The (Ver)milion-dollar question: share options
David Whiscombe brings us back to earth.
Some things are just too good to be true. HMRC say it of tax avoidance schemes that purport to make tax liabilities disappear into thin air (and they are usually right). But it occasionally also applies to Tribunal decisions in cases that have nothing whatever to do with avoidance: you look at the reported facts, the law, the arguments and the decision and you think: What? How can this be?
Some will think that Vermilion Holdings  UKFTT 230 (TC) is one such case. It was about a share option granted by a company to a director.
The question before the Tribunal was whether the gain on the exercise of the 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” (which includes a directorship) of the director. The Tribunal considered that, as a matter of fact, it was not: it was made available because of the surrender or partial surrender of an earlier option. For what it’s worth, we think that that was probably correct.
However, there is a deeming provision (at ITEPA 2003 s471(3)): if a right to acquire shares is made available by an employer to an employee, it is regarded as available by reason of the employment. (There is an exclusion where an individual employer makes a right available in the normal course of his “domestic, family or personal relationships” but that was not in point in the Vermilion case.)
The Tribunal agreed that in the case before it, the right was made available to an employee by the employer. HMRC said that that was the end of the matter: on those facts, the legislation plainly deemed the right to have been available by reason of the employment, and the Income Tax charge inevitably followed.
The Tribunal conceded that “In most cases, I agree that would most likely be the end of the matter.” But the Tribunal considered that 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.”
That is a startling conclusion: a moment’s thought shows that it is only where the “artificial assumption” differs from the “factual reason” that you need the deeming provision at all: the Tribunal’s formulation seems to rob the deeming provision of any application.
It would be nice to think that one could rely on the Tribunal’s decision in future share option planning. We think there are two reasons for hesitating to do so. The first is that, as a First-tier decision, it sets no legally binding precedent: HMRC can and doubtless will ignore it. The second is that it seems to us inevitable that the decision will be reversed on appeal to the Upper Tribunal.
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