Revenue and Customs v Vermilion Holdings Ltd (Scotland) [2023] UKSC 37 (25 October 2023)
Citation: Revenue and Customs v Vermilion Holdings Ltd (Scotland) [2023] UKSC 37 (25 October 2023)
Rule of thumb: Stare-decisis: What is the tax position if an investment company has an option to buy shares in a company they have invested into, and they gift this option to a director in the investment company? This is deemed to be a form of income from employment & subject to income tax.
Background facts: The facts of this case were that Vermilion were a software company. Quest Advantage were an investment company who bought shares in Vermillion, with an option to buy more shares at an agreed price. It was clear that Vermilion were not make the profits envisaged so a new shares option for Quest Advantage to buy the shares at a cheaper price was created in 2007. It became clear in 2016 that this would not be an option that Quest would be taking up, however, a director there, Mr Noble was interested in acquiring the option as he may have been able to bring some value to the business.
Quest sought to just transfer this option to Mr Noble personally with no money to be paid, rather only capital gains tax if they were sold at a profit at a later date.
Parties argued: This raised the point of law over whether Mr Noble gaining these shares was employment income from being a director in Quest Advantage or just the general gaining of an asset subject to capital gains tax.
Court held: The Court held that this was deemed to be income for Mr Noble as payment for working as a director in Quest. The value of the shares had to be calculated by an accountant & Mr Noble pay income tax upon these if he sought to acquire them from Vermilion.
Ratio-decidendi:
1. ‘This appeal is concerned with the correct interpretation of section 471 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”). This section, with its related sections, imposes a liability to income tax as employment income in relation to gains made on the exercise of a share option if it is treated as an employment-related securities option…
8. Moving on nine years, in June 2016, in the context of a proposed sale of Vermilion’s shares to another company, a novation agreement was entered into whereby Quest was replaced by Mr Noble as the holder of the 2007 option. Mr Noble exercised the option. In November 2016 Mr Noble and Vermilion submitted a non-statutory clearance request to HMRC seeking their agreement that the gain in the sum of £636,238 on the exercise of the 2007 option by Mr Noble was liable to Capital Gains Tax. On 14 December 2016 HMRC gave their decision that the 2007 option was an employment-related securities option. The decision was that the exercise of the option was a chargeable event and the taxable amount of the gain on acquiring the securities counted as employment income of Mr Noble in the relevant tax year…
33. … The statutory provision makes clear that if an employer makes available to an employee a securities option, that option will be treated in the employee’s hands as an employment-related securities option and taxed accordingly. Vermilion, which at the relevant time was Mr Noble’s employer, made available to his nominee such an option. Vermilion’s reason for so doing is irrelevant when section 471(3) applies’…
Lord Hodge
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