It has long been understood that the charges to income tax on employment-related securities apply to shares, or a share option, acquired by a person if the right or opportunity to do so is available “by reason of” an office or employment (see ss421B(1) and 471(1) ITEPA). However, when re-enacted in 2003, the legislation further extended the scope of Part 7 by providing that a right or opportunity to acquire shares, or options, is deemed to be available by reason of an office or employment if it is made available by a person’s employer or by a person connected with a person’s employer (e.g. another company in the same group). These ‘deeming provisions’, in ss421B(3) and 471(3), are not easy to interpret and apply, not least because the definition of “employer” – which refers to the (office or) employment by reason of which the opportunity is available – appears to produce a circular analysis.
As Charles Hellier pointed out in his decision in Steven Price ([2013] UKFTT 297 (TC)), the sections cannot be construed literally, as that would mean that shares or options acquired pursuant to an opportunity made available to an individual by someone who happened to be an employer of another person, would be caught by the deeming provisions, and that is absurd.
If the answer is that, for the deeming provisions to apply, the provision by a company of an opportunity under which the shares or options are acquired must be linked to an office or employment by the individual with the same , or a connected company, then this would appear to be no different from the test of whether the shares or options have been acquired pursuant to an opportunity made available “by reason of” an employment. Further, if Parliament had intended that an option granted to a person who is, or has been, an officer or employee, is invariably to be treated as an employment-related securities option (regardless of the fact that it is not ‘by reason of such office or employment’), the legislation would simply have said so. But it does not.
Of course, if the opportunity was in fact made available by a person or persons other than the company with which the individual has an office or employment (or a connected company), the deeming provisions cannot apply. So, if for example, on investigation, it is the shareholders, or one or more of them, who make the opportunity available, not the company itself, then, provided the acquisition is not “by reason of” an office or employment, the shares or options will fall outside the scope of Part 7.
A recent decision by Dr Heidi Poon (best known for having delivered the minority judgement in the Glasgow Rangers case in the First Tier Tribunal – ultimately substantially upheld by the Supreme Court) in the case of Vermilion Holdings Ltd v HMRC ([2019] UKFTT 0203 (TC)) has looked again at the scope of these deeming provisions. An individual investor held options to subscribe for shares in the company. He subsequently became a director and, in his capacity as an investor, was party to the negotiation of a reconstruction and refinancing deemed necessary to save the business of the company. In short, in was decided that his option terms should be amended so as to reduce his proportional entitlement on exercise of the option, relative to that of other investors (including himself). Rather than amend the terms of the existing option, it was decided, for commercial reasons, to cancel the original option and grant a fresh option on new terms. The new option was clearly not granted “by reason of employment”, but as it was granted by the company of which the individual was then a director, HMRC asserted that the deeming provision of s471(3) applied. Clearly it would be unfair if the individual were, in this situation, to find himself chargeable to income tax and NICs, rather than capital gains tax as would be the case with any other investor in the same position who happened not to be a director.
At the end of a long judgement, Dr Poon holds in favour of the company (the appeal having been brought by the company in response to a Reg 80 determination in relation to the PAYE income tax and a s8 decision in relation to the associated NICs), apparently on the basis that “[the individual’s] right to acquire the 2007 option was not ‘made available’ by Vermilion as his ‘employer’” (para 141). Expressed in these terms, the decision is clear and straightforward – and hardly justifies some 15+ pages of analysis. However, I say “apparently”, as this is stated to be an alternative ground: the principal ground being that “The ambit of the deeming provision should be limited where the artificial assumption is at variance with the factual reason that gave rise to the right to acquire the option” (para 140). This leads us into difficult territory, suggesting as it does that, even if the opportunity to acquire the option is provided by the company, the deeming provision does not apply if (a) that right or opportunity was not available by reason of the individual’s office or employment and (b) the acquisition was not pursuant to an opportunity which was so available.
Charles Hellier earlier gave the example of a bank offering options to all customers, some of whom are employees of the bank. He suggested the need for an investigation in such cases into whether a link exists between the employment and the opportunity. If the opportunity under which an option is acquired is not the same as the opportunity offered to an employee, the deeming provision does not apply. This may work if the opportunity is afforded to a number of individuals, some only of whom happen to be employees or directors, but the position is not so clear if the opportunity is offered to only a single individual who happens to be an employee or director. Can the link with the office or employment be so easily broken?
What if (for example) an employed shareholder is given the opportunity to acquire shares made available by operation of the articles of association requiring a leaver to offer their shares for sale to all remaining shareholders on a pro-rata basis? If an opportunity to acquire shares is offered to all shareholders, only some of whom are directors or employees, it is easy to see that the opportunity is acquired qua shareholder and that there is no link between the acquisition of the shares and an individual’s office or employment with the company. Here, the “artificial assumption”, that the acquisition is by reason of employment, is at variance with the factual reason which gave rise to the right or opportunity to acquire the shares.
However, the opportunity to acquire the shares is made available by the employer (through the operation of its articles), and prima facie therefore the deeming provisions would appear to apply. Put another way, if they are not to apply in such a case, Parliament’s presumed intention of extending the scope of Part 7 may be rendered ineffective.
That said, the decisions in both Steven Price and Vermilion would appear to support the conclusion that the deeming provisions do not apply if:
- the opportunity to make the acquisition is not by reason of an office or employment; and
- although that opportunity is made available by the employer company, there is no causal link between the acquisition of the shares or option and the office or employment held by the individual.
The difficulty remains that, if the deeming provisions are not to apply in relation to such an acquisition by a director or employee, in what circumstances are they intended to apply? When is an acquisition from the employer made pursuant to an opportunity afforded by the employer which is not by reason of that office or employment, but is linked to the office or employment with that employer (so as to fall within the deeming)?
We are left in a situation in which unless, as in Vermilion, the opportunity to acquire shares or an option is not in fact made available by the employer of the individual concerned, the scope and application of the deeming provisions remains unclear.
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5 May 2019
David Pett, Tax Barrister 