Revenue and Customs v Vermilion Holdings Ltd (Scotland) [2023] UKSC 37

HMRC appealed against Vermilion Holdings Ltd regarding whether a securities option granted to an employee's nominee constituted an employment-related securities option under section 471 of ITEPA 2003. The Supreme Court allowed HMRC's appeal, holding that the deeming provision in section 471(3) applied, making the option taxable as employment income.

Facts

Vermilion Holdings Ltd was created as a holding company in 2006 during a funding exercise for Vermilion Software Ltd. Quest Advantage Ltd, owned by Mr Marcus Noble, received a supplier option to acquire shares as partial payment for advisory services exceeding budget. When the business underperformed by early 2007, a rescue funding exercise was required. As part of this rescue, Mr Noble was appointed executive chairman of Vermilion, and the 2006 option was cancelled and replaced with a new 2007 option over a different class of shares representing 1.5% of equity. In 2016, the option was novated to Mr Noble personally, who exercised it for a gain of £636,238. HMRC determined this was an employment-related securities option subject to income tax rather than capital gains tax.

Issues

The central legal issue was the correct interpretation of section 471 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), specifically whether the 2007 option was an ’employment-related securities option’. The key question was whether the deeming provision in section 471(3) applied such that any right or opportunity to acquire a securities option made available by a person’s employer is regarded as available by reason of employment.

Judgment

The Supreme Court unanimously allowed HMRC’s appeal. Lord Hodge, delivering the judgment, held that the deeming provision in section 471(3) applied. The court found that the First-tier Tribunal and Inner House majority had erred in law by attempting to limit the deeming provision based on causation analysis under section 471(1).

The Purpose of the Deeming Provision

Lord Hodge explained the purpose of section 471(3):

To avoid such difficult questions, subsection (3) creates a bright line rule: if a person’s employer (or a person connected to that person’s employer) provides the employee the right or opportunity to acquire a securities option, that right or opportunity is conclusively treated as having been made available by reason of the employment of that person.

The court emphasised that the correct question was simply whether Vermilion conferred the 2007 option on Mr Noble’s nominee while Mr Noble was its employee, not why this was done.

Error of the Lower Courts

Lord Hodge found the FTT committed an error of law:

It put the cart before the horse: the purpose of the deeming provision is to avoid the decision-maker having to carry out the section 471(1) assessment. There is no anomaly here.

The court rejected the argument that the deeming provision could be disapplied by conducting a causation analysis under section 471(1):

It is not open to the taxpayer to defend a demand for tax from HMRC by carrying out the subsection (1) exercise in order to disapply the subsection (3) deeming provision.

Application of Deeming Provision Principles

The court applied the principles from Fowler v Revenue and Customs Comrs [2020] UKSC 22 regarding interpretation of deeming provisions, finding no absurdity, anomaly or injustice in giving effect to section 471(3) in this case.

Implications

This decision clarifies that section 471(3) of ITEPA creates a ‘bright line rule’ that takes precedence over the causation analysis in section 471(1). Where an employer makes available a securities option to an employee, the statutory deeming provision will apply regardless of the underlying commercial reasons for granting the option. The case reinforces that deeming provisions should be given their full effect unless clear language compels a different interpretation, and taxpayers cannot circumvent such provisions by proving alternative causation. This has significant implications for the taxation of share options granted to employees in commercial contexts.

Verdict: Appeal allowed. The 2007 option was an employment-related securities option within section 471 of ITEPA 2003, and the gain on its exercise was taxable as employment income.

Source: Revenue and Customs v Vermilion Holdings Ltd (Scotland) [2023] UKSC 37