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Facts trump the deeming provision in Vermillion: Share options granted to directors are not always taxed as employment-related securities

Facts trump the deeming provision in Vermillion: Share options granted to directors are not always taxed as employment-related securities

Posted on 9 July 2019

When employees or directors (or persons who become employees or directors), receive shares or options, HMRC's starting point is to deem the securities have been received by virtue of the employment or directorship. As a result, they are treated as "employment-related securities". This is important because income tax (and in some cases national insurance contributions), could consequently be due on exercise or sale of those securities rather than capital gains tax (which is charged at a lower rate).

HMRC's deeming provision applies by default unless the right to acquire the shares or share options is "made available in the normal course of the domestic family or personal relationship of that person".  But what happens when the fact suggests that the securities were not issued because of employment? This is what the Tax Tribunal had to consider in Vermilion Holdings Limited v HMRC [2019] TC07077.

In this case, an option was granted by a struggling corporate customer (Vermillion) to its supplier, a company supplying consultancy services. Vermillion later replaced the option with another (less valuable) option, which was instead granted to the individual director of the consultancy company. At that time, the individual had also become a director of the customer, and as a result, the deeming provision applied. Factually however, the new option had been granted because of the existence of the old option, not because the individual had become a director. 

Vermilion asked HMRC for a non-statutory clearance that any gain on the replacement option would only be liable to CGT (i.e. that it would not be treated as an employment-related security). In its response, HMRC acknowledged that "it was probably not the intention of the legislation that such situations should be caught, but given the letter of the law HMRC were not able to authorise such treatment". 

Fortunately the Tribunal was able to conclude that, despite the width of the legislation, the deeming provision may not apply where the facts point to the securities being issued by reasons other than employment.

Care needs to be taken when granting options or shares rather than paying cash, particularly where a company is in its start-up phase or struggling, and/or the recipient (or person connected with the recipient) is or may become an employee or director. Approaching HMRC for a ruling may not be the most appropriate course of action to take without seeking advice in the first instance.

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