Updated HMRC guidance following Vermilion Holdings: when is a securities option “employment-related”?
Towards the end of 2023, we wrote about the Supreme Court's ruling in the Vermilion Holdings case. The decision is authority for determining when a securities option is “employment-related” under the UK employment-related securities (ERS) legislation and is an important decision on the application of a particular ERS deeming provision. Following the ruling, HMRC has updated its Employment Related Securities Manual so that its guidance reflects the judgment in the case.
Vermilion: a reminder
As discussed in our article, there are two tests within section 471 Income Tax (Earnings and Pensions) Act 2003 (section 471) that determine when a securities option is an employment-related securities option: (i) the causal test (section 471(1)) and (ii) the deeming provision (section 471(3)):
- The causal test asks if the right or opportunity is made to a person by reason of their employment as a matter of fact.
- A security option is automatically an employment-related securities option under the deeming provision where a right or opportunity to acquire a securities option has been made available to a person by their employer or a person connected with their employer (unless a narrow exception applies which requires the option to have been made available by an individual in the normal course of the domestic, family or personal relationships of the recipient).
In our article, we discussed the Supreme Court’s consideration of these two tests, and the decision by the Court that the deeming provision should be applied in priority to the causal test when an option is granted by someone’s employer. The decision means it will be unnecessary to apply the causal test where there is an employment relationship at the time the securities option is granted.
HMRC’s updated guidance
Following the decision, HMRC has updated its guidance in ERSM20215 as follows:
- It now states that the judgment in Vermilion aligns with HMRC’s “long standing position” that where the deeming provision applies, the securities option is an ERS option and there is no need to consider causation.
- The judgment confirms there is a clear test to apply when determining whether a securities option is caught by the ERS provisions.
- The deeming provision in section 471(3) is designed to remove the need to consider causation under section 471(1). Therefore, where the deeming provision in section 471(3) is met, the option is an ERS option and section 471(1) should not be considered.
- 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.
- The principles established in Vermilion also apply to: (i) a direct issue of securities under section 421B and (ii) when a company makes a rights issue, or issues warrants to its shareholders and a shareholder is an employee of the Company.
HMRC has also updated its guidance at ERSM20210 on the meaning of “by reason of employment” to refer to the Vermilion judgment and the application of the deeming provision in circumstances where it is the employer, or someone connected with the employer who makes available the right or opportunity.
What does this mean for employers and employees?
The updated guidance is helpful in reinforcing that HMRC’s interpretation of the legislation aligns with that put forward in Vermilion. In HMRC’s view, the judgment provides clear authority for the test that should be applied when determining when securities options are employment-related for the purposes of the ERS rules. This means there will be little scope for departing from the application of the ERS rules as set out in Vermilion when taxpayers and their advisers are considering whether a securities option falls within the ERS rules.
The updated guidance also confirms our understanding that the same principle of interpretation confirmed in Vermilion in the context of securities options also applies to the direct issue of securities and therefore the application of section 421B when, for example, shares are issued by an employer. Further, HMRC state that the deeming provision can be applied in the same way to issues of warrants or a rights issue. These updates are a welcome confirmation of HMRC’s view on the scope of the decision and put beyond doubt a point that would have likely been assumed by advisers.
Finally, ERSM20215 refers to the relevance of the decision to ERS reporting which acts as a helpful reminder that when securities or a securities option fall within the ERS regime, this has compliance consequences as well as tax implications.
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