Mark McLaughlin highlights a case in which an employee’s share options were not considered to have been received by reason of his employment.
If an employee receives something from their employer (e.g. an option over shares in the employer company) there will generally be tax implications to consider.
What does it mean?
The right or opportunity to acquire the option is treated as ‘by reason of an employment’ (including former or prospective employment) unless that right or opportunity was made available in the normal course of their domestic, family or personal relationships (ITEPA 2003, s 471).
The legislation applies equally to directors, office holders, and employees.
Did he or didn’t he?
It should be noted that the above rule deems an individual to have received a share option ‘by reason of employment’ except in very specific and limited circumstances. This deeming rule seems clear and unquestionable – or is it?
In Vermillion Holdings Ltd v Revenue and Customs UKFTT 230 (TC), an individual (MN) was a private equity investor in the appellant company. A corporate advisory business (Q Ltd) was brought in to produce a business plan and financial projection. Q Ltd was partly owned by MN. It was agreed that Q Ltd would not be paid a fee for the financing exercise, but that a share option in the appellant would later be offered.
The appellant ran into financial difficulty. In February 2007, a plan was formulated to refinance the company. A precondition of further investment by the investors was that MN would be appointed chairman of the appellant. MN was appointed in March 2007. In July 2007, an option agreement between the appellant and Q Ltd was entered into, in respect of shares in the appellant. In June 2016, MN replaced Q Ltd as the option holder of the 2007 option. HM Revenue and Customs (HMRC) considered that the share option was an employment-related securities (ERS) option, that the exercise of the option was a chargeable event, and that the taxable amount of the gain on acquiring the securities was employment income of MN. The appellant appealed.
The First-tier Tribunal had to decide whether the option granted in 2007 when MN was already a director of the appellant company was an employment-related securities option within ITEPA 2003, s 471. The tribunal considered the meaning of ‘by reason of employment’. It decided that the ambit of the deeming provision should be limited where the artificial assumption from deeming was at variance with the factual reason that gave rise to the right to acquire the option. The tribunal concluded that the 2007 option was not an ERS option.
Is that correct?
This decision may be welcomed by taxpayers, but it would be surprising if HMRC did not appeal against it. The purpose of a ‘deeming’ provision is broadly to disregard the actual circumstances and to proceed on a different basis. If the tribunal can overrule a deeming provision, there would seemingly be no point having it.
In any event, decisions of the First-tier Tribunal do not create a binding precedent. The conclusion must, therefore, be to proceed with caution if seeking to rely on the Vermillion Holdings Ltd decision.
