No £30,000 exemption for payment for loss of share options

In Peter Hemingway v HMRC [2023] TC 08929, the First Tier Tribunal (FTT) agreed that an amount paid to compensate an employee for the cancellation of stock options was taxable. The Employment-Related Securities (ERS) legislation overrode the £30,000 exemption for a change in his employment rights.

• During 2006 and 2007 Mr Hemingway had been granted share options in his employer's parent company, Broadcom Corporation, which had vested but were outstanding i.e. he could have, but had not yet, exercised the options and acquired shares.
• In 2015, on the takeover of Broadcom, the options were cancelled in return for a cash payment of £19,549. This was net of £15,679 in deductions for tax and National Insurance, i.e. a gross payment of £35,228. It was described on the payslip as a ‘notional share gain’.
• In April 2016, Mr Hemingway submitted a voluntary Self Assessment return for 2015-16 reporting the payment as taxable income. He then filed an amended return in August 2016 claiming a Tax exemption for the first £30,000, received under s.403 ITEPA 2003, on the basis that the payment was in connection with a change to the earnings from his employment under s.401 ITEPA.
• HMRC opened an enquiry into the return, denying relief under s.403 and stating that the payment should be taxed under s.477 ITEPA as employment income from a share option.
• HMRC issued a Closure notice. The taxpayer appealed to the FTT, who struck out the claim due to technicalities.
• On 1 March 2019, HMRC issued a notice to file a 2015-16 return and Mr Hemingway submitted a new return on 11 April 2019.
• HMRC issued new enquiry and closure notices on the same basis as before which the taxpayer Appealed. 

The FTT, dismissing the appeal found that:

• The issue was whether the payment fell under s.401 ITEPA as a change in earnings and was thereby eligible for relief on the first £30,000, or whether it was taxable under s.476 or s.477 ITEPA as an Employment-Related Securities ‘chargeable event’.
  • S.476 ITEPA takes priority over s.401 ITEPA.
  • Whilst it was arguable that the payment was compensation for a change to his employment rights under s.401, the payment was intended and was most closely connected to the loss of the share options. Mr Hemingway accepted that he would not have had the payment had he not held the options.
  • The payment was made ‘in connection with’ an Employment-Related Securities option within s.476 and not for the loss of employment rights, so s.403 did not apply.
• There was a secondary procedural issue relating to the validity of the enquiry and closure notices.
  • Mr Hemingway originally filed a voluntary return which was retrospectively validated under s.12D Taxes Management Act 1970 under the 2019 changes to the legislation, which put voluntary returns on the same footing as returns filed under a formal notice to file and had retrospective effect back to April 1996.
  • The FTT dismissed his arguments finding that whilst s.12D did not apply to the initial return following the first appeal to the FTT, HMRC had been within their rights to issue the 2019 notice to file and restart the enquiry process in respect of the resubmitted return, which meant the enquiry and closure notices had been validly issued.
  • The FTT also dismissed Mr Hemingway’s application for costs.

Useful guides on this topic

Termination, redundancy and leaving payments
How are redundancy and termination payments taxed? What amounts can be paid tax-free? What amounts are taxable as earnings?

Employee Shares: the Employment-Related Securities rules
What are the tax consequences when a company gives shares to an employee or director? What are employment-related securities? What is best: shares or share options? How do you set up a share scheme?

Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights? 

How to appeal an HMRC decision
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External links

Peter Hemingway v HMRC [2023] TC 08929