»Ê¹ÚÌåÓýapp

»Ê¹ÚÌåÓýapp Supreme Court’s decision in HMRC v Vermilion Holdings Ltd provides clarity in relation to the need to consider causation where an option is deemed to have been made available by reason of employment. ÌýThis judgment supported HMRC’s long standing position that where the ‘deeming provisionâ€� applies, the securities option is an Employment-Related Securities option and there is no need to consider causation.

Mr Noble provided consultancy services to Vermilion via a company he owned. In 2006 the Company was granted an option to acquire up to 2.5% of the equity in lieu of fees (“the 2006 option�). In 2007, external investors agreed to provide rescue funding to Vermilion, on the condition that Mr Noble became executive chairman and agreed to a reduction in option equity. Mr Noble was appointed as a director of Vermilion from 16 March 2007. A new option, to acquire up to 1.5% of equity in Vermilion, was granted on 2 July 2007 (“the 2007 option�) by Vermilion and, in the same agreement, the 2006 option was cancelled. Mr Noble exercised the 2007 option in 2016 when Vermilion was sold.

»Ê¹ÚÌåÓýapp 2007 option was deemed to have been granted by reason of Mr Noble’s employment, because it was made available by his employer, Vermilion by ITEPA03/S471(3). For these reasons, HMRC considered it to be an ERS option.

»Ê¹ÚÌåÓýapp Supreme Court agreed with HMRC and held that the deeming provision in ITEPA03/S471(3) applied to the 2007 option. »Ê¹ÚÌåÓýapprefore, the 2007 option was to be treated as being acquired by reason of Mr Noble’s employment and subject to income tax rather than capital gains tax.

»Ê¹ÚÌåÓýapp Supreme Court declined to give a view on ITEPA03/S471(1) and whether the 2007 option was granted by ‘by reason of an employmentâ€� because it was not necessary to consider ITEPA03/S471(1) when the deeming provision in ITEPA03/S471(3) was met.

Principles

»Ê¹ÚÌåÓýapp deeming provision in ITEPA03/S471(3) is designed to remove the need to consider causation under ITEPA03/S471(1). »Ê¹ÚÌåÓýapprefore, where the deeming provision in ITEPA03/S471(3) is met, the option is an ERS option and ITEPA03/S471(1) should not be considered.

»Ê¹ÚÌåÓýapp Supreme Court noted that the deeming provision is not concerned with why the right or opportunity was conferred, but who conferred it.

If the right or opportunity to acquire a securities option is made available by a person’s employer, or a person connected with a person’s employer, then it is an ERS option, regardless of the reason for doing so.

This gives a clear test to apply when determining whether a securities option is caught by the ERS provisions.

Where a company makes a rights issue or issues warrants to its shareholders and a shareholder is an employee of the Company, this is also covered by the deeming provision and reported in accordance with the ERS reporting obligations.

»Ê¹ÚÌåÓýapp principles established in this case also apply where ITEPA03/S421B(3), the ‘deeming provisionâ€� applies in respect of the acquisition of securities under ITEPA03/S421B, so there is no need to consider causation under ITEPA03/S421B(1). »Ê¹ÚÌåÓýapp shares/securities are deemed to be acquired by reason of employment and are within scope of the ERS provisions.ÌýÌý