In Vermilion Holdings Limited v HMRC [2019] TC07077, the First Tier Tribunal (FTT) found that share options granted to a director were not Employment-Related Securities. They were not issued by reason of his employment.
Shares including share options given to an employee or director by virtue of employment are termed as 'Employment-Related Securities' (ERS).
- A deeming provision (at s.471(3) in ITEPA) provides that a right or opportunity to acquire a securities option made available by a person’s employer are to be regarded as available by reason of the employment of that person unless the right or opportunity is made available in the normal course of the domestic, family or personal relationships of that person.
- Employees are subject to Income Tax on the benefit of ERS shares or options awarded. They are taxed as earnings under s.62 ITEPA 2003.
Vermilion Holdings Ltd (Vermilion) was the holding company for a software company. Quest Advantage Limited ('Quest'), was a consultancy company owned by Mr Marcus Noble and another individual.
- Quest provided corporate advisory services to the Vermilion group. Due to the financial difficulties Vermilion was experiencing, it granted share options over 2.5% of the company equity ('the supplier options') in lieu of payment for these services.
- In March 2007 Mr Noble became a director of Vermilion. In July 2007 the Quest share option was diluted to 1.5% by way of a new option agreement which now named Mr Noble as option holder. The agreement provided for Mr Noble to indemnify Vermilion for any tax consequences resulting from an exercise of the share options.
- In 2016 the company was sold, Mr Noble exercised his share option and sold the shares.
- In 2017, following a non-statutory clearance request from Vermilion and Mr Noble that the shares would be subject to Capital Gains Tax, HMRC issued a regulation 80 PAYE assessment and s.8 National Insurance Contribution (NIC) decision against Vermilion totalling £385,859 on the basis that Mr Noble’s share options were Employment-Related Securities.
The FTT, after much discussion about how to interpret a deeming provision and the wording of s.471(3), found that the options were not Employment-Related Securities.
- The fact was that the reason for the issue of the option to Mr Noble was not his employment as a director. The option replaced the 2006 supplier option which had been issued in lieu of payment for services. The judge dismissed the appellant's argument that the 2007 option was in substance the same as the 2006 supplier option.
- The ambit of the deeming provision should be limited where the artificial assumption from deeming is at variance with the factual reason that gave rise to the right to acquire the option.
- The judge said, “The analysis of the underlying causes that led to the grant of the 2007 Option and the economic mechanism whereby the 2007 option came to be granted, when viewed realistically, meant that Mr Noble’s right to acquire the 2007 Option was not ‘made available’ by Vermilion as his ‘employer’. “
Comment
The judge said that the facts of the case were unusual, mainly because Mr Noble had happened to be the right person to steer the Company out of its financial difficulties. It is not uncommon for start-up businesses to offer share options in lieu of payment for consultancy services in circumstances where the service provider then takes on a future role in the business. The ERS rules should not be overlooked when agreeing to accept payment on such terms.
Links
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.
EMI: Enterprise Management Incentives
The Enterprise Management Incentive (EMI) scheme is a tax incentivised employee reward scheme which uses share options.
External link
Vermilion Holdings Limited v HMRC [2019] TC07077
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