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HMRC v Vermilion Holdings Ltd

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In HMRC v Vermilion Holdings Ltd [2020] UKUT 162 (TCC) (27 May 2020), the Upper Tribunal found that the granting of a share option to an employee, where that option replaced a previous option granted in different circumstances, was an employment-related securities option. 

Mr Noble (N) had provided consultancy services to Vermilion Holdings Ltd (V). In return for those services, rather than paying fees, V had granted an option over shares to N. That option had originally been granted in 2006. V subsequently came into financial difficulty and N was appointed as a director of V as part of a rescue package. During that restructuring, the 2006 option was replaced with a new 2007 option, on amended terms including that N would be the option holder rather than his consultancy company. 

HMRC claimed that the 2007 option was an employment-related securities option as it was granted by V as N’s employer.  

The question before the Upper Tribunal (UT) was whether the gain on the exercise of the share option was chargeable to income tax. That, in turn, depended on whether the right to acquire the shares was made available ‘by reason of an employment’ and would be treated as an employment-related securities option under ITEPA 2003 s 471. The FTT had previously considered that it was not, instead finding that the share option was made available as a result of the surrender of the 2006 option. 

Allowing HMRC’s appeal, the Upper Tribunal found that the requirements of s 471(1) were satisfied: the opportunity to acquire the 2007 share option was available by reason of employment. The 2007 option had been granted to N both to replace the 2006 option (which could no longer continue in its existing form) and also as part of a package of measures which included the employment of N. The 2007 share option was an employment-related securities option. 

Read the decision.

Why it matters: This is a case about whether or not the grant of a share option was by reason of an individual’s employment. If it was then the profit on exercise would be chargeable to income tax and NIC. If it was not then the exercise would not be taxable and any gain on the subsequent disposal of the shares would be charged to capital gains tax. The background here is unusual: the options were granted as part of a corporate rescue package and replaced earlier options which no longer had any value. The FTT had found, perhaps surprisingly, that the new options were not granted by reason of the individual’s employment. The Upper Tribunal has reversed that decision. The facts here may be out of the ordinary but the decision is well worth reading by all involved in employment taxes for its very clear analysis of the way that these complex provisions operate. 

Issue: 1490
Categories: Cases