In HMRC v Vermilion Holdings Limited v [2020] UKUT162, the Upper Tribunal (UT) held that share options granted to a director were Employment-Related Securities. The employment did not have to be the sole reason for the grant of the options, it was enough that it was one of the reasons.
Share options granted to an employee or director by virtue of their employment are Employment-Related Securities (ERS).
- Awards by an employer of ERS or options are taxed as earnings unless market value is paid.
- A right/opportunity to acquire shares which is provided by a person’s employer is deemed available ‘by reason of’ their employment unless the right/opportunity is made available in the normal course of their domestic, family or personal relationships, the ‘friends and family exception.’
Quest Advantage Limited (“Quest”), was a consultancy owned by Mr Noble and another individual.
- Quest provided corporate advisory services to the Vermilion group. In 2006, due to financial difficulties, Vermilion granted share options over 2.5% of its equity in lieu of payment for the services.
- In 2007 as part of a rescue package for Vermilion, Mr Noble became a director and the share options were cancelled with options over 1.5% of the equity being issued under a new agreement which named Mr Noble as the option holder.
- HMRC assessed Vermilion on Income Tax and National Insurance Contributions (NICs) over the 2007 options on the basis they were ERS. Vermilion appealed. HMRC did, however, agree that the 2006 options were not ERS.
The FTT found, by interpreting a deeming provision at s.471(3) ITEPA 2003, that the options were not ERS as they were not issued by reason of his employment. HMRC appealed.
The UT allowed the appeal:
- The ‘friends and family' exception did not apply in this case.
- Mr Noble’s directorship was not the sole reason for the grant of the 2007 Option. The right to acquire the 2007 option came from the right under the 2006 option as well as being part of a package of measures which included Mr Noble's employment.
- The FTT had erred in law. The employment does not have to be the sole or dominant cause for the granting of the benefit, it is enough that it was a condition of the benefit being granted.
- The employment of Mr Noble was an operative cause of the grant of the 2007 option in the sense that it was a condition of the option being granted. As a result, the grant of the option was available by reason of Mr Noble’s employment and it was an ERS under s.471(1) ITEPA 2003.
- The UT went on to say that they did not need to consider the deeming provision at s.471(3). This was only relevant where the option did not fall within s.471(1) and it did.
Whilst the assessments upheld by the UT were raised on Vermilion, a clause in the agreement entered into in 2007 meant Mr Noble was liable to indemnify them for any tax consequences from the exercise of the share options. He was in the difficult position of being liable for the tax, but not a party to the Tribunal proceedings, though he was called as a witness and the FTT judge acknowledged that he had a direct interest in the outcome of the case.
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Employment-Related Securities and share schemes
This guide explains the tax consequences when a company gives shares to an employee or director and will assist you in designing share schemes.
Employment-related Securities: Reporting issues
If an employer gives shares to an employee, or sets up a tax-advantaged share or share option scheme, the benefit is taxed within the Employment Related Securities (ERS) regime.
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