HEATH BRIAN ZARIN v. THE COMMISSIONER OF INLAND REVENUE

HCIA 4/2019

[2019] HKCFI 3101

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO. 4 OF 2019

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J U D G M E N T

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Introduction

1.  By summons dated 18 September 2019, the appellant (“Taxpayer”) seeks leave to appeal from the decision D11/19 (“Decision”) of the Inland Revenue Board of Review (“Board”) dated 23 August 2019.  The Decision dismissed the appellant’s appeal against a Determination by the respondent Commissioner of Inland Revenue (“CIR”) confirming three additional assessments to salaries tax amounting to an aggregate of $1,752,968 (“Assessments”).  The Assessments were raised by the CIR under sections 8 and 9 of the Inland Revenue Ordinance Cap 112 (“IRO”).

2.  Section 8(1)(a) of the IRO materially provides as follows:

“(1) Salaries tax shall, subject to the provisions of this Ordinance, be charged for each year of assessment on every person in respect of his income arising in or derived from Hong Kong from the following sources – (a) any office or employment of profit;”

3.  Section 9(1)(a) of the IRA materially provides as follows:

“(1) Income from any office or employment includes – (a) any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance, whether derived from the employer or others [with certain exceptions not applicable in this case]”

4.  The representation on the application for leave was the same as that before the Board.  Mr Stefano Mariani, of Deacons, appeared for the Taxpayer, and Mr Wilson Leung, of Counsel, instructed by the Department of Justice, appeared for the CIR.

Principles on Leave to Appeal

5.  The application for leave is made under section 69 of the IRO.  Under that section, leave to appeal must not be granted unless the Court of First Instance is satisfied: (1) that a question of law is involved in the proposed appeal; and (2) that (a) the proposed appeal has a reasonable prospect of success, or (b) there is some other reason in the interest of justice why the proposed appeal should be heard.

6.  In this application, no argument has been put forward as to the “some other reason” limb.  Therefore, the focus of the argument has been on whether or not a question of law is involved in the proposed appeal, and whether the proposed question has a reasonable prospect of success.  There is no dispute that “reasonable prospect of success” in the context of section 69 of the IRO means “reasonably arguable” and nothing more.

7.  Further guidance as to applications under section 69 can be found, for example, in the decisions of Chow J in China Mobile Hong Kong Co Ltd v CIR [2018] 2 HKLRD 146 at §30, and of G Lam J in CIR v Right Margin Ltd [2017] 5 HKLRD 398 at §§12-13.  That guidance includes that:

(a)  The right to appeal is not unqualified and absolute.  Any proposed question of law must be proper and satisfy a qualitative aspect.

(b)  A question may superficially appear to be a question of law, but if it is general and vague and does not identify the issues to be argued, it is inadequate.

(c)  It is not a proper question of law by turning the ultimate conclusion of the Board into a form of question.

(d)  It is also not a proper question of law if the framed question fails to identify precisely the point of law involved or any specific legal error or question.

(e)  Whether or not a proposed question is a proper question of law depends on the circumstances of the case.

8.  As to challenges made to findings of fact, said to amount to an error of law, guidance can be found for example in Kwong Mile Services Ltd v CIR (2004) 7 HKCFAR 275 at §§31-34, and §37.  Such challenges can only be made if (a) the decision was based on a finding of fact or inference from the facts which was perverse or irrational; (b) there was no evidence to support the decision; (c) the decision was made by reference to irrelevant factors; or (d) the decision was made without regard to relevant factors.  The appellant court should not disturb the Board’s conclusion unless it regards that conclusion as contrary to the true and only reasonable one.

9.  This reflects that appellate courts are reluctant to interfere with findings at first instance, because Judges and tribunals can reasonably differ as to on what side of the line any particular case falls, particularly where there is the assessment of numerous facts.

10.  It may also be important to bear in mind that, in an appeal before the Board, the taxpayer bears the burden of proof throughout, and the CIR does not have to prove anything.  As a result, in this particular case, the Taxpayer bore the burden of proving to the Board that the various sums assessed as chargeable to tax were not “from” his employment (see below).

Background

11.  The Taxpayer was employed by HSBC Markets (Asia) Ltd (“Company”) as Managing Director, Head of Direct Principal Investments Asia, by a letter dated 27 May 2010 and countersigned on 31 May 2010 (“Employment Contract”).  Under the Employment Contract, and in addition to a base salary, the Taxpayer was provided with a “guaranteed bonus”, participation in a “Carry Plan”, and participation in a “discretionary bonus scheme”.

12.  As part of his guaranteed bonus for the performance year 2010, on 15 March 2011 the Taxpayer was granted a restricted share award of shares in HSBC Holdings plc under the HSBC Share Plan, which shares were defined in the Decision as the “2011 Shares”.  The total shares granted were to vest as to 33%, 33% and 34% in March 2012, 2013 and 2014 respectively.  As part of his discretionary bonus for the performance year 2011, on 12 March 2012 the Taxpayer was granted another restricted share award of shares in HSBC Holdings plc under the HSBC Share Plan 2011, which shares were defined in the Decision as the “2012 Shares”.  Those shares were to vest as to 33%, 33% and 34% in March 2013, 2014 and 2015 respectively.

13.  Amongst the terms of the two share plans (“Plans”) were terms that: (a) participation in the Plans was governed by the rules of the plans and did not form part of the Employment Contract; (b) the award would vest on the vesting date specified, provided the participant remained continuously employed within the Group or fell within the scope of the ‘good leaver’ provisions set out in the Plans; (c) awards might be amended, reduced or cancelled by a relevant remuneration committee at any time before the award vested, and the committee had the discretion to impose additional conditions on the awards; (d) if the participant left the Group before the vesting date(s) as a good leaver, then subject to the approval of the committee and the policy of the Company, the awards would vest in full on the vesting date(s) subject to the committee’s authority already mentioned; (e) good leaver reasons included, amongst other things, redundancy; and (f) where the rule of good leaver is applied and the participant had entered into a termination agreement in connection with the cessation of employment, the awards would not vest until the participant had complied with, or was released from his obligations under, that termination agreement.

14.  By letter dated 21 January 2013, the Company terminated the Taxpayer’s employment on the grounds of redundancy.  Amongst other things, the letter stated that the payment in lieu of three months’ notice would be made, together with an enhanced severance payment of $467,500; that the terms of the letter would be in full and final settlement of the termination of employment, and the Taxpayer would not bring any claims against the Company or other group companies; that the Taxpayer would be treated as a good leaver, and the vesting of any un-vested shares would be conditional on his compliance with the terms in the letter; and that the Taxpayer would assist the Company and any group company in relation to certain litigation (“Litigation”) regarding the Company’s investment in a particular company, including attendance at court or arbitration hearings outside Hong Kong.

15.  The Taxpayer did not accept those terms offered and made alternate suggestions.  There then followed negotiations between solicitors appointed on behalf of the Company and the Taxpayer.  Ultimately, by letter dated 20 June 2013 from the Company’s solicitors, signed by the Taxpayer on 21 June 2013, revised terms and conditions regarding the taxpayer’s termination of employment were agreed (“Termination Agreement”).  In passing, I would note that I have adopted the definition used by the Board in the Decision, but Mr Mariani suggests that a proper description of that agreement might better have been the “Settlement Agreement”.  Of course, he also acknowledges that more turns on the content then on any particular label given to it.

16.  The terms of the Termination Agreement included:

(a)  because the Taxpayer’s employment was terminated by reason of redundancy, he would be treated as a good leaver for the purposes of the Plans, so that all remaining restricted shares previously awarded to the Taxpayer would vest on the same terms as stated in the letters awarding them to the Taxpayer;

(b)  any release of the 2012 Shares would be conditional on the Taxpayer having not committed a breach of any of the terms of the Termination Agreement, including the one that he should not claim against the Company in connection with the employment or the cessation of the employment;

(c)  if the Taxpayer committed a breach of any of the terms of the Termination Agreement, any unvested 2012 Shares would be forfeited and the Taxpayer would repay the cash value of any shares vested in the period from termination of employment and the date of breach;

(d)  for the avoidance of doubt, the 2011 Shares would continue to vest on the release date(s) set out in the letter awarding them to the Taxpayer;

(e)  subject to the Taxpayer providing reasonable assistance, as set out in the Termination Agreement, in respect of the Litigation, he would be compensated for the time he spent, calculated at the rate of $12,692 per day, including four days of time spent between 22 January and 20 June 2013, as well as certain other expenses and reimbursements;

(f)  the Company would pay the Taxpayer a total enhanced severance payment of $467,500;

(g)  the Taxpayer would be obliged to provide reasonable assistance in proceedings and any matter with which he was dealing during his employment in relation to which he had relevant knowledge, as well as specifically the Litigation;

(h)  the Taxpayer agreed to withdraw an outstanding data access request and not to issue any similar one;

(i)  except for a claim to enforce the Termination Agreement itself, the Taxpayer agreed to release and discharge the Company and related parties from all claims etc in connection with the employment or the cessation of the employment, including any claims for carried interest, bonus, restricted shares under the Plans and any payments during employment or arising from cessation of employment;

(j)  there were confidentiality provisions, and a provision that neither party would make inaccurate or definitive statements about the other.

17.  The Company subsequently filed notifications by an employer (including of an employee who is about to cease to be employed), in which it reported the Taxpayer as being in receipt of released restricted shares, as against the date of the award, date of release, number of shares released and market price, hence reportable value.  The reported value included:

(a)  the sum of $2,214,468 (“Sum A”) released on 28 June 2013 as part of the 2011 Shares;

(b)  the sum of $2,155,895 (“Sum B1”) released on 17 March 2014 as part of the 2011 Shares;

(c)  the sum of $1,764,805 (“Sum B2”) released on 12 March 2014 as part of the 2012 Shares; and

(d)  the sum of $1,579,820 (“Sum C”) released on 12 March 2015 as part of the 2012 Shares.

18.  The Company also notified the payment of the severance payment of $467,500 in compensation for the involuntary loss of employment with HSBC due to redundancy, which the Assessor of the Revenue accepted should not be assessed to salaries tax.

19.  However, the Assessor raised additional assessments to salaries tax on Sums A, B1, B2 and C.  The Assessor also raised additional assessment to salaries tax on the total of $50,768 (“Sum D”), being the total amount paid to the Taxpayer for four days’ compensation in relation to the Litigation.

20.  The Taxpayer objected to the additional assessments, but the assessment was upheld in the Determination dated 29 November 2017 made by the Deputy Commissioner of Inland Revenue.

21.  The Taxpayer appealed against the Determination to the Board.  The Board dismissed that appeal by its Decision.

The Decision

22.  In the Decision, the Board recited the agreed facts and the documents, and a rehearsal of the evidence given by the Taxpayer at the hearing.  The Board found the Taxpayer’s evidence to be credible, and considered his testimony as part of the body of evidence as a whole.  The Board also rehearsed the submissions made on behalf of the Taxpayer by Mr Mariani, and on behalf of the CIR by Mr Leung.

23.  In its discussion of the relevant law, the Board referred to the main material statutory provision in section 8(1)(a) of the IRO, relating to the chargeability to salaries tax of a sum paid to a taxpayer on or after the termination of employment, and to the judgment of the Court of Final Appeal in Fuchs v CIR (2011) 14 HKCFAR 74, in particular the summary of principles by Ribeiro PJ at §§14-22.

24.  The Board summarised the applicable principles broadly as follows:

(a)  The question involves the construction of section 8(1)(a) of the IRO, namely whether payment is income “from” any office or employment of profit.

(b)  Not every payment which an employee receives from his employer is necessarily income “from his employment”.  It is not sufficient to qualify a payment in that way simply because the employee would not have received the sum in question if he had not been an employee.

(c)  Income chargeable under section 8(1) is not confined to income earned in the course of employment, but embraces payments made “in return for acting as or being an employee”, or “as a reward for past services or as an inducement to enter into employment and provide future services”.  If a payment, viewed as a matter of substance and not merely of form and without being “blinded by some formulae which the parties may have used”, is found to be derived from the taxpayer’s employment in the sense mentioned above, it is assessable.  The vital question is what is the “substance of the bargain” made between the employer and the taxpayer for the payments in question.  Thus, even a gratuity would still be chargeable if payment is a reward from the employer (for example for past services), even though the employer was not obliged to pay it and thus the employee has no legal entitlement to it.

(d)  A payment that is concluded as being “for something else” is not assessable, and does not come within the above test. (The Board gave various examples of payments falling outside the test.)

(e)  Insofar as it is contended that a payment was not made in return for a taxpayer acting as or being an employee, but as consideration for “abrogating” his rights under the contract of employment, the operative test must always be the test identified above, reflecting the statutory language.  The question is always: In the light of the terms on which the taxpayer was employed and the circumstances of the termination, is the sum in substance “income from employment”?  Was it paid in return for his acting as or being an employee?  Was it an entitlement earned as a result of past services or an entitlement accorded to him as an inducement to enter into the employment?  If the answer is “Yes”, the sum is taxable, and it does not matter that it might linguistically be acceptable also to refer to it as “compensation for loss of office” or something similar.  On the other hand, the amount is not taxable if on a proper analysis the answer is “No”.

(f)  The “abrogation” examples may reach the conclusion that a payment is made in consideration of an employee agreeing to surrender or forego his pre-existing contractual rights, but “abrogation of contractual rights” is not itself the test of chargeability in every termination situation.  The test is not whether the employer had acted in breach in terminating the contract.  In every case, the test remains that of the purpose of the payment at the relevant time.

(g)  Hence, in the context of payments made upon termination of employment, the same consideration applies.  What was the substance of the bargain for the payments in question?  What was the purpose of the payment?  Was it a reward for services past, present or future (in which case it was from his employment or office), or was it “for some other reason” (in which case it was not)?  If the employee was entitled to the payment under the contract of employment, then the purpose of the payment was in order for the employer to perform its obligations under the contract, and it follows that the payment was income “from” the employment.  But if the employee was not so entitled, then one must go on to consider the purpose for which the employer made that payment.

25.  Reference was also made to the decision of the Court of Appeal in Poon Cho-ming John v CIR [2018] 5 HKC 233.  (As an aside, since the Decision, that case has been heard on final appeal – see CIR v Poon Cho-ming John [2019] HKCFA 38 – and the CFA confirmed that the applicable principles are those set out in Fuchs, and that the Court of Appeal had correctly applied those principles on the particular facts of the Poon case.)

26.  It is significant in the context of this application for leave to appeal that it is common ground between Mr Mariani and Mr Leung that the Board correctly identified the legal principles to be applied.  As Mr Mariani put it, the Board and the Taxpayer and the CIR “are on all fours as regards the applicable law”.  Of course, each case ultimately involves applying the statutory language to the facts.  There may be different phrases which have been used by judges in different cases to describe where the source of payment satisfies the statutory language that it is “from” employment, but ultimately it is the statutory words which apply.  It is necessary to look at the substance, not the form nor the formulae or labels which might have been adopted by the parties.  Entitlement to a payment under a contract of employment would indicate the payment is from employment, but even the absence of such an entitlement then requires looking further at the purpose of the payment.

27.  As it is convenient to do, the Board considered the relevant Sums in three sections of the Decision, dealing with (1) Sum A and Sum B1 together, (2) Sum B2 and Sum C together, and then (3) Sum D.

28.  As to Sum A and Sum B1, the Board noted that both sums were derived from the 2011 Shares, which it found to have been unequivocally guaranteed in the Employment Contract in passages which it quoted.  One part of the provisions quoted was that:

“The Guaranteed Bonus in the form of restricted shares detailed above will be released on the condition that you have not resigned or been dismissed as a result of your gross misconduct on the date the restricted shares are due to be released.”

29.  It is, of course, an undisputed fact that the Taxpayer had not resigned and was not dismissed as a result of his gross misconduct.

30.  The Board took into account that the Taxpayer’s own testimony was that the guaranteed bonus was a significant part of his compensation package.  The Board further noted that the continued vesting of the 2011 shares was not subject to any condition in the Termination Agreement. The Board found that Sum A and Sum B1 were contractual entitlements the Taxpayer had under the Employment Contract, and accordingly rejected the submission that he had no accrued right to the 2011 Shares, and rejected the submission that the discretion to vest the 2011 Shares was consideration given for a separate bargain, namely the Termination Agreement.  Reference was also made by the Board to certain rules in the applicable Plan, as part of the rejection of the submission that the primary cause for the Taxpayer to be paid Sum A and Sum B1 was a “fresh bargain”, without which the 2011 Shares which remained unvested at the date of termination of the Taxpayer’s employment would in effect simply have lapsed.

31.  Hence, the Board found Sum A and Sum B1 to be “income from employment” within the meaning of section 8 of the IRO, so chargeable to salaries tax.

32.  The Board noted that Sum B2 and Sum C were derived from the 2012 Shares, as part of a discretionary bonus which provided no guarantee of them or their value.  Having referred to clause 1.1(b) of the Termination Agreement, the Board found Sum B2 and Sum C to represent the value of shares the Company released to the Taxpayer pursuant to the Termination Agreement, instead of being contractual entitlements under the Employment Contract.

33.  Nevertheless, the Board noted that was not determinative as to whether their value was “income from employment”, and went on to consider the purpose for which the employer made the payment to the employee.  To ascertain that purpose, the Board considered the background against which the Termination Agreement was entered into, engaging in what Mr Leung described as a “multi-factorial assessment”.  The Board looked in particular at the background circumstances, the correspondence between solicitors for the Taxpayer and the Company, what it regarded as the peripheral importance of the data access request, and the general confidentiality provision and withdrawal of threat of litigation in the Termination Agreement as not constituting a fresh bargain.  The Board held as a fact overall that the disagreement between the Taxpayer and the Company had not gone to the point that litigation was imminent or where the Company was eager to settle to avoid litigation.

34.  On that basis, the Board distinguished the facts from those in the Poon case, which involved the making of a payment as “consideration to make the Taxpayer go away quietly”.  The Board held that the continuing release of the 2012 Shares to the Taxpayer was “in return for acting or being an employee” or as a “reward for past services” and was not “for something else”.  Hence, Sum B2 and Sum C were “income from employment” chargeable to salaries tax.

35.  As to Sum D, the Board considered but rejected on the evidence the Taxpayer’s contention that he was acting as an “expert witness” or an “independent consultant”.  Instead, the Board held that both the Taxpayer and the Company had an “understanding” that he was assisting in the capacity of a former employee.  Some reliance was placed on the basis of calculation of the daily rate by reference to a specific proportion (1/260) of the Taxpayer’s final fixed pay.  Pointing out, on the basis of the authority of Hochstrasser (Inspector of Taxes) v Mayes [1960] AC 376 (HL) at 388, that a payment would be taxable insofar as it is “made in reference to the services the employee renders by virtue of his office, and it must be something in the nature of a reward for services past, present or future”, the Board found Sum D to be “income from employment” chargeable to salaries tax.

The Proposed Appeal

36.  In the Statement in Support of Application for leave to appeal, Mr Mariani identified three grounds of proposed appeal.  Those three grounds essentially arose one each from the three sections of the Decision, and are as follows:

(a)  Ground 1: Whether the Board erred in law in finding that Sums A, B1, B2, C and D were sums sourced from the employment of the Appellant within the meaning of sections 8(1) and 9(1)(a) of the IRO – that is, a reward for past, present, or future services in employment as opposed to consideration for something else – where the evidence before it was univocal that each sum was actually paid because restricted shares were released by the Company pursuant to the Termination Agreement, and not the Employment Contract.

(b)  Ground 2: Specifically as regards Sums B2 and C, whether the Board erred in law in concluding that they were income from employment within the meaning of section 8(1) and so chargeable to salaries tax, notwithstanding its finding of fact that such Sums were not sourced in the Employment Contract.

(c)  Ground 3: Specifically as regards Sum D, whether the Board erred in law in finding that sum was derived from the Appellant’s prior employment with the Company or was otherwise a reward for services rendered in employment, notwithstanding that the Appellant was, at the time he rendered the services for which Sum D was consideration, not employed by the Company and there was nothing in his Employment Contract requiring him to render such services.

37.  Each of those grounds was explained in two or three further sub-paragraphs:

(a)  As to Ground 1, the main point made was that the Board erred in failing to distinguish between the grant of a restricted share and its vesting, where the Taxpayer received nothing of value upon the grant, and received value only upon the vesting of such shares, which vesting was (in the case of a departing employee) contractually subject to the agreement of the Company.  Hence, the continued vesting was confirmed by the Termination Agreement, which was by way of fresh consideration extracted from the Taxpayer that required him to enter into certain covenants and undertakings that did not exist in the Employment Contract.  The new bargain was the true source of the vesting.

(b)  As to Ground 2, the main point made was as regards the manifest inconsistency between the finding of fact that Sums B2 and C represented the value of shares released pursuant to the Termination Agreement and the conclusion nevertheless that those sums were from the Appellant’s employment for the purposes of the charge to salaries tax.  It was said that there is a logical fallacy in confusing correlation with causation.

(c)  As to Ground 3, the main point made was that where there was no employment at the time of the provision of services for which Sum D was paid, and no prior agreement in the Employment Contract that the Taxpayer should render those services, the only contractual arrangement governing the provision of services was in the Termination Agreement.

38.  It was common ground between Mr Mariani and Mr Leung that I might make different findings on each of the proposed grounds of appeal.  In other words, they fall for separate consideration and do not necessarily stand or fall together.

Ground 1 – Sums A and B1

39.  As a preliminary point, I agree with Mr Leung that Ground 1 could only have application to Sums A and B1, and not to Sums B2 or C.  This is because, contrary to the suggested error in the finding identified at the end of Ground 1, the Board did find that Sums B2 and C were released by the Company pursuant to the Termination Agreement, and not the Employment Contract.  In the end, I think Mr Mariani agreed that Ground 1 would be limited to Sums A and B1, so that if I grant leave to appeal on this ground he would be content to delete the references to Sums B2 and C.

40.  Mr Leung then argued that Ground 1 fails to identify and state a proper question of law, being nothing more than a mere conversion of the Board’s conclusions into a question, and no question of law arises from the reasons set out in the Appellant’s Statement in any event.  In essence, he said, the ground was in reality a disguised challenge to findings of fact.  In any event, he said, the construction of written instruments is a question of mixed law and fact, where “construction” includes two things being first the meaning of words and secondly their legal effect, or the effect which is to be given to them.  Construction becomes a question of law as soon as the true meaning of the words in which an instrument has been expressed and the surrounding circumstances, if any, have been ascertained as facts (the meaning of words or technical or commercial terms, and discovery of surrounding circumstances when relevant being questions of fact).  Mr Leung reminded me that proposed appeals from findings of mixed fact and law are to be treated in the same way as proposed appeals from findings of fact.

41.  In response, Mr Mariani argued that the question of the contractual source of payment to determine whether it falls within the section 8(1) charging provision is “a paradigmatic question of law”, where the appellate court would be asked to decide whether the Board misdirected itself in law in identifying the sources of Sums A and B1 in the Employment Contract as opposed to the Termination Agreement.

42.  Mr Mariani argued that the Board failed to recognise the “independent contractual vitality” of the Termination Agreement, being the separate bargain struck between the Company and the Taxpayer well after the employment had ceased, and which stipulated that the Taxpayer accepted certain undertakings and covenants to which he was not already bound by the Employment Contract.  Those issues, he says, are questions of law, because they go to the heart of the proper construction of section 8(1) and the proper interpretation of the Employment Contract and the Termination Agreement.  The position is binary; either a sum is “from” employment, or it is not.  So, the way to frame an appeal on that specific point of law is asking whether the Board erred in law in mischaracterising the source of the sum received by the employee.  Reference back to the Board’s reasoning and conclusions within the formulated ground of appeal does not necessarily amount merely to reframing the decision as a question.

43.  As regards the form of the question posed by Ground 1, Mr Mariani also pointed to its similarity with the question formulated for the appeal in the Poon case, and suggested it is unclear why Ground 1 drafted following a similar rubric and on comparable terms should not be thought to be properly stated.

44.  Though I think there is at least room for some doubt about it, I am prepared to accept Ground 1 as framing a question of law.

45.  As I have indicated above, Mr Mariani accepts that the Board came to its conclusions of law by adopting the correct methodology, by seeking to identify what each payment was for – that is, what was its purpose – in the causal sense, but he submits that the Board arrived at the wrong conclusion by ascribing the source of Sums A and B1 to the Employment Contract, and not to the Termination Agreement.

46.  However, I do not think that Ground 1 is reasonably arguable.  Whilst the challenge is based upon the suggestion that the evidence before the Board was univocal that the sum was paid because restricted shares were released pursuant to the Termination Agreement and not the Employment Contract, I disagree.

47.  Whilst it is correct that there is a difference between the grant of the restricted shares and the vesting of those shares, the Board was alive to the difference (and indeed recited Mr Mariani’s argument based upon it).  I do not think that the Board was distracted by the label or formula “guaranteed bonus” in the Employment Contract, as Mr Mariani suggested.  Rather, the Board simply looked at the terms of the Employment Contract.  It held, in my view correctly, that the 2011 Shares were unequivocally guaranteed by the Employment Contract, so giving rise to a contractual entitlement to the vesting of those shares.

48.  The Board considered not just the provisions of the Employment Contract, but the Taxpayer’s own testimony (which I have mentioned above), and rightly pointed out the absence of any condition in the Termination Agreement to the continued vesting of the 2011 Shares.  I say “rightly pointed out” because clause 1.1(d) said expressly, and so as to avoid any doubt, that the 2011 Shares “will continue to vest on the release date(s) set out in the letter awarding them to your client”.  (Though it does not particularly matter, that point as to contractual entitlement had been precisely the Taxpayer’s own previous argument.)

49.  In those circumstances, any “independent vitality” of the Termination Agreement does not matter.  I do not think the general waiver of claims or promises of confidentiality or anything else in the Termination Agreement reasonably arguably change the analysis.

Ground 2 – Sums B2 and C

50.  The main focus of Mr Mariani’s argument on Ground 2, and the reason why the ground is said to arise separately from Ground 1, was from the suggested internal contradiction in the Decision. The argument was that, once the Board found that Sums B2 and C were not contractual entitlements under the Employment Contract, but instead represented the value of the shares released to the Taxpayer pursuant to the Termination Agreement, it was not open to the Board inconsistently to hold that the value should nevertheless be chargeable to salaries tax as income from employment.

51.  Mr Mariani argued that that conclusion was erroneous, in failing to distinguish between the grant of the share subject to a vesting schedule on the one hand, and the vesting of the share on the other.  Again, he drew the distinction between when economic value was received by the Taxpayer, that being not on the grant but only on the vesting.  Whilst he accepted that the quantum of the shares granted to the Taxpayer was indeed a reflection of his performance in employment, the vesting of the shares arose from the Termination Agreement, as the Board itself concluded.  Therefore, to mistake correlation for causation is a logical fallacy and a plain error of law.  As Mr Mariani put it, because the Taxpayer was not entitled to the vesting of those shares at the date of the cessation of his employment, he received Sums B2 and C from the Termination Agreement, and not otherwise.

52.  Mr Mariani submitted that the juristic source of the transfer of value was the Termination Agreement, which was made months after the employment relationship had ceased, and that the Taxpayer only got anything vested because he agreed to the terms of the Termination Agreement.  Putting it slightly differently, he suggested that the causal nexus was interrupted by the “fresh bargain” made in the Termination Agreement.  That the amount of Sums B2 and C might have been in the same amounts as would have vested had the Taxpayer continued to be employed is a matter of correlation or computation, not one of source.

53.  However, I agree with Mr Leung that the focus on the suggested inconsistency is misplaced. As the Board itself said, the mere fact that the release of the 2012 Shares was made pursuant to the Termination Agreement is not determinative as to whether their value paid to the Taxpayer was income from employment.  It remained necessary to consider the purpose for which the Company made that payment, there being many cases (and Fuchs was one of them) where sums paid pursuant to a termination or similar agreement have nevertheless been held to be “from” employment.

54.  Here, the Board examined the facts to ascertain the purpose of the payment, of course including the terms of the Termination Agreement itself and the factual matrix against which it was made.  The Board made a finding of fact that the 2012 Shares were not released for the purpose of settling potential litigation, because it did not accept that there was in fact sufficient prospect of litigation.  So there was also the finding that the purpose of continuing release of the 2012 Shares was “in return for acting or being an employee” or as a “reward for past services”.  That purpose brought the payment within the meaning of section 8(1)(a).

55.  I might add that the supposed conditionality for release of the 2012 Shares, against compliance with the terms of the Termination Agreement, was something in any event foreshadowed by the terms of the relevant Plan.  Those terms provided that where the rule of good leaver is applied and the participant had entered into a termination agreement in connection with the cessation of employment, the awards would not vest until the participant had complied with, or was released from his obligations under, that termination agreement.  Though the Plan was not part of the Employment Contract, the Taxpayer only became a participant in it as a consequence of his employment, and that participation therefore came directly from his employment.  The Plan specifically envisaged that if, as became the fact, the Taxpayer left as a good leaver his awards would vest so long as, albeit not until, he complied with any termination agreement entered into.  The Plan also specified that the award would vest on the vesting date specified, provided the participant remained continuously employed within the Group or fell within the scope of the ‘good leaver’ provisions set out in the Plans.  The Taxpayer fell within the latter description, so I do not think it is reasonably arguable that the substance of the Sums B2 and C were other than “from” employment, as the reward for past services.

56.  Mr Mariani also criticised the Board for adopting a reading of the Poon case which was overly reliant on the technically irrelevant factual distinctions between the two disputes, glossing over compelling similarities of principle.  I agree with Mr Leung that that criticism is misplaced.  First, it is actually common ground that the correct legal principles were identified by the Board.  However, it fell to the Board to apply them to the facts of this case.  The Board identified where it thought the facts of this case differed from those in the Poon case.  In essence, the Board found that the payments of Sums B2 and C, and in contrast to the Poon case, were not payments made so that the Taxpayer would “go quietly”.

57.  Stepping back, and looking at the big picture, the question for the Board might be put as follows: What was the continued release of the 2012 Shares really given for as a matter of substance?  Was it given for past performance in employment, or was given for something else?  On the basis that the continuing release of the 2012 Shares was not “for something else”, notwithstanding that they were triggered by the Termination Agreement, the Board found them to be the reward for past services.

58.  I do not think Ground 2 is reasonably arguable.

Ground 3 – Sum D

59.  Mr Mariani described the Board’s reasoning as “with respect, incoherent”.  Even if there was evidence (which Mr Mariani does not accept) to support a finding of the “understanding” between the Taxpayer and HSBC that the former would help the latter in the Litigation, there is no provision in the IRO to charge to salaries tax any sums paid by a former employer to a former employee with respect to services not contemplated in the former employee’s contract of employment and rendered after the relevant employment had ceased.

60.  In those circumstances, Mr Mariani submits, such sums simply could not be “from” employment, and the Board’s reliance on the Hochstrasser case was misplaced.  Therefore, the Board’s conclusion was a non sequitur legally speaking, and that amounted to an error giving rise to a question of law.

61.  In response, Mr Leung points out that Mr Mariani is re-running his argument before the Board, though that does not seem to me to matter if the argument gives rise to a ground of appeal with reasonably arguable prospects. But Mr Leung also submits that the fact that service was rendered after the formal end of the Taxpayer’s employment does not preclude the Board from finding that payment received was “from” his employment, as section 8(1) is not limited or confined to income earned in the course of employment.  Nor is there anything in the case law, such as Fuchs, which says that a payment can only be taxable if it is made in relation to a task stipulated under the employment contract.  That, says Mr Leung, is not the statutory test.

62.  But, perhaps Mr Leung’s primary point is that it was the Taxpayer’s case before the Board that he was acting as an “expert witness” or “independent consultant” in providing assistance in the Litigation, but the Board rejected that contention after examining all the facts.  Once the Board had come to that decision, it followed that the Taxpayer had failed to discharge his burden of proof in relation to Sum D.

63.  I am not sure I agree with Mr Leung’s criticism that Ground 3 is another thinly disguised attack on the Board’s findings of fact.  Albeit that the case may involve consideration of the relevant facts, the ultimate question remains under the statutory test as to whether or not Sum D was income “from” employment.

64.  Nevertheless, it seems to me that the facts on which the Board placed reliance at least reasonably arguably identify that Sum D was not income “from” employment.  It is correct that the Taxpayer’s own letter to the Company dated 28 January 2013 acknowledged that after termination he was “willing to provide reasonable assistance” in relation to legal proceedings, but that was in circumstances where he had no obligation to do so under the Employment Contract, and it is unlikely that someone of his seniority would do so without monetary compensation.  It is also correct that the basis of the compensation was ultimately calculated as a proportion of his final base salary, but I do not think mere computation or calculation answers the question as to whether the payment was “from” employment.  Most importantly, another fact to which the Board paid attention was that clause 2.1(a)-(b) of the Termination Agreement, under the heading “obligations after termination of employment”, provided that:

“… reasonable assistance in relation to any claim or threaten claim, investigation, administrative or regulatory proceedings as the Company or the Group may reasonably require in relation to any matter with which [the Taxpayer] was dealing during his employment and/or any matter which arises after the termination of [the Taxpayer’s] employment with the Company but in relation to which [the Taxpayer] has relevant knowledge.”

65.  I think that clause identifies, at least reasonably arguably, that the source of the payment of Sum D was the Termination Agreement.  There seems to me to be real force in Mr Mariani’s submission, which acknowledged that of course the Taxpayer was useful because he had previously been employed, and the Company wished to maintain the benefit of knowledge obtained during employment, but the money was actually not paid for providing services which can be said to have come themselves “from” the employment.  The Taxpayer had no compulsion to assist in the way he agreed to, and he agreed to as part of – and only as part of – the Termination Agreement.

66.  I also agree with Mr Mariani that, notwithstanding where the burden lay before the Board, the question as to the source of income is not a matter which ought to be decided by default.  Indeed, if one focuses merely on whether the Taxpayer can be regarded as an “expert witness” or “independent consultant” in his assistance in the Litigation, it is easy to lose sight of the real question. The only burden which the Taxpayer faced was to identify that Sum D was not “from” his prior employment so that it was “from something else”.  I do not think it was necessary to have identified in precise terms the “something else” so has to have satisfied the burden that it was not “from” employment.

67.  I also have in mind that had the services being provided for more hours, or over a longer period, on the facts they would almost certainly have been taxable as income in Singapore, or potentially as income chargeable to tax under section 14 of the IRO in Hong Kong.  Those points also seem to me to make it at least reasonably arguable that the Sum D is not properly chargeable to tax under section 8(1)(a).

68.  In the circumstances, therefore, I would grant leave on Ground 3.

Result

69.  I refuse leave to appeal on Grounds 1 and 2.  I grant leave to appeal on Ground 3 only.

70.  However, I am conscious that the relevant income and the tax chargeable on it is almost de minimis against the wider scheme of the battleground before the Board, and in the intended proposed appeal.  In the circumstances, I direct that the appeal on Ground 3, if it is necessary that it is pursued to an actual argument, shall be reserved to myself to be dealt with on paper submissions only.  I shall allow (a) 10 pages of written submissions for the Taxpayer to pursue the appeal, (b) 10 pages of written submissions for the CIR to oppose the appeal, and (c) 5 pages of written submissions for the Taxpayer to reply.  Those submissions will be provided by 10 January 2020, 17 January 2020, and 24 January 2020 respectively.

Costs

71.  As to the costs of the leave application, I heard submissions during the hearing.  Essentially, it was agreed that the usual order upon the grant of any leave to appeal would be that the costs of the leave application should be in the appeal, though it was recognised that there could be a different costs order if leave to appeal is granted on only one or two but not all three grounds pursued.

72.  As I have refused leave to appeal on the more financially substantial grounds, and only granted leave to appeal on one of relative inconsequence financially (even if not as a matter of principle), I do not think it would be right that the substantial part of the costs from the leave application should follow the result of any further argument on Ground 3.  I also take account of the fact that both sides of the argument on whether leaves should be granted on Ground 3 were dealt with in rather shorter order than the arguments on the other two more complex grounds.

73.  In those circumstances, it seems to me in the exercise of my broad discretion on costs that the CIR is entitled to 75% of the CIR’s costs of the leave application in any event, to be taxed if not agreed. The other costs will be costs in the appeal.