
63.	Regulation 40 sets out for how much the employer must account to the Revenue. “A” is the amount of the employer was liable to deduct in the month. This has, by Regulation 80ZA, to be given effect “as if the relevant amount were emoluments paid.” If such an amount were paid then the employer would have been liable to deduct an amount of PAYE under the regulations. Thus “A” would have been increased by that amount of PAYE. Thus the amount for which the employer would have been liable to account would have been increased by the same amount. Thus the effect of Regulation 80ZA(2) is that the employer, for the month ending 5 August 1998, is required to account for an extra sum namely the PAYE that which would have been deductible from the release payment but for section 67(3).
64.	Thus the effect of Regulation 80ZA is to make the employer accountable for the tax without giving him any right or obligation actually to deduct it from any payment to the employee. (Of course if I am wrong about deduction and accounting in the tailpiece of section 67(3), this regulation would be ultra vires and of no effect.)
65.	On this analysis therefore the combined effect of section 67 and the Amendment Regulations is that Demon was liable to account for PAYE in respect of the moneys paid for the release of the options, and was liable to make payment within 14 days of 5 August 1998.
66.	Miss Simler disagrees. She says that the Special Commissioners in Demon Internet rightly held that these provisions manifestly failed to provide an effective obligation to deduct and account for PAYE which was coterminous with the making of the payments in question.
67.	She notes that the Appellants do not challenge the finding in Demon Internet that these provisions did not confer an obligation on the employer to deduct (in particular to deduct from the cash cancellation payments on 30 April 1998), and yet they maintain that Demon had an obligation to account. She says that this is misconceived.
68.	The Respondents say that because, when the payments were made, there was no duty to deduct, the payments were not amounts which but for section 67(3) would have been deductible. I disagree. It seems clear to me that the effect of section 67(2) (without section 67(3)) was retrospectively to impose an obligation to deduct. But, as I have explained above the effect of section 67(3) is to remove the retrospective obligation that would otherwise have been imposed. Accordingly the amounts which should, but for section 67(2) have been deducted are the PAYE amounts which would retrospectively have fallen to be deducted. But for section 67(3), the payments would have been amounts to which a deduction obligation applied.
69.	The deduction obligation under the PAYE regulations prior to any amendment by virtue of section 67(3) would have applied but for section 67(3) because the payments for release would have been treated as if the taxable part of the payments (all of it in the case of Demon’s payments) were a payment of assessable income. Regulation 14 of the PAYE Regulations imposes an obligation on the employer when making a payment of emoluments to deduct. Since the employer would (in the make belief world) have been making a payment of emoluments he would have had a liability to deduct. (Alternatively, if the payment fell within section 203J(2)(a) it would have been notional payment to which the Notional Payments Regulations applied, in which case regulation 7 of those regulations would have imposed an obligation to deduct. Regulation 7 of course was, at the time of the payment, unmodified by the Amendment Regulations brought in by section 67(3) whose effect is required to be ignored by the words “but for this sub-section”.)
70.	Miss Simler says that the effect of Regulation 80ZA and Regulation 40 is not to impose an obligation to account. She says that Regulation 80ZA is about the timing of an obligation to account for an amount which has been deducted: it is a timing provision and no more. She says that “A” in Regulation 40 is the amounts of “tax which the employer was liable to deduct”, She notes that Regulation 40 imposes no obligation to deduct. She notes that the effect of Regulation 80ZA is to add “the relevant amount” to the sums to which “A” applies. But she says, since “A” represents only sums in respect of which the employer was liable to deduct, and there was no liability under the Regulation to deduct, there is nothing to add to “A” and so no liability to account.
71.	I do not agree. Regulation 80ZA requires Regulation 40 to be applied “as if” the “relevant amount” was an amount of emoluments. If there is a “relevant amount”, then Regulation 40 will cause “A” to be increased by the tax in respect of it. The “relevant amount” is defined by Regulation 80ZA to be the amount in respect of which the taxpayer would have been liable to deduct if section 67(3) had not applied. Whether or not there was an actual liability to deduct is immaterial; the question is: would there have been an actual liability to deduct “but for section 67(3)”, and the answer is yes: on the amount paid by Demon.
72.	Miss Simler says but it is an unjust and absurd result if an employer is liable to account for tax which he cannot deduct. She says that if this is the result of following a deeming provision to its logical conclusion then one should stop short of that conclusion. She quotes the “wise words” of Nourse J in IRC v Metrolands 1981 STC 193 at p 208c:
“When considering the extent to which a deeming provisions should be applied, the court is entitled and bound to ascertain for what purposes and between what persons the statutory fiction is to be resorted to.  It will not always be clear what those purposes are.  If the application of the provision would lead to an unjust, anomalous or absurd result then, unless its application would clearly be within the purposes of the fiction, it should not be applied.  If, on the other hand, its application would not lead to any such result then, unless that would clearly be outside the purposes of the friction, it should be applied.”
73.	I am not quite sure how relevant these words are. Nourse J was dealing with a position where facts were deemed to be not what they actually were. Here we are dealing with a provision which requires us to assume that the law was different. And there is a difference I believe between the approach to be adopted to a secondary consequence of a deeming provision and what appears on its face to be its primary intent: in the latter case one should be more robust than in the first. Nevertheless it must be the case that a construction even of such a provision as this which results in anomaly, injustice or absurdity is to be avoided if at all possible.
74.	Miss Simler says that a duty to account does not entail a duty to pay one’s own obligation but rather a duty to discharge the obligation of another by accounting for his obligation to pay tax. Deduction and accounting go hand-in-hand. Clear words - such as those in section 203J(3) - would be needed to impose an obligation to account where there was no possibility of deduction. She regards neither section 67 nor regulation 80ZA as clear words.
75.	Convoluted deeming provisions are always difficult, but that does not mean that they are not clear words. Section 17 clearly flags a retrospective effect in section 67(2) but modifies the effect of that retrospection in sub-section (3). Section 67(3) seems clear to me. It says that there may be tax to deduct, or account in respect of section 203FB amounts whenever the event occurred between 6 April and 31 July. It says that there will be regulations to deal with this. Those regulations clearly impose an obligation to account.
76.	Neither is this result anomalous, unjust or absurd. First, there can be no injustice or absurdity as these terms are properly understood in a statutory provision which expressly sets out to impose future obligations in respect of actions before its enactment: it is the prerogative of parliament to impose such obligations as it will. Second, although very clear words indeed may be required to impose a liability with some form of retrospective affect where no form of warning is given to the citizen, less emphatic clarity may be needed where warning is given that the effect may be retrospective to the date of the warning; the press release of 17 March 1998 made clear (at paragraph 10) that the changes would take effect from 6 April 1998. Third, the publication of the Finance Bill on 8 April 1998 gave further warning of these provisions. Fourth, section 203J(3), a provision already on the statute books, imposed exactly what the Revenue complain of - an obligation to account for tax which the employee has not been able to deduct. (Mr Tallon noted that in McCarthy v McCarthy and Stone [2006] 4 A11 ER 1127 the High Court held that an employer could, where three conditions were satisfied, recover tax for which the employer was liable to account to the Revenue from the employee. But one of the conditions for such recovery was that the employer’s payment discharged a tax liability of the employee. It is not, for reasons I expand upon later, clear to me that this condition is satisfied in the circumstances of this appeal. Thus I do not think that McCarthy can be prayed in and against injustice. However the other considerations listed above seem adequate to dispose of this concern without this further argument.)
77.	Miss Simler says that the employer could not have deducted in the period 6 April to 31 July because it had no statutory authority to do so. How, therefore, was it proper to require the employer to pay the tax? That it seems to me is a decision for parliament not for me.
78.	The Respondents say that the intention of parliament in section 67 and in the budget resolutions passed on 23 March 1998 and having effect by reason of the Provisional Collection of Taxes Act 1968 was to create a transitional obligation to deduct and an accounting holiday so that the employer had to account for the tax he would have deducted only after Royal Assent. They said, and the Special Commissioners held in Demon Internet (in a passage with which Mr Tallon had no quarrel) that the Budget resolutions had misfired - so the obligation to deduct had fallen. Thus there could be no obligation account.
79.	I do not follow this. If parliament did A and B but got A wrong, then unless it expressly or by implication provided that B’s effectiveness was subject to A working, A’s failure cannot affect the viability of B. I see no such express or implied condition in the statutory provisions.
80.	I now turn to the Special Commissioners’ decision in Demon. I understand that the main thrust of the taxpayer’s argument in Demon was that neither section 67 nor any of the regulations imposed a retrospective liability to deduct, and that any obligation to account, being parasitic on a liability to deduct, fell if there was no liability to deduct. Mr Tallon put his argument before me differently. He concentrated on whether or not a liability to account for tax was created even if there was no ability to deduct the tax. That is the argument I have accepted above. But accepting it means I am in the unfortunate position of differing from the Special Commissioners in Demon both of whom I hold in very high regard and from whom I differ with regret. I should therefore address their reasoning in detail and explain why I differ. That reasoning starts at paragraph 34 of their decision:
“34. Section 67(3) of the 1998 Act expressly disapplies s 203 and the PAYE Regulations 'at any time on or before the day on which this Act is passed'. So the disapplication lasts until 1 August 1998. [I note that section 67(3) merely said that there was to be no change in the amounts to be deducted or accounted for, and did not in terms disapply section 203 and the PAYE regulations] Subject to that disapplication, the subsection states that any amounts that would have been deductible but for that disapplication shall be deducted 'in accordance with any such provision as may be made by regulations under section 203'. The duty in s 67(3) is a duty to comply with the PAYE Regulations that are extant at any particular time. Accordingly, the first question that the proviso to s 67(3) poses is: what amounts would Demon have had to have deducted in accordance with the new s 203FB on the basis specified in s 67(2) that s 203FB applied to events on or after 6 April 1998? Even if we assume that this was the amount that the respondent says ought to have been deducted, the proviso to s 67(3) then requires that that amount 'shall be deducted in accordance with any such provision as may be made by regulations'. Thus the effect of the section is to empower the making of new regulations that may impose a further duty to deduct, subject to the disapplication provision. The new regulations can be applied to any 'event' on or after 6 April 1998. As we have noted above, that may mean the agreement providing for payment or it may mean (as we assume) the payment itself.
35. Subsection (3) is not an easy provision to interpret, not least because it appears to contemplate that there would have been an obligation to deduct tax prior to 1 August 1998 (but for sub-s (3)) and regulations can impose a further obligation to deduct after 31 July 1998, notwithstanding that payment (and with it the opportunity for deduction) has already occurred. (The references in sub-s (3) to 'accounting for tax' rather than deducting tax refer to the obligation to account under s 203J(3), which is not said to apply in this case.) It may be that with continuing employments the regulations might have imposed an obligation to deduct the amounts that would have been deductible before 1 August 1998 from future emoluments. It is unnecessary for us to speculate on this as this is not the basis of the respondent's argument.
36. As events turned out there was no obligation imposed by further regulations before 4 August 1998 and, on the assumption that s 203FB was designed to close a gap by imposing an obligation to deduct where previously none existed, there was no duty to deduct prior to that date. It follows that this was not a case of payments being made subject to a duty to deduct extant at that time but disapplied only by sub-s (3). On the contrary, they were made at a time when there was no duty to deduct. 
81.	I think that this part of this paragraph rests on the assumption that any obligation to deduct and account in respect of the transactions brought into change by section 203FB would arise from the Amendment Regulations of 4 August 1998  only, but that since those regulations were not in place prior to 4 August 1998 they could not have been effective in relation to the transactions in question. But it seems to me that if there had been no section 67(3) then the effect of section 67(2) would have been retrospectively to engage the existing PAYE regulations in respect of the release payments. Thus there would have been a duty to deduct - retrospectively imposed - but that duty was disapplied by sub-section (3). The decision continues:
“The amounts sought by the respondent are not 'amounts which (but for this subsection) would have been deductible' unless sub-s (2) can be said to be effective to impose that obligation subject only to the disapplication of sub-s (3).” (my italics)
82.	I have italicised the last words of this paragraph because it seems to me that they describe precisely what sub-sections (2) and (3) do. Sub-section (2) it seems to me does impose a retrospective obligation to deduct but one which is disapplied by sub-section (3). Thus the amounts sought are “amounts which (but for this sub-section) would have been deductible”.  The timing of the Amendment Regulations is irrelevant to this logic: these regulations deal with hypothetical amounts which would absent sub-section (3) have been deductible; the effect of the retrospective application of section 203FB(3)(a) would have been to cause the existing PAYE regulations to have been triggered and liabilities to deduct and account to have been incurred. It is those liabilities - those liabilities, which are made notional rather than real by section 67(3), which are dealt with by the Amendment Regulations which came into force on 4 August 1998. The decision continues:
“37. Should the section be read to have retrospective effect either in the effect of the regulations it authorised to be made or by imposing the provisions of regulations not yet made? We were referred to various authorities about the approach to be taken to retrospective tax provisions, but in our view the issue does not need that support. We do not consider that the wording of the section imposes any obligation on an employer to deduct tax from a payment made before 1 August 1998.”
83.	I agree. The decision continues:
“We bear in mind that we are considering provisions that are asserted to impose a liability to collect, and therefore to pay, income tax retrospectively. This needs, in our view, clear language. We see no language either in s 203 or in s 67 such as to make the operation of the PAYE Regulations retrospective by reference to a regulation that had not been made until after that date.”
84.	But neither section 67, nor section 67 together with section 203 and its regulations, have that effect. The effect of section 67(3) is to require the calculation of the amounts which would be deductible or accountable if they had had that effect, and thus to require those amounts to be dealt with in accordance with a regulation to be made.
“What we think is clear is that anyone paying sums for the release of options on 30 April 1998 (assuming that is the correct event) had no legal authority to withhold any part of the amount paid in respect of tax. On any reading of s 67 there was no obligation (or right vis-à-vis the payee) to withhold any amount at that date.”
 “We read both s 67 and reg 80ZA as capable of applying only after the regulation was made and came into effect on 4 August. It therefore does not apply to these payments, irrespective of whether it is, might be or could have been effective in relation to some other payments made on or after it came into effect.”
85.	I agree that there was no obligation to withhold any amount at 30 April 1998, but section 67 and Regulation 80ZA ask you to determine what would have been deductible if that obligation had existed. The existence of an actual obligation is irrelevant. The tailpiece of section 67(3) and regulation 80ZA apply in the make belief world - the “as if” or “but for” world, not the real world.
86.	The decision continues:
“38. This point can also be answered in a different way, based on the drafting of reg 80ZA itself. If reg 80ZA cannot operate until 4 August, then it must be considered whether it operates on the payments to which it purports to apply. Regulation 80ZA(1)(b) specifically states that the regulation applies where 'the payment is made in the period beginning on 6th April 1998 and ending on 31st July 1998'. It cannot do that under the terms of the regulation itself. That must be derived from s 203 before or after amendment. Mr Aaronson strongly contended that this entire period is before reg 80ZA came into effect. In other words there is no common period of time between the period that the regulation purports to cover and the period which by reason of s 67 it actually covers. If that is so, it follows that for that reason also the section and regulation fail to apply to these payments.”
87.	This seems to suppose that the make-belief deduction had to be under the new Amendment Regulations - regulation 80ZA - but as I note above it did not have to be under that regulation; it was under the existing regulations where effect in the make-belief world was triggered by section 67(2). The decision continues:
“39. Mr Aaronson's argument about retrospection was also put on another basis. If and in so far as reg 80ZA operated or purported to operate retrospectively, it was ultra vires as beyond the power of the enabling provision (s 203). There is nothing in s 203, before or after its supplementation by s 203FB and by s 67 of the 1998 Act, that enables the Revenue to make retrospective regulations imposing a liability to collect tax from payments already made before any of the PAYE Regulations come into effect. In particular, s 67 does not provide such authority.”
88.	The argument here rests on the words “If and insofar as regulation 80ZA operated or purported to operate retrospectively…” but it is clear to me that it does not do so. Instead it creates a liability to account which arises after its coming into effect but by reference to events occurring before it was made. Neither does it impose “a liability to collect tax from payments already made”; instead it imposes a liability to account in respect of such payments. Section 67 is authority for that power. The decision continues:
“40. Miss Simler's skeleton argument indicated that, in addition to resisting Mr Aaronson's argument on its merits, she would also challenge the power of the Special Commissioners to deal with issues of vires. We indicated to the parties at the start of the hearing that in our view we were empowered to consider the issue of vires by the decision of the House of Lords in Chief Adjudication Officer v Foster [1993] AC 754. That decision applied to Social Security Commissioners (an office held by one of us) but in our view applied equally to the role of Special Commissioners for the reasons made clear in the opinion of Lord Bridge (with whom their Lordships agreed). Miss Simler did not seek to argue against that view, while reserving the right to challenge it elsewhere. We did not ask Mr Aaronson to address us on the point. Had we taken the view that the regulation necessarily had retrospective effect, we would have considered this argument further. In the result, on our interpretation it does not apply and we do not need to decide on its validity.

41. Separately again from those issues, there is another difficulty with the wording of reg 80ZA and the way in which it is stated to affect reg 40 (and no other provision in the PAYE Regulations). Regulation 80ZA(1) can be read as a statement of the circumstances in which reg 80ZA(2) applies. Thus, in this case it can be said that there was a payment in the period beginning on 6 April 1998 and ending on 31 July 1998 and it might also be said that there could have been an obligation to deduct tax but for s 67(3). When one turns to reg 80ZA(2), however, we find it impossible to see how this imposes an obligation consistent with the proviso to s 67(3) to deduct any amount when there is no further payment and all that reg 80ZA(2) does is to treat the relevant amount as an amount of emoluments for the purposes of reg 40. Paragraph (2) of reg 80ZA provides that reg 40 is to have effect as if the 'relevant amount' was an amount of emoluments paid in the income tax month ending on 5 August 1998. 'Relevant amount' is defined by reg 80ZA(1)(c) as the taxable amount of the payment by reason of s 135 and to which s 203FB(3)(a) applies. Regulation 40 refers to amounts of tax rather than amounts of emoluments. The effect of reg 80ZA must then be to add the 'amount of emoluments' to the sums to which 'A' applies in reg 40(2). If reg 80ZA operates in this way, it adds those amounts to 'emoluments paid by him (the employer) in that income tax month'. But 'A' is specifically not the amount of the emoluments but the amounts of tax 'which the employer was liable under these regulations to deduct from' those emoluments.”
89.	I do not agree. Regulation 80ZA(2) requires regulation 40 to be applied “as if” the emoluments were increased. If the emoluments were increased then “A”  would have been increased. Applying regulation as if the emoluments were increased means that the amounts of tax which the employer would have been liable to deduct would be correspondingly greater. The effect therefore is that the employer’s actual obligation to account for the month ending 5 August 1998 was actually increased.
90.	The decision continues:
“42. As noted above, reg 40 contains no obligation to deduct. That must exist elsewhere in the regulations. In which regulation? Regulation 80ZA does not impose any new obligation. Section 67 of the 1998 Act does so in so far only as it introduces s 203FB. But s 203FB merely expands the enabling power of s 203. And the only use of that power was in making reg 80ZA. Quite apart from the wording of the Regulations, we would be reluctant to conclude that reg 80ZA(2) could be effective to impose an obligation to deduct tax on a post-3 August 1998 notional payment when no earlier obligation to deduct existed. To so conclude would effectively be to penalise someone who had previously made a payment gross by requiring them to hand over tax that they had no obligation or right to deduct.”
91.	This is the argument adopted by Miss Simler which I record above. It is a harsh result or at least potentially so but, in the absence of any ambiguity, it is not one which leads me to a conclusion that the provisions do not do what they say on their face.
“43. These arguments lead us, by a series of different routes, to the same conclusion. If the intention of s 67 was to impose income tax on, and empower collection of income tax from, the payments made to the Demon employees on 30 April 1998, then it manifestly fails to do so because it at no time provides an effective obligation to deduct and account that was coterminous with the making of the agreements or the payment of the consideration under those agreements.”
92.	For the reasons set out above I fear that I reach a different conclusion. In my judgment Demon was liable to account for tax on the option release payments.
93.	There is one final point to note about timing. Regulation 80ZA deems the relevant amount to be for the purposes of Regulation 40 emoluments paid by the employer in the month ending on 5August 1998. It seems to me that whether or not the employee was employed at any time in that month is irrelevant to the operation of these provisions (save in relation to the rate at which tax should be accounted for). If the amounts were emoluments paid by the employer in that month then the PAYE regulations apply to those sums regardless of whether at the time of payment or in the month of payment the recipient (the “employee” for the purpose of Regulation 2(1)) was employed at that time or in that month. 
Assessment
94.	In this section I address the question of whether any amount for which Demon should have accounted can be deducted from the tax otherwise payable by the Appellants.
95.	Section 203(2)(e) permits the PAYE Regulations to make provision for the assessment and charge of income tax in respect of income to which section 203 applies.  That I think means income in respect of which a payment is made within section 203(1). Because section 203FB was deemed to come into force on 6 April 1988 (subject to the limitation in s67(3) FA 98) that means, at least that before the application of section 67(3), that the payments for the release of the option fell within the potential ambit of the PAYE Regulations, so that any provision they make in relation to assessment or self assessment of the Appellants’ income will be relevant.
96.	Regulation 99 of the PAYE Regulation provides that nothing in the Regulations presents an assessment being made in respect of income assessable to income tax. Assessment for these purposes does not include self-assessment (Reg 101(7)) I believe however that it is easier to understand the effect of the Regulations by starting with their operation the case of assessment and then to consider their adaption to self-assessment and I therefore consider the provisions in that manner in the following paragraphs). 
97.	Regulation 101 deals with the obligation to make payment following an assessment. Regulation 101(2) provides that
	‘If the tax payable under the assessment exceeds the total net tax deducted from the employee’s emolument during the year less any subsequent repayments made, the inspector may require the person concerned to pay the excess to the collector….’

98.	The “total net tax deducted” is defined by Regulation 2 to mean “…the total tax deducted from [the emoluments less any tax repaid to the employee”].
99.	At this stage it appears that the employee is obliged to make up any shortfall between the assessed tax and that actually deducted. But there are two modifications.
100.	First Regulations 101(3) and (4) require the “total net tax deducted” to be adjusted by (which relevantly must mean ‘increased by’) any tax which the employer was liable to deduct from the employee’s emoluments but failed so to deduct. Thus the employee is saved if, for example,  the employer makes an error or otherwise fails to deduct.
101.	Second section 203J(5) treats anything which an employer accounts for under section 203J(3) in respect of notional payments as paid by the employee in the year specified in PAYE regulations. Regulations 101A and 101 of the PAYE Regulations and Regulation 13(3) of the Notional Payment Regulations appear to provide the specification envisaged: the former providing that total net tax deducted is credited against tax otherwise assessable and the latter that total net tax is increased by tax “accounted for in accordance with section 203J(3)”. Thus if an employer provides a non cash benefit which counts as a notional payment and is unable to deduct the relevant tax PAYE from later actual payments but still accounts for that tax, that tax is to be treated as deducted and reduces the tax the employee would otherwise be liable to pay.
102.	Section 203J(5) makes explicit that an amount for which an employer accounts under section 203J(3) is to be treated as tax paid by the employee.  There is some question as to what happens when the employer is liable to account but does not: is “for which he accounts” in sub-section (5) to be taken as meaning “for which he is accountable”? With ordinary deduction from real payments, regulations 101(4) and (5) expressly assent to that proposition, but there is no equivalent assent in section 203J or in the Notional Payment Regulations. Each  of these deal with what the employer accounts for, not what he ought to have accounted for. Thus if the employer does not actually account for the tax (even though it should have accounted for it) it seems that the employee remains liable.
103.	In relation to amounts which by virtue of FA98 are treated as notional payments and were made between 6 April 1998 and the date of Royal Assent (I shall call these “transitional notional payments”) the Amendment Regulations disapply regulations 7 and 8 of the Notional Payment regulations which would otherwise have determined the date on which an employer would have been obliged to deduct and account in respect of such transitional notional payments, and replace those obligations with an obligation only to account for tax under regulation 8A. Now, if the tax so accountable fell within section 203J(3), then, the employee could treat it as paid by him and would get credit for it. But the tax will fall within section 203J(3) only if the employer is “unable to deduct” “by reason of any insufficiency of payments actually made”. But the tax for which the employer is accountable under regulation 8A is not tax which the taxpayer is unable to deduct for that reason: the employer us unable to deduct because (a) no mechanism is provided for deduction from later actual payments because of the disapplication of regulation 7, and section 67(3) disapplied any retrospective obligation to deduct. It is not because of any “insufficiency of payments” that deduction cannot be made. Therefore section 203J(3) does not appear  to operate to give the employee any credit for tax accounted for any transitional notional payments. Neither is there any express provision to that effect in the regulations.
104.	Thus no relief is provided for under the Act or the regulations:
(a)	where a “normal” non-transitional notional payment is made and the employer fails to account; and
(b)	where a transitional notional payment is made whether or not the employer accounts.
105.	Against this unhappy background the effect of regulation 80ZA and the release payments needs to be examined.
106.	The insertion of Regulation 80ZA does not affect the liability of the employer to deduct PAYE but merely his liability to account for it.  The same logic applies here as applied to the obligation to account in respect of transitional notional payments. Section 203J(5) gives credit only where section 203J(3) applies, section 203J(3) applies only if there was an insufficiency of payments from which to deduct which resulted in a deduction less than the amount accounted for; and the excess of any amount accountable for under regulation 80ZA over amounts deducted was not by reason of an insufficiency of payments actually made. Thus even if the employer had accounted for tax as a result of Regulation 80ZA no credit would have been available to the employee: and tax on the section 135 gain would have been collectable twice. That is an unpalatable conclusion, but, for the reasons in the following paragraphs, one from which I cannot escape.
107.	In Herd Lord Mackay at p64B said “the employee cannot be held liable for amounts which the employer ought to have deducted whether or not he has actually done so”. However he said this after having quoted regulation 49(2) an (3) of the 1973 PAYE regulations which are substantially replicated in regulation 101 of the PAYE Regulations.  In my judgment therefore he was not stating a general principle but deducing a result from the terms of the regulations. That conclusion holds good for the more recent regulations but cannot be extended beyond the terms of those regulations.  In particular it is not capable or transmutation into a principle that if the employer was liable to account for the tax, the employee is absolved from tax pro tanto.  Indeed the express provision of regulations  101A, 101(3) and (4) suggest that the contrary is the case: the fact that the employer should have deducted but did not has expressly to be made an occasion for the employee receiving a deduction suggest no general principle to that effect. Whilst in circumstances where the employer has actually accounted for the tax one might appeal to a general principle that the same income should not be taxed twice. I see no scope for it here where the employer has not accounted (and been held not to be accountable).
108.	I note that section 144A TA 88 provides that where an employer is treated under any of sections 203D to 203I (including therefore 203FB) as having made a payment of assessable income in respect of which the employer is required to account for tax under section 203J(3) (i.e. because the employer is unable to deduct) and the employee does not reimburse the employer then the amount the employer has to account for is treated as income of the employee.  Thus although the employer has to account for the tax on a notional payment, some tax burden falls on the employee: it is as Peter Smith J said in McCarthy a rough and ready penalisation of the employee who does not reimburse his employer.
109.	Thus, where the employer has to account (under section 203J(3)) but cannot deduct, a statutory liability falls on the employee (albeit not a liability for all the tax). Therefore a conclusion in relation to a release payment which does not fall within the definition of notional payment that, even though the employer is under a duty to account the employee remains liable to the tax, is not wholly at variance with the statutory scheme – despite its departure from the scheme applying to actual payments of emoluments.
110.	Thus far I have dealt with the position in relation to an assessment to tax on the employee, but this appeal relates to amendments to a self-assessment. In that context the rules are adapted:
(i)	section 59B TMA requires the excess of tax assessable on income over the tax paid or deducted, or treated as deducted, at source under section 203 to be payable by the taxpayer;

(ii)	section 59B(8) TMA provides that the PAYE regulations may provide, for the purpose of determining this difference, any necessary adjustments; and

(iii)	regulation 101A effectively incorporates the requirements of regulations 101(3) and (4), viz; that amounts which the employer was liable to deduct shall be treated as deducted.

111.	Section 209J(5): that any amount for which the employer accounts is to be treated as paid by the employee remains unaltered.

112.	Thus on self assessment the employee is liable for the difference between:
(i)	the tax on his income; and

(ii)	the tax which was actually or which should have been deducted as PAYE together with the amounts for which the employer accounted under section 203J.

113.	In other words there is also no relief under self-assessment for amounts for which the employer should have, but did not, account for under 203J, and no relief for amounts which are accountable for (but not deductible) under the PAYE regulations apart from section 203J.
114.	Mr Tallon suggested that it was a consequence of the statutory deeming in section 67 that amounts for which the employer became liable to account should be treated as having been amounts which he was liable to deduct: so that even the employer did not account for the tax the employee should be treated as if the employer had been liable to deduct and thus able to take the benefit of regulation 101(3) and (5) and 101A. It seems to me that the words of section 67(3)(a) get in Mr Tallon’s way: by expressly providing that the deeming does not affect the amounts which were deductible these words prevent section 67 supporting an argument that the taxpayer should get a deduction for what would have been deductible. If the taxpayer is to get a benefit it must be provided for in the regulations and there is nothing in the regulations which has that effect or given rise to it by creating a liability to deduct. The deeming is exhausted in these regulations.
115.	That dichotomy between what should have been accounted for but was not, and what should have been deducted and was not, is in my view illogical and surprising, but I can see no way of reading the statutory provisions to reach a different result.  Even if I had held that the payments were notional payments for the purposes of regulation 8A and the Notional Payments Regulations the same result would obtain although, had the Budget resolutions had the effect that the employer should have deducted when making payment then, although it did not, the conclusion would have been different (as a result of regulation 101(3) and (4), regulation 101A and section 59B TMA 1970). Likewise if I had agreed with the taxpayers in relation to Herd.
116.	As a result, although I accept the arguments of Mr Tallon in relation to the section 67 issue, I dismiss the appeal.

CHARLES HELLIER

SPECIAL COMMISSIONER
RELEASE DATE:  6  March  2007

SC 3148-3153/2006

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

East End Dwelling Company Limited v Finsbury Borough Council [1952] AC 109
Bootle v Bye [1996] STC (SCD) 95